Given the stresses on the oil and gas industry over the last year, it’s not surprising that there have been many oil company bankruptcies, both in Texas and throughout the country. Royalty owners throughout Texas have been getting notices that the operator who is paying their royalties have filed for bankruptcy. In most cases, the oil company is filing a Chapter 11 proceeding, which is a reorganization, although a few have filed a Chapter 7 bankruptcy proceeding, which is a liquidation.
In the 1980s, the Texas Legislature added a provision to the Texas Business and Commerce Code to assist royalty owners. It is known as the “First Purchaser Statute” and is found in TEX. BUS. & COM. CODE § 9.343. The statute states, in part:
This section provides a security interest in favor of interest owners, as secured parties, to secure the obligations of the first purchaser of oil and gas production, as debtor, to pay the purchase price. An authenticated record giving the interest owner a right under real property law operates as a security agreement created under this chapter. The act of the first purchaser in signing an agreement to purchase oil or gas production, in issuing a division order, or in making any other voluntary communication to the interest owner or any governmental agency recognizing the interest owner’s right operates as an authentication of a security agreement in accordance with Section 9.203(b) for purposes of this chapter.
The security interest provided by this section is perfected automatically without the filing of a financing statement. If the interest of the secured party is evidenced by deed, mineral deed, reservation in either, oil or gas lease, assignment, or any other such record recorded in the real property records of a county clerk, that record is effective as a filed financing statement for purposes of this chapter, but no fee is required except a fee that is otherwise required by the county clerk, and there is no requirement of refiling every five years to maintain effectiveness of the filing.
Such security interest “exists in oil and gas production, and also in the identifiable proceeds of that production owned by, received by, or due to the first purchaser,” in certain circumstances.
As a result of the statute, a royalty owner could file a proof of claim in its operator’s bankruptcy proceeding as a perfected secured creditor, giving it priority over general unsecured creditors and giving that owner a much better chance of being paid delinquent royalties. A recent bankruptcy case has eliminated much of the protections of the statute. In the case of In re SemCrude, L.P., 407 B.R. at 112 (2009), the Bankruptcy Court held that since the operator in bankruptcy was headquartered in Delaware, an Oklahoma statute giving royalty owners secured creditor status did not apply. The interest owners in that case were thus treated as general unsecured creditors. (Keep in mind that one way a Texas royalty owner could protect themselves was to provide in the lease that the lease or lease memorandum could be filed in the deed records as a financing statement and then to file that document with the Secretary of State in Texas and in the state where the operator is incorporated). Oklahoma then added the Oil and Gas Owners’ Lien Act, which actually gave interest owners an actual lien on the oil and gas. In a second case, In re First River Energy, LLC, 2019 WL 1103294, (Bankr. W.D. Tex. 2019), the Bankruptcy Court held that the Oklahoma interest owners were entitled to their lien status based on the new statute, while Texas interest owners lien rights were disregarded.
On March 10 and 11, 2021, Senate Bill 1468 and House Bill 3794 were introduced to respond to the problems royalty owners faced in the SemCrude case. The bills would create a new Chapter 67 in the Business and Commerce Code that would give royalty owners a lien on oil or gas and is modeled after the Oklahoma Oil and Gas Owners’ Lien Act. If passed, the bill would eliminate the problem that royalty owners face when the operator who files bankruptcy is headquartered in a state other than Texas.