On September 15, 2014, the New Mexico Supreme Court entered a decision in First Baptist Church of Roswell v. Yates Petroleum Corp., a case that could call into question the validity of royalty agreements and division orders throughout New Mexico and that will have broad implications for how New Mexico operators draft and negotiate such agreements in the future. In rejecting a contractual provision that allowed an operator to withhold interest payments on monies held in suspense, the state supreme court articulated a strong state policy in favor of royalty interest holders, elevating that policy over private parties’ freedom to contract in oil and gas transactions.
The New Mexico Oil and Gas Proceeds Act ( “OGPA”), N.M. Stat. Ann. §§ 70-10-1 to -6, requires that royalty payments on oil and gas production be paid to royalty interest owners within six months after the first sale of oil and gas from the well. The Act also provides that, in instances where payments cannot be made within the six-month period because, among other reasons, there is a delay in determining who is legally entitled to receive the payments, the royalty payor shall place royalty proceeds in a suspense fund until the proper recipient of royalties is determined. Once the proper payee is determined, the Act directs that “[t]he person entitled to payment from the suspended funds shall be entitled to interest on the suspended funds from the date payment is due.”