After last week’s unprecedented cold that crippled much of Texas, it appears that Punxsutawney Phil’s prediction was correct; we were due for six more weeks of winter. And boy, we got it! We here are Rapp & Krock PC are neither meteorologist nor experts on groundhogs; however, the historical cold that Texas (and much of the country has faced this winter) has given the energy industry a silver lining in the dark cloud that has shrouded it for several years now: an uptick in oil and gas prices. Many treaties have been written on nearly every aspect of oil, gas, and mineral law; however, this article will focus on a very specific issue, your rights (and responsibilities) as a royalty owner in Texas in the event that your oil and gas royalties are not paid or are underpaid.

The payment of the proceeds of sale of oil in gas is governed by Subchapter J of Section 91 of the Texas Natural Resources Code (the “Code”). The Code contains four defined terms that are important to understanding your rights and responsibilities as a royalty owner. The “Payee” is the person who is entitled to proceeds from the sale of oil or gas produced from a well in this state. The “Payor” is the party responsible for distributing the proceeds from the sale of oil or gas that is produced. It is important to understand that the Payor may or may not be the operator of the well. In many instances, the statutory Payor is not the operator and the royalty checks are issued by a company that gathers the production.  The “Division Order” is an agreement signed by the Payee which directs the Payor how and where to deliver payment to the Payee. A “Transfer Order” is an agreement where a Payee directs the Payor to pay another person a share of the proceeds of production.

Assuming the operator drills and completes a successful well, the Payor has a maximum of “120 days after the end of the month of first sale of production from the well” to make its first payment to the Payee.  After the first payment is made to the Payee, the language of the oil and gas lease regarding the timing and frequency of payments controls.  If, in the event that the oil and gas lease is silent as to the time and frequency of payments, the Payor has “60 days after the end of the calendar month in which subsequent oil production is sold; or 90 days after the end of the calendar month in which subsequent gas production is sold.”

There are numerous exceptions to the timeframes above, each of which require an individual legal analysis; however, it is impermissible for a Payor to outright refuse to pay a Payee after any exceptions or issues are resolved.  In the event that payments have been improperly withheld by a Payor, the Payee has several remedies (and prerequisite responsibilities) before it can pursue a non-paying Payor.  Should the Payor not have a valid excuse for untimely or incorrect payments the Payor must begin paying interest to a Payee beginning at the expiration of those time limits at two percentage points above the percentage rate charged on loans to depository institutions by the New York Federal Reserve Bank, unless a different rate of interest is specified in a written agreement between payor and payee (which is usually the lease).

Additionally, if the Payee seeks relief for the nonpayment of proceeds, the Payee must provide the Payor written notice, typically sent by certified mail, of the non- or underpayment.  The Payor then has 30 days from the receipt of this notice to either make payment or provide a written response that outlines one of the statutorily defined reasons for non- or underpayment.

Assuming the Payor is nonresponsive to the notice or responds with a reason that is not supported by one of the statutory exceptions to timely payment, the Payee may then file suit against the Payor to collect payment.  Should the situation escalate to this point, the statute is fairly generous to the Payee in this regard and allows the Payee to recover its reasonable attorney’s fees associated with collecting its payment from the Payor and its actual damages.  Being able to recover attorney’s fees is critical because damages for missed payments in some cases may not be substantial enough for a Payee to justify employing an attorney otherwise.  Additionally, in the event that the Payee’s damages are less than $200 dollars, Payee is entitled to an additional award, such that damages equal at least $200.

It is critical to remember that each situation possesses its own unique set of facts and the Code contains numerous exceptions to the timeframe in which a Payor must pay the Payee its proceeds of production.  That said, Payors have and will continue to make mistakes that are not justified and are not protected by one of the numerous statutory exceptions to payment.  If you have not received payment that you believe you are entitled to or if believe you have improperly paid, we at Rapp & Krock will gladly assist you in determining if you have an actionable claim for non- or underpayment of your oil and gas royalties.