The New Mexico Court of Appeals was recently called upon to determine whether a contractual agreement to waive interest on proceeds owed to mineral owners was rendered void by the New Mexico Oil and Gas Proceeds Payment Act (the “Act”). As most of those operating in New Mexico know, the Oil and Gas Proceeds Payment Act governs the timing and procedure required for the payment of proceeds from oil and gas productions to interest holders of those minerals. The current version of that law provides that payments must be made within certain time frames and, if payment cannot be made within the time limit provided, the operator must hold the funds in a suspense account and pay interest once the funds are distributed.

In the case at hand, Yates Petroleum Corp. was the operator and was sued by a class of mineral owners, (the First Baptist Church of Roswell being one of the representative class members), who claimed they were entitled to interest on the proceeds they received from production of the well under the Act. After production was obtained, Yates ordered a title opinion and required each person who was entitled to a royalty share to execute a division order. Yates’ division order further provided that until a satisfactory title determination was made, no interest was owed on withheld payments. All of the division orders in this case were signed and returned. However, there were questions regarding title, so the proceeds were suspended.

When the Plaintiffs in the case at hand were put on pay status, Plaintiffs claimed they were owed interest pursuant to the Act. Yates refused, pointing to the division orders signed by Plaintiffs that authorized payment without interest in cases of questions concerning title. Plaintiffs sued and the district court held that the agreement to suspend payment without interest violated the Act. The district court declared the agreement in the division order void. The reasoning behind the district court decision was that the Act created:

a mandatory requirement that payors pay interest on suspended oil and gas accounts. [The Act] is positive law, and [the Act] expresses strong public policy. The provisions of [the Act] are incorporated in the [d]ivision [o]rder here. Any contractual provisions that attempt to delete the mandatory requirement to pay interest as provided in [the Act] are unenforceable as violative of New Mexico public policy.

Yates appealed to the New Mexico Court of Appeals.

The Court of Appeals reviewed the Act’s history, the legislative intent and New Mexico’s public policy as it made its determination, and ultimately reversed the district court’s holding. The Court of Appeals first found that the Legislature did not intend to prohibit contractual agreements to waive the payment of compensatory interest under the Act. The Court of Appeals stated that they “[found] nothing in the plain language of the Act which explicitly articulates a fundamental public policy that payment of compensatory interest is deemed to be of such importance, required in the public interest, that its payment cannot be waived.” Further, they found that there was no evidence that “allowing the parties to contractually waive compensatory interest in the division order ‘manifestly tend[s] to injure the public.’”

The Court concluded that in this case, “the parties contractually agreed in the division orders that when there is a good faith question of title, the interest holder agrees to provide the payor with abstracts or other evidence of title acceptable to the payor and to cure any defects which render the title unmarketable. Consistent with their right under [the Act], the parties also contractually agreed that “[i]n the event of failure [of the interest holder] to furnish such evidence of marketable title, [the payor] is authorized to withhold payments without payment of interest until the claim is settled.” As a result, the Court of Appeals held that contractual agreements waiving interest owed to mineral owners is not void under the Act.