a primer on overriding royalties

Annual Institute on Mineral Law

Volume 57 The 57th Annual Institute on Mineral Law Article 9

3-25-2010

A Primer on Overriding RoyaltiesSara E. Mouledoux

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A Primer on Overriding RoyaltiesSara E. Mouledoux

Gordon, Arata, McCollam, Duplantis & Eagan, L.L.P.New Orleans, Louisiana

I. IntroductionI begin by acknowledging that there are numerous articles on

overriding royalties which I have drawn on for purposes of this paper.'Here, I will attempt to define the term "overriding royalty," compare thetreatment of an overriding royalty interest with that of the lessor'sroyalty, including enforcement of such interest, consider extension andrenewal clauses and their importance in avoiding a so called "washout",and comment on recent judicial decisions concerning overriding royaltyinterests in Louisiana and in other jurisdictions. Throughout thisexamination of an overriding royalty, the potential application of thearticles of the Louisiana Mineral Code (La R.S. 31:1 et seq.) will beexamined and considered.

II. The Nature of an "Overriding Royalty"

While the Louisiana Mineral Code does not specifically define theterm "overriding royalty," it is universally considered to be a"nonoperating interest that is carved out of (the) working interest of anoil and gas lease."2 An overriding royalty is typically created byassignment3 or reservation and generally entitles the owner of theoverride to a specified share of the oil and gas produced under the termsof the lease, free and clear of drilling, completing and operating costs.4

Randall S. Davidson, The Overriding Royalty, Twenty-Seventh Annual Institute onMineral Law (1981); John K. H. Akers, Jr., Overriding Royalty Interests: Pitfalls,Precedent, and Protection, ROCKY MTN. MIN. L. INST. 21-1 (2004); Bruce A. Ney, Note,Protecting Overriding Royalty Interests in Oil and Gas Leases: Are the Courts Moving toWashout Extension and Renewal Clauses?, 31 WASHBURN L. J. 544 (1992).2 EUGENE KUNTZ, LAW OF OIL & GAS, §63.2, 217 (2009).3 The assignment can be of a present and specific interest or a future interest to beacquired by the grantor. See, e.g., Wurzlow v. Placid Oil Co., 279 So.2d 749 (La. App. ICir. 1973).4 KUNTZ, supra note 2, at 218. (citing Brenimer v. Cockburn, 254 F.2d 821 (101h Cir.1958); Kingwood Oil Co. v. Bell, 244 F.2d 115 (7th Cir. 1957); Hagood v. Heckers, 513P.2d 208 (Colo. 1973); Halbert v. Hendrix, 95 N.E. 2d 221(Ind. Ct. App. 1950); Young v.Hill, 57 S.W. 2d 470 (Ky. 1933); Campbell v. Nako Corp., 402 P.2d 771 (Kan. 1965);Homestake Exploration Corp. v. Schoregge, 264 P. 388 (Mont. 1928); Thornburgh v.Cole, 207 P.2d 1096 (Okla. 1949); MacDonald v. Follette, 180 S.W. 2d 334 (Tex. 1944);Alamo Nat'l. Bank of San Antonio v. Hurd, 485 S.W. 2d 335 (Tex. Civ. App. 1972))."One of the most important aspects of an 'overriding royalty' is that it is a 'royalty,' vizin absence of an express agreement to the contrary it is free of costs which the lessor'sroyalty is free and subject to the costs to which the lessor's royalty is subject." WILLIAMS& MEYERS, OIL AND GAS LAW, 728 (rev. ed. 2008). (whether reserved by the lessor in alease as in the earlier usage of the term or created by a subsequent instrument executed by

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Mouledoux: A Primer on Overriding Royalties

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Since an overriding royalty is typically created out of an oil and gaslease, that overriding royalty is limited in duration to the life of thelease.5 Thus, an overriding royalt7 will terminate upon expiration of thelease out of which it is created. In Louisiana, that durational limit isexpressly imposed by article 126 of the Louisiana Mineral Code whichspecifically states: "[a]n interest created out of the mineral lessee'sinterest is dependent on the continued existence of the lease."0Overriding royalties and similar interests that are carved out of theworking interest are deemed appendages of the working interest and aredependent upon the continued existence of the working interest out ofwhich they are carved.

Though the Louisiana Mineral Code does not expressly define theterm "overriding royalty,"9 several article of the Mineral Codeacknowledge such an interest and provide for a means to enforce same.'oThus, an overriding royalty interest is considered a mineral right underLouisiana law and is subject to the Mineral Code. And, a mineral right isconsidered to be an incorporeal immovable and is alienable andheritable." Moreover, since an overriding royalty is an immovable, it canonly be created, conveyed or assigned by an authentic act or an act under

the lessee or the lessee's successor) "A holder of an overriding royalty participates in thegross value of the production but does not bear any cost of production. In comparison, apossessor of a working interest while sharing in the gross value of the production bears aproportionate share of production costs." La. Land & Exploration Co. v. PennzoilExploration and Prod. Co., 962 F. Supp. 908, 913 (E.D. La 1997).5 "An outstanding characteristic of overriding royalty is that its duration is limited bythe duration of the lease under which it is created." Williams & Meyers, at 730.6 KuNTz, supra note 2, at 227.7 LA. REV. STAT. ANN. §31:126 (2000).8 See id cmt. (citing Fontenot v. Sun Oil Co., 243 So. 2d 783 (La. 1971); ArkansasFuel Oil Co. v. Gary, 79 So.2d 869 (La. 1955); Ascher v. Midstates Oil Corp., 64 So. 2d182 (La. 1953); and Wier v. Glassell, 44 So. 2d 882 (La. 1950)).9 It is important to note that the Mineral Code does define the term "royalty" as itrelates to the lessor's royalty or a mineral royalty created out of the lessor's interest.Article 213 specifically defines the term "royalty" as "any interest in production, or itsvalue, from or attributable to land subject to a mineral lease, that is deliverable or payableto the lessor or others entitled to share therein" if "[sluch interests in production or itsvalue are "royalty," whether created by the lease or by separate instrument, if theycomprise apart of the negotiated agreement resulting in execution of the lease." §31:213.Obviously, the great majority of overriding royalty interests would not qualify as a"royalty" if the underlined portion of the foregoing definition is applicable. In thisauthor's judgment, either article 213 should be amended to delete that portion of thedefinition of a "royalty" or the term "overriding royalty" should be specifically defined inthe Mineral Code.I0 See §§31:126 and 171." §31:18; see also CLK Co., L.L.C. v. CXY Energy, Inc., 07-834 (La. App. 3 Cir.12/19/07) 972 So.2d 1280, 1290 (acknowledging that "[a]n overriding royalty is anincorporeal immovable").

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Annual Institute on Mineral Law, Vol. 57 [2010], Art. 9

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private signature.12 A mineral right's situs is deemed to be in the parishor parishes where the land burdened by the mineral right is located. Allsales, contracts, and judgments affecting such rights are subject to thelaws of registry." As with other mineral rights the sale of an overridingroyalty is not subject to rescission for lesion beyond moiety.' 4 Anotherarticle of the Mineral Code which should be mentioned is Article 171which allows a co-owner of the lessee's interest in a mineral lease to"create a dependent right such as an overriding royalty, productionpayment, net profits interest, or other non-operating interest out of hisundivided interest without the consent of his co-owner."45

The term "overriding royalty" was once utilized to reflect anadditional "royalty" paid to a mineral owner above and beyond thestandard one-eighth (1/8) granted in consideration for the granting of thelease. However, through the evolution of the term in the oil and gasindustry and related jurisprudence, the term "override" attached- to aroyalty paid to a lessor under a lease is no longer considered an"overriding royalty." It is still a royalty in the sense that it is anonoperating interest carved out of the working interest of a lease butsome argue that it is simply an additional sum retained by the lessor.

It is important to note that aside from the "lessor's overridingroyalty" discussed above, there are three ways in which an overridingroyalty is created, namely through reservation, through conveyance, andby an obligation "to convey." When an oil and gas lease is assigned bythe original lessee to a third party and the original lessee reserves anoverride in that lease, Louisiana law considers such assignment a sub-lease.' 6 This distinction may be important as the obligations of a sub-lessee to its sub-lessor may be more onerous than that of the workinginterest owner to the overriding royalty holder.

12 LA. CIV. CODE ANN. art 1839 provides:

A transfer of immovable property must be made by authentic act or by act underprivate signature. Nevertheless, an oral transfer is valid between the parties whenthe property has been actually delivered and the transferor recognizes the transferwhen interrogated on oath.

An instrument involving immovable property shall have effect against third personsonly from the time it is filed for registry in the parish where the property is located.

13 Id.14 §31:17.15 §31:171.16 Bond v. Midstates Oil Corp., 53 So. 2d 149 (1951). As noted recently by theLouisiana Second Circuit Court of Appeal in Pinnacle Operating Company, Inc v.ETTCO Enterprises, Inc., in Louisiana, when a lease is "assigned to another with areservation of an interest such as an overriding royalty, it is deemed a sublease." 40-367(La. App. 2 Cir. 10/26/05) 914 So.2d 1144, 1146, n. 4.

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III. Obligations of Grantor to Overriding Royalty OwnerUnder article 122 of the Mineral Code no fiduciary relationship

exists between a mineral lessee and its lessor.'7 The mineral lessee is,however, "bound to perform the contract in good faith and to developand operate the property as a reasonably prudent operator."' 8 Based onthese two general obligations the courts in Louisiana have defined fivespecific implied obligations. They are:

(1) the obligation to develop known mineral producing formationsin the manner of a reasonable, prudent operator; (2) the obligation toexplore and test all portions of the leased premises after discoveryof minerals in paying quantities in the manner of a reasonable,prudent operator; (3) the obligation to protect the leased propertyagainst drainage by wells located on neighboring property in themanner of a reasonable, prudent operator; (4) the obligation toproduce and market minerals discovered capable of production inpaying quantities in the manner of a reasonable, prudent operator;and (5) the obligation of the lessee to restore the surface of the leasepremise on completion of operatiofis where there is evidence ofunreasonable or excessive use of the surface.' 9

An important case on this topic under consideration is TidelandsRoyalty "B " Corp. v. Gulf Oil Corp.,20 authored by Judge Wisdom of theUnited States Court of Appeals for the Fifth Circuit. Judge Wisdomfound that the implied obligations owed by a lessee to its lessor under amineral lease were not applicable to the relationship between a lesseeand an overriding royalty owner who acquired his interest by a separateassignment.21

Gulf had granted to Tidelands by separate assignment an overridingroyalty which covered certain areas in the Gulf of Mexico includingBlock 332 of the West Cameron Area off the Louisiana coast.22 Gulf also

" §31:122.' Id.

19 See §31:122 cmt.; Terrebonne Parish Sch. Bd. v. Castex, 04-0968 (La. 1/19/05)893 So. 2d 789, 801. Additionally, it has been suggested that there is an impliedobligation of a lessee to fairly represent its lessor before regulatory agencies applicable inLouisiana although no court has addressed the issue to date. See John M. McCollam, APrimer for the Practice of Mineral Law under the New Louisiana Mineral Code, 50 TUL.L. REv. 732, 804 (1976).20 804 F.2d 1344 (5th Cir. 1987).21 Id. at 1355. ("The.relationship between the parties is neither that of a lessor andlessee nor that of an executive and nonexecutive. Nevertheless, an examination of thenature of the agreement in this case leads to the conclusion that Gulf's implied dutytowards Tidelands is only one of good faith the standard of conduct implicit in anexecutive-nonexecutive relationship.")22 Id at 1348. 43 U.S.C. §l333(a)(1), (2)(A) provides:

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was the lessee of West Cameron Block 333 to which the plaintiffsoverride did not attach.23 After drilling a dry hole on Block 332, Gulfcompleted a successful gas well on Block 333 and eventually built adrilling platform on Block 333 from which five additional successfulwells were completed.24 At least two of the Block 333 wells weredraining a reservoir underlying both Block 333 and Block 332.25Tidelands filed suit seeking damages from Gulf based on Gulf's failureto Rrotect it from drainage under the alleged implied obligation to doso. The district court found that the even though there was no minerallease between plaintiff and defendant, the "implied obliations attendinga mineral lease also attend overriding royalty interests."2

On Appeal, the U.S. Fifth Circuit overturned the district court'sruling and held that the implied covenants of a mineral lease do notattach to an overriding royalty interest. The court compared theoverriding royalty at issue to that of a mineral royalty created by alandowner which "establishes an executive-nonexecutive relationship"with the landowner (the executive interest owner) having the right togrant leases and the mineral royalty owner (the nonexecutive interestowner) not having the right to explore, develop, or lease the subjecttract. 28 The court then found that Tidelands only had a "passive interestin the tracts subject to its overriding royalty" and that it had no right to"produce or explore for minerals."29

The court then contrasted that relationship with the lessor/lesseerelationship where the lessee assumes "an affirmative, implied obligationto develop the leased premises" and "the lessor surrenders his exclusiveright to explore for and produce minerals in exchange for the lessee'sobligation to develop and protect from drainage."30 In considering article

To the extent that they are applicable and not inconsistent with this subchapter orwith other Federal laws and regulations of the Secretary now in effect or hereafteradopted, the civil and criminal laws of each adjacent State, now in effect orhereafter adopted, amended, or repealed are hereby declared to be the law of theUnited States for that portion of the subsoil and seabed of the outer ContinentalShelf, and artificial islands and fixed structures erected thereon, which would bewithin the area of the State if its boundaries were extended seaward to the outermargin of the outer Continental Shelf.

23 Tidelands, 804 F.2d at 1348.24 Id25 Id.26 Id.27 Id.28 Id. at 1350.29 Id.30 Id

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109 of the Louisiana Mineral Code31 in its analysis of the obligations ofGulf to Tidelands, the court recognized:

The Mineral Code preserves the rule of earlier jurisprudence that thenonexecutive royalty interest is passive and not generally protectedby any implied affirmative duties of the grantor of the right absent alessor-lessee relationship. The royalty owner's interest isspeculative: a hope that the grantor's own interest in securingproduction will, in fact, result in production from the tract burdenedby the royalty. If this hope fails to materialize because of thegrantors' inaction, the royalty owner has no complaint. 32

The court did recognize that the grantor of a royalty interest "mustact with good faith towards the interest of the royalty owner" but furtherfound the grantor need not act unreasonably or against its own economicinterest to fulfill the good faith obligations. 3 Specifically, the court held,"[i]f the conduct of the grantor is supported by reasons other than merelythe advantage of avoiding the royalty burden, the standard of good faithmay be fulfilled even though the royalty owner is harmed."34 The courtfurther concluded that the obligatioh of good faith implicit in therelationship between Tidelands and Gulf did not "create an affirmativeduty of Gulf to protect Tidelands' interest"35 Thus, it reversed the districtcourt and remanded the action for a determination of whether Gulf'sactions violated the good faith standard.36

A question arises, however, relative to an overriding royalty interestwhich is created by the assignment of a lease with the reservation of anoverriding royalty interest as opposed to the conveyance of an overridingroyalty interest by a separate assignment. As noted above, in Louisiana,the assignment of a mineral lease with the reservation of an overridingroyalty creates a sublessor/sublessee relationship.37 Therefore, anargument can be made that the implied covenants established underarticle 122 of the Mineral Code and Louisiana jurisprudence are

31 Article 109 of the Mineral Code provides:

The owner of an executive interest is not obligated to grant a mineral lease, but indoing so, he must act in good faith and in the same manner as a reasonably prudentlandowner or servitude owner whose interest is not burdened by a nonexecutiveinterest.

§31:109.32 804 F.2d at 1352.

3 Id. at 1353.34 Id.

35 Id.

36 Id. at 1355.

n See Pinnacle Operating Co., 914 So.2d at 1146, n. 4.

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applicable to that relationship. While some states have rejected thisposition, the issue is still unsettled in Louisiana in this author's opinion.

IV. Enforcement of Overriding RoyaltiesThe Louisiana Civil Code provides that a liberative prescription of

three years applies to "an action to recover underpayments oroverpayments of royalties from the production of minerals."" A questionarises as to whether or not this liberative prescription period is applicableto claims for under or over payment of overriding royalties due to thedefinition of "royalty" provided in article 213 of the Mineral Code.4 Theoriginal enactment of the Louisiana Mineral Code included specificprocedures for the enforcement of royalty obligations owed to a lessorunder a mineral lease.4 1 The purpose of those articles was to "providelessors with a meaningful remedy while simultaneously giving operatorswho have made substantial investments in producing properties thesecurity of title which the nature and size of their investment deserves."A2

In 1982, similar provisions were added to the Louisiana Mineral Code toprovide a specific manner in which to ensure payment of overridingroyalties. These provisions are very similar to those for enforcing thepayment of a lessor's royalty but obviously do not include the harshremedy of lease cancellation provided in article 140 as an overridingroyalty is a passive interest in a lease.4 3

Article 212.21 states that "[i]f the owner of a mineral productionpayment or a royalty owner other than a mineral lessor seeks relief forthe failure of a mineral lessee to make timely or proper payment ofroyalties or other production payments, he must give his obligor writtennotice of such failure as a prerequisite to a judicial demand fordamages."" Article 212.22 goes on to provide that "[t]he obligor shallhave thirty days after receipt of the required notice within which to payroyalties or production payments due or to respond by stating in writing a

38 See, e.g., McNeill v. Peaker, 488 S.W. 2d 706 (Ark. 1973) (holding that Arkansaslaw does not recognize implied covenants on the part of an assignee of an oil and gaslease to an overriding royalty owner whose interest was created by reservation and who isnot a lessor).3 LA. CIV. CODE ANN. art. 3494 (2010).4 See supra note 9, regarding the need to define the term "overriding royalty."41 See §31:137-140.

42 §31:137 cmt.43' §31:140 provides:

If the lessee fails to pay royalties due or fails to inform the lessor of a reasonablecause for failure to pay in response to the required notice, the court may award asdamages double the amount of royalties due, interest on that sum from the date due,and a reasonable attorney's fee regardless of the cause for the original failure to payroyalties. The court may also dissolve the lease in its discretion.

4 §31:212.21.

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reasonable cause for nonpayment."4' The effect of payment ornonpayment of the sums due or stating or failing to state a reasonablecause for nonpayment within this period is treated in Article 212.23 asfollows:

A. If the obligor pays the royalties or production payments due plusthe legal interest applicable from the date payment was due, theowner shall have no further claim with respect to those payments.

B. If the obligor fails to pay within thirty days from notice but statesa reasonable cause for nonpayment, then damages shall be limited tolegal interest on the amounts due from the date due.

C. If the obligor fails to pay and fails to state a reasonable cause forfailure to pay in response to the notice, the court may award asdamages double the amount due, legal interest on that sum from thedate due, and a reasonable attorney's fee regardless of the cause ofthe original failure to pay. 4

There are only three reported decisions in Louisiana which evenreference these articles, two of which are relatively recent and discussedbelow.

V. Extension and Renewal ClausesAs discussed above, an overriding royalty in Louisiana is

considered "an appendage to an oil and gas lease."A7 "Expiration of alease generally destroys an overriding royalty interest appended to thelease."48 "A 'washout' is the elimination of the nonoperating interest as aresult of the termination or surrender of the burdened lease, and thesubsequent reacquisition of a lease on the same lands by the lessee or itsagent with the intention of taking the lease free from the burden of thatnonoperating interest."" An extension or renewal clause, also commonlyreferred to as an anti-washout provision, in the assignment of anoverriding royalty is intended to protect the interest of the overridingroyalty holder in the property.s0 As observed in by the United StatesCourt of Appeals for the Fifth Circuit in the Avatar case:

45 §31:212.22.46 §31:212.23. But see supra note 9.4 Avatar Exploration, Inc. v. Chevron U.S.A., Inc., 933 F.2d 314, 319 (5th Cir. 1991)(citing §31:126)).4 Id. (citing Fontenot v. Sun Oil Co., 243 So. 2d 783, 786 (La. 1971) and Wier v.Glassell, 44 So.2d 882, 888 (La. 1950)).4 John K. H. Akers, Jr., supra note 1, at §21.2 (citing Sawyer v. Guthrie, 215 F.Supp. 2d 1254, 1258 (D. Wyo. 2002) and Otter Oil Co. v. Exxon Co. U.S.A., 834 F.2d531, 533 (5th Cir. 1987)).so 933 F.2d at 319. (citing Otter Oil Co. v. Exxon Co., US.A., 834 F.2d 531, 533 (5thCir. 1987)).

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Unhindered by an anti-washout provision, a lessee could agree withthe landowner to allow a current lease to expire and to enter a newlease on the same land unburdened by the overriding royaltyinterest. These clauses are for the purpose of extending theoverriding royalty interest to new leases obtained on the sameproperty by the same lessee.'

Since an overriding royalty cannot exists beyond the life of thetenement of title out of which it is created, the inclusion of an extensionand renewal clause is vital to ensure the continued existence of theoverriding royalty interest.

There are issues, however, as to how such a clause is to be appliedin various factual situations. For example, how long is such a clause inforce and effect? What about long periods of interruption in title? Shouldthe clauses be applicable just for a one-year period? A ten year period?In perpetuity? When confronted with these issues the courts should lookto the general rules of contract interpretation in Louisiana, as thecommon intent of the parties at the time of contracting should govern thecontract.52

Another issue is what if there is no extension and renewal clause butthere has clearly been collusion between the lessor and the lessee toterminate the lease solely to eliminate the overriding royalty obligation.While there is clearly no fiduciary relationship or any implied covenantto maintain the burdened lease, there is always the concept of good faithdealing. All these aspects must be considered in determining whether theoverriding royalty attaches to the "new" leases.

VI. Recent Cases in LouisianaThere are two relatively recent cases in Louisiana that address some

of the issue discussed above. Both are out of the Louisiana Court ofAppeal for the Third Circuit and are addressed below.

1. CLK Co., L.L.C. v. CXY Energy, Inc., 872 So. 2d 1280, (La.App. 3 Cir 2007)This matter involved the enforcement of an obligation "to assign an

overriding royalty." The plaintiff, CLK, was a consulting group thatgenerated geological drilling prospects for the oil and gas industry. It hadentered into an agreement (the "Confidentiality Agreement") with thedefendant regarding a prospect in Southwest Louisiana.5 3 CLK agreed toprovide geophysical and geological services to CXY in exchange for a3.125% of 8/8ths overriding royalty interest, if CXY "acquired an

5 Id.52 LA. CIV. CODE ANN. art. 2045 (2010).s3 07-834 (La. App. 3 Cir. 12/19/07) 972 So.2d 1280, 1283.

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interest or the right to acquire an interest in the prospect." 54 The timeperiod in which the interest or the right to acquire an interest had to beobtained in order for the CLK override to attach was limited to a oneyear period." The Confidentiality Agreement did not contain a form ofassignment or any specific terms that the ultimate assignment wouldinclude. 56

The prospect at issue included state water bottoms and overlappingprivately owned lands which made the prospect subject to very specificbidding rules with the Louisiana State Mineral Board. CXY obtainedthe state lease (State Lease 14367) covering the prospect but eventuallyreleased it in exchange for a state operating agreement (OperatingAgreement A0206) due to mistakes made by CXY in the biddingprocess.58 Several months later, CXY released Operating AgreementA0206 and entered into another operating agreement with the state(Operating Agreement A0217) which covered the same acreage as StateLease 14367 and Operating Agreement AO206 plus an additional tract.59

At trial, the parties stipulated that CLK was owed an overridingroyalty interest in both State Lease 14367 and Operating AgreementAO206 and that no assignment was ever made. 60 The defendant deniedthat CLK was owed an overriding royalty interest in OperatingAgreement A0217 because it was obtained after the one year periodprovided for in the Confidentiality Agreement.61 The plaintiff argued thatif an assignment of an overriding royalty in State Lease 14367 orOperating Agreement A0206 had been made when it was owed (withinone year), such assignment would have included an extension andrenewal clause. And, that the inclusion of such a clause would have madethe overriding royalty interest applicable to Operating Agreement A0217since it was an extension of State Lease 14367 and Operating AgreementA0206.62

At trial, the plaintiff introduced evidence regarding the form ofassignment typically utilized by the defendant in conveying overridingroyalties which included a standard extension and renewal clause.6 ' The

54 Id.ss Id.56 Id.

5 Id. at 1283-84.58 Id. at 1284-85.

s9 Id.60 Id61 Id.62 Id.63 Id. at 1288. Testimony was offered at trial from a lease analyst for the defendantwho stated that it was her responsibility to prepare the assignments for the defendant, that

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trial court found, and the appellate court affirmed, that because theConfidentiality Agreement did not define the word "assign" or detail theterms of the assignment of the overriding royalty, it was ambiguous andtherefore extrinsic evidence was admissible to show the parties' intent.6The court upheld the jury's finding stating that "the evidence establishedthat, pursuant to industry custom (as of 1992), any assignment of anoverriding royalty interest would have included an extension or renewalclause."6 5

Another issue in this case worth noting for purposes of this paperdealt with whether certain correspondence from the plaintiff to thedefendant constituted proper written demand for payment of royaltiesunder Article 212.21 of the Louisiana Mineral Code entitling CLK to aclaim for double damages.66 The appellate court overturned the trial courtand found that the correspondence at issue was a request for assignmentof an overriding royalty and not a demand for payment of royalties asrequired under Article 212.21.6 Further, the court acknowledged that noroyalties were due at the time of the correspondence as there had been noproduction from the prospect.

2. Cimarex Energy Co. v. Mauboules, 6 So. 3d 399 (La. App. 3Cir. 2009)The Cimarex case is not an overriding royalty case, however the

court considered the accrual of damages under the Articles of theMineral Code which deal with the demand for payment of overridingroyalties and therefore should be noted for the purpose of this paper. Thisaction was a concursus proceeding instigated by the operator claimingthat there was a dispute as to the entitlement to certain monies betweencompeting interests.6 9 The court found that there was no valid basis forthe concursus proceeding and that the operator had failed to make properpayment of royalties even though it was depositing funds into theregistry of the court.70

the defendant's customary form included an extension and renewal clause, that she hadbeen instructed to prepare an assignment in favor of the plaintiff, and that she preparedthe customary assignment which included an extension and renewal clause. Id. at 1289.6 Id. at 1288.

65 Id. at 1289.6 Id. at 1290. The trial court had instructed the jury that the correspondence at issuewas proper notice under 31:212.21. The jury, however, did not award double damages.Id.67 Id. at 1291.68 Id.69 08-452 (La. App. 3 Cir. 3/11/09) 6 So.3d 399, 404. There was a dispute as towhether the sale of a lessor's royalty was valid. Id. at 403.70 Id. at 406. The trial court found that the "concursus proceeding was orchestrated asa condition to the lessor (Marboules) granting Cimarex a mineral lease, rather than as a

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The appellate court affirmed the trial courts findings that: (1) theroyalty owner had made proper demand for payment of royalties underMineral Code article 212.21, (2) Cimarex had failed to pay in response tothe notice of failure to pay and (3) Cimarex had failed to state areasonable cause for failure to pay.' The court upheld the award ofdouble damages finding:

The royalties owed to Orange River are not damages but merely asum of money due that would be owed to Orange River in anyevent, as Orange River is the rightful owner of those royaltyinterests. The Mineral Code, as cited above, plainly states that thecourt may award double the amount due as damages. Thus, theobligor, in addition to owing the unpaid royalties, would pay anadditional sum as damages to the obligee. 72

As to the interest award under Article 212.23, the court found thatthe "'date due' for damages for delayed performance is the date ofwritten demand" instead of the date of judgment as argued by Cimarex.nThe court did however only award interest from the date of judicialdemand because the royalty owner had not appealed such award from thetrial court.74

VII. Recent Cases in Other JurisdictionsTo complete this analysis there are two (2) non-Louisiana cases

which should be mentioned.

1. El Paso Production Co. v. Geomet, Inc., 228 S.W.3d 178 (Tex.App. 2007)This case was decided by a Texas court applying Alabama law

pursuant to a choice of law clause. 7s The issue presented was the effectof a preferential purchase right on a previously created overriding royaltycovering lands within an area of mutual interest ("AMI") created by ajoint operating agreement ("JOA"). In May of 2004, El Paso, notifiedthe defendant, Geomet, that it wanted to purchase Geomet's interest inthe overriding royalty covering the area subject to the preferential right.7Geomet argued that while El Paso did have the right to purchase its

result of actual concern about a competing claim." Id. at 404.71 Id. at 407.72 Id. at 407.

7 Id. at 408.74 Id. at 408. "Further, while we did find that the interest on the statutory damagescould have potentially begun to accrue from the date of judicial demand Orange River didnot appeal that issue." Id.7 228 S.W. 3d 178, 180.76 Id.

n7 Id.

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leasehold interest, it did not have the right to purchase its overridingroyalty.7' El Paso then filed suit seeking specific performance of thepreferential right to purchase clause. 79 The claim in question providedinter alia, that if any party desired to sell all of any part of its interestsunder the JOA, ... "or its right and interest in the Contract Area, it wouldgive notice to the other party pursuant to the preferential right clause." 80Geomet, the owner of the overriding royalty, refused to accept the noticefrom El Paso on the ground that the overriding royalty "was not part ofthe Contract Area" under the Farmout Agreement.8 ' The court, however,found that the issue was not whether the overriding royalty "was part ofthe Contract Area" but was rather "whether the overriding royaltyconstituted a right or interest in the Contract Area."82 The court thenfound that because the overriding royalty was clearly "a right and interestin the land and leases in the Contract Area and as such, was subject to thepreferential right to purchase." The lesson to be learned here is that ifthe parties intend the overriding royalty to not be subject to thepreferential right to purchase clause, that intent should be clearly spelledout in the instrument creating the overriding royalty and/or theinstrument creating the preferential right to purchase.

2. Bakke v. Murex Petroleum Corp., 2008 WL 4937553 (D.N.D.2008)The court held that a release of the lease out of which an overriding

royalty had been carved had the effect terminating the override.8 Theissue arose because the assignment creating the override in questionprovided that it would be "binding upon and shall inure to the benefit andassignor and assignee and their respective successors and assigns."85 Inso holding the Court expressly rejected the argument that because theassignment creating the override was to be binding on assignees that itwas in effect "an extension and renewal clause" and that the unilateraltermination of the leases did not violate the duty of good faith and fairdealing.

78 Id.7 Id.80 Id. atl 81.Si Id. at 180.82 Id. at 182. The overriding royalty in question had been carved out of oil and gasleases which covered the Contract Area. Id.

83 Id. at 182.84 No. 07-86, 2008 WL 4937553, *6 (D.N.D. Nov. 13, 2008) Note the similarity withthe Louisiana case of Wier v. Glassell, 44 So.2d 882 (La. 1950).85 2008 WL 4937553, at *6.86 2008 WL 4937553, at *6.

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VIII. Conclusion

As noted at the inception of this paper, its basic purpose is to collectthe existing authorities on overriding royalties and to briefly discuss theessential features of an overriding royalty. Hopefully, the paper hasachieved its purpose and will provide a starting point for additionalresearch should the need arise.

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a primer on overriding royalties

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