In Powell v. Statoil Oil & Gas LP,[1] the North Dakota Supreme Court found that failure to properly notify a suspended royalty owner of an alleged title defect may allow for statutory interest under North Dakota’s “Suspense Statute.”[2] This rule particularly applies when the title discrepancy is between a mineral owner and an operator, as opposed to a dispute between two competing mineral or royalty owners.  The court also held that the ten-year statute of limitations applies to unpaid, underpaid, and untimely royalty payments.

I. Background

June Slagle owned a life estate mineral interest in McKenzie County prior to her death on April 23, 2016 (the “Slagle Interest”).  The remainder was owned by the June Slagle Family Mineral Trust (the “Slagle Trust”).  In April 2010, Brigham Oil & Gas L.P., the predecessor in interest to Statoil Oil & Gas LP (n/k/a Equinor Energy LP) (hereinafter “Statoil”), took a lease from “Fonda Powell, power of attorney for June Slagle.”  Importantly, a power of attorney naming Fonda Powell (June’s daughter) as attorney-in-fact for June Slagle was provided to Statoil but was never recorded in McKenzie County.[3]

Statoil’s Patent Gate 7-6 #1H Well was spud in October 2011 and began producing in April 2012.  However, June Slagle was never paid royalties during her lifetime.  In April 2017, after June’s death, Statoil paid the Slagle Trust ~$750,000 for the suspended royalties attributable to June’s life estate mineral interest.[4] In May 2019, the Estate of June A. Slagle, Deceased and the June Slagle Family Mineral Trust (the “Plaintiffs”) filed suit, alleging that Statoil breached its obligation to timely pay royalties and seeking statutory interest.[5]

Statoil countered that it had legitimately suspended the payments because, although a copy of the power attorney had been provided to Statoil, it had never been recorded in McKenzie County.  However, Statoil had never contacted June or Fonda and informed them of this alleged title defect or that June’s life estate interest was being held in suspense.  The district court found that the unrecorded power of attorney created a legitimate title dispute under the “Safe Harbor” provision of the Suspense Statute, and that Statoil thus did not owe statutory interest.  The Plaintiffs appealed,[6]  challenging (i) the applicable statute of limitations, and (ii) whether Statoil rightfully suspended the Slagle Interest due to a dispute of title.

II. Kittleson and the Ten-Year Statute of Limitations

Section 28-01-17(2) of the North Dakota Century Code imposes a three-year statute of limitations on actions for a “penalty or forfeiture.”  Statoil argued that the interest owed under the Suspense Statute is “not truly interest,” but a penalty and that the three-year statute should apply.  The court disagreed, noting that the “Legislature is aware of the difference between ‘interest’ and ‘penalty,’ and although there may be an upper limit where interest becomes a penalty, we will not second-guess its use of the word ‘interest’ here.”[7]

Section 28-01-15(2) of the Code imposes a ten-year statute of limitations on “a contract contained in any conveyance . . . affecting title to real property.”  As previously held in 2016’s Kittleson v. Grynberg Petro. Co., the ten-year statute of limitations applies to a breach of contract action for the underpayment of royalties.[8] In North Dakota, unlike some other states, the obligation to pay royalties is “of the essence” in an oil and gas lease and breaching the obligation can lead to lease cancellation.  The obligation to pay royalties is thus a “contract in a conveyance affecting title to real property” and falls within the scope of Section 28-01-15(2).[9]

Under the Suspense Statute, the 18% interest is part of an unpaid royalty owner’s damages for the nonpayment and an alternative remedy to cancellation of the lease.[10]  The basis of the grievance can be nonpayment, underpayment, or (as in Powell) untimely payment of royalties.  The Plaintiffs’ claim for untimely royalties and statutory interest accrued within ten years of bringing suit and was not barred by limitations, including the three-year statute.[11]

III. Vic Christensen and the Safe Harbor Provision

As noted above, the Suspense Statute allows a mineral owner to charge 18% interest on untimely royalty payments.  However, the Statute does not apply in the event of a dispute of title affecting the distribution of royalty payments.  This is sometimes referred to as the “Safe Harbor” provision.  In 2022’s Vic Christensen Mineral Trust v. Enerplus Res. (USA) Corp., an “erroneous” comment in a title opinion caused certain royalty payments to be placed in suspense.[12] The trusts sued each other to quiet title, but ultimately found that no issue existed and signed a stipulation of interest to clear title.  The trusts then sued Enerplus Resources Corporation (“Enerplus”) for statutory interest, claiming that Enerplus had wrongfully placed their interest in suspense.

The Vic Christensen court held that the Safe Harbor provision does not require a successful title claim, but merely an existing dispute of title.  Otherwise, an operator would have to evaluate the legal merits of a dispute, a job best left to the courts.[13] In Vic Christensen, the “crucial facts” were that the operator notified the mineral owners of a title discrepancy, and thereafter the mineral owners sued each other.  This “undoubtedly creat[ed] a ‘dispute of title’ that would affect their royalty payments from [the operator].”[14]

Here, unlike Vic Christensen, there was no quiet title action or other disagreement between mineral owners.  Under N.D. Cent. Code § 47-16-39.4, “if the mineral owner and mineral developer disagree over the mineral owner’s ownership interest in a spacing unit, the mineral developer shall furnish the mineral owner with a description of the conflict and the proposed resolution or with that portion of the title opinion that concerns the disputed interest.”  Unlike Enerplus in Vic Christensen, Statoil did not contact June Slagle providing a description of the disputed interest or advise her that it was suspending her royalties.[15]

The Powell court declined to address whether failure to record a power of attorney in the county where the property is located qualifies as a title dispute under the Suspense Statute.  Instead, because the dispute was between the mineral owner and the operator (as opposed to between mineral owners) notice of the dispute was required under N.D. Cent. Code § 47-16-39.4.[16]  Statoil did not notify June Slagle of her title defect, and failed to pay royalties to June Slagle on her life estate interest during her lifetime.  Thus, Statoil did not avail itself of the Safe Harbor provision and statutory interest was due and owing.[17]

IV. Takeaways from Powell

Several noteworthy takeaways emerge from the Powell decision.  First, Powell serves as a reminder that the obligation to pay royalties in North Dakota is a condition (not a covenant) under an oil and gas lease.  Failure to pay royalties, underpayment of royalties, or untimely payment of royalties can result in lease forfeiture or, alternatively, the assessment of interest under the Suspense Statute.

Second, the North Dakota Supreme Court declined in Powell to treat interest under the Suspense Statute as a penalty or forfeiture within the meaning of the three-year statute of limitations.  Instead, the nonpayment, underpayment, or untimely payment of royalties falls within the purview of a contract contained in a conveyance affecting title to real property and the ten-year statute applies.

Third, Powell highlights an important distinction regarding notice of a title dispute under the Safe Harbor provision if the dispute is between a mineral or royalty owner and a mineral developer.  Construing N.D. Cent. Code §§ 47-16-39.1 and 47-16-39.4 together, if an operator fails to notify a mineral owner of a title dispute affecting her distribution of royalties and fails to pay royalties within 150 days after oil or gas produced under the lease is marketed, and cancellation of the lease is not sought, the operator will likely be obligated to pay the 18% per annum statutory interest under the Suspense Statute.  This notice should include a description of the conflict and the proposed resolution or that portion of the title opinion that concerns the disputed interest.

V. Parting Thoughts on POAs

The court left open the question of whether failure to record a power of attorney in the county where the property is located is a dispute of title within the meaning of the Safe Harbor provision of the Suspense Statute.  Although we are not aware of any binding authority on point, the North Dakota Title Standards state that a power of attorney must be recorded to establish authority of an attorney-in-fact on behalf of the principal.[18]  Therefore, there is some support for the assertion that a missing power of attorney could be a suspendible offense (as long as proper notice is provided to the party in suspense).  At the least, failure to record a power of attorney remains a strike against marketable title.  Note that missing powers of attorney greater than 20 years old may be cured under the North Dakota Marketable Title Act,[19] or treated as an “ancient document” for evidentiary purposes.[20]

In Powell, Statoil had been provided with an unrecorded copy of the Slagle/Powell power of attorney.  It remains an open question as to whether this type of “actual notice” might take this somewhat technical title defect outside the protection of the Safe Harbor provision.  Perhaps the biggest takeaway in this arena is that if you are going to place a party in suspense – and the party can be located after reasonable inquiry – you should provide them with thorough and timely notice of their suspension and instructions on how to cure.

References

[1] 2023 N.D. LEXIS 233; 2023 ND 235.  Note that Lexis citations are used in this article.

[2] N.D. Cent. Code § 47-16-39.1.  Note that this Code section is sometimes generically referred to by practitioners as the North Dakota “Suspense Statute.”  That portion of the Suspense Statute stating that “[t]his section does not apply . . . in the event of a dispute of title existing that would affect distribution of royalty payments, or if a mineral owner cannot be located after reasonable inquiry by the operator . . .” is sometimes referred to as the “Safe Harbor” provision.

[3] 2023 N.D. LEXIS 233, 2 (¶ 3).

[4] Id. at 2-3 (¶ 4).

[5] Id. at 3 (¶ 5).

[6] Id. at 4 (¶ 6).

[7] Id. at 7-9 (¶ 11).

[8] 876 N.W.2d 443 (N.D. 2016).

[9] Powell (at ¶ 12).

[10] Id. at (¶ 13).

[11] Id.

[12] 969 N.W.2d 175 (N.D. 2022).

[13] Id. (at ¶ 11).

[14] Id.

[15] Powell at ¶ 16.

[16] Id. at ¶ 17.

[17] Id.

[18] N.D. Tit. Stand. § 2-11; see generally N.D. Cent. Code § 35-03-03.

[19] N.D. Cent. Code Ch. 47-19.1.

[20] N.D.R.Ev. 803(16).