What are the rights of the Overriding Royalty Interest Owners when the operator takes bankruptcy and owner disbursements are made 60 days after the operator sells the oil?
I have an ORI that I was last paid for January sales at the end of March. In late April the producer filed bankruptcy. Emergency motions have been filed allowing the producer to pay post petition obligations but from February thru bankruptcy, the ORI and the Working Interest owners are not being paid. Seems crazy to me that the operator borrowed $20 million and that loan caused their bankruptcy and my funds are being used to apply towards their outstanding obligation.
Any thoughts or suggestions?
I invested over $50,000 in legal fees learning the following:
- Bankruptcy laws are for the protection of both the debtor and creditors
- Bankruptcy courts are charged with making both the process and settlements fair to both.
- Shareholders generally get the hind most part. (Remember your question about investing in E&P Co.s)
- ORRI AND WI are rarely creditors but have contractual rights above shareholders.
- Lessees with royalty reservations are primary to the rights obtained by the operator and hold a preferential right in the eyes of the court. In other words the minerals are the goose that lays the golden eggs through exploitation; a team effort.
- Courts, debtors,and creditors desire to keep the goose alive and work towards that end by law. One aspect of saving the goose is to maintain the rights to the eggs for all to share. Contracts to control the goose must be maintained or broken, thereby stopping the laying of golden eggs. Hence leases must be maintained and royalty obligations paid.
In my case, the creditors in control were given sufficient time by the court to make the contractual lease payments by petition to the court on my behalf. When the payment was not made, the judge ordered the lease broken. I got the goose back whole, and the other assets of the lessee were liquidated, the bond holder creditors got the proceeds after legal costs, and the unsecured creditors and second tier hangers on got little if anything and the company shareholders got the memory of goose feathers. (Lawyers cleaned up as usual)
If you have a WI interest with the debtor, better check the Operating Agreement as to your liability.
If you have a ORRI based in a governmental lease, hope you have the residual right to take the lease back.
There is a lot more to management of mineral rights than flipping a coin to lease or sell, negotiating a bonus without understanding a lease, and calculating the NRI. Mineral present a challenge full of risk, uncertainty, and vagaries of global economics. We're not making widgets.
Gary L Hutchinson