An Opportunity to Cure? When Bankruptcy and Unpaid Oil and Gas Lease Royalties Collide in North Dakota

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The North Dakota Supreme Court recently issued its second opinion in Van Sickle v. Hallmark & Associates, a case that has tested the boundaries of a mineral interest holder’s right to royalties when well operators go bankrupt.

The Van Sickles own interests in oil and gas produced from a well in McKenzie County that's operated under four leases.  In 2002, the original well operator filed for bankruptcy.  A reorganization plan provided for the formation of a new entity - Missouri Breaks, LLC - that took over the well operator’s working interest.  The Van Sickles alleged they never received notice of the bankruptcy proceedings, and were unable to recover unpaid royalty payments owed to them before or after the bankruptcy proceedings.

In 2008, the North Dakota Supreme Court affirmed summary judgment against the Van Sickles on breach of contract claims for post-bankruptcy royalties (Van Sickle I), finding that the Van Sickles were not entitled to recover unpaid royalties under the terms of the reorganization plan because they didn’t file a claim and neither the final bankruptcy court order nor the plan itself provided for their claim.  But the court found an issue of material fact with regard to the Van Sickles’ right to unpaid pre-bankruptcy royalties; in other words, if the Van Sickles didn’t actually receive notice of the bankruptcy, then they could seek to adjudicate their breach of contract claims with regard to royalties accrued prior to the bankruptcy proceedings. 

In November, the North Dakota Supreme Court issued its opinion after review of that issue (Van Sickle II), and upheld the district court’s determination that Missouri Breaks “implicitly agreed to assume its statutory liability to the Van Sickles for unpaid pre-confirmation royalties, which were not discharged in the bankruptcy proceedings.”  Under the reorganization plan, Missouri Breaks assumed the oil and gas leases that entitled the Van Sickles to royalty payments.  Missouri Breaks, as the successor-in-interest to those leases, was thus required to cure any defaults, including default on the Van Sickle leases. 

The Van Sickle case provides lessons for both well operators and mineral interest owners in North Dakota, particularly where there are issues involving default under oil and gas leases and bankruptcy.  First, when reorganizing a well operator in bankruptcy, it’s key to identify those oil and gas leases where default has occurred and identify the lessors who haven’t received royalties.  Second, it’s vital to ensure that the lessors under leases where the operator defaulted receive proper notice of bankruptcy proceedings and an opportunity to submit claims for unpaid royalties.  Finally, mineral interest owners should be vigilant as to the proper payment of their royalties to ensure they're not left in the cold, or stuck in litigation years later, to recover money they’re rightfully owed.

 

Topics:  Mineral Rights, Oil & Gas, Royalties

Published In: Bankruptcy Updates, Civil Procedure Updates, General Business Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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