What Happens to Landowner Royalties in Bankruptcy?

Given the possibility of some oil companies going bankrupt if the current low prices continue, what happens to landowner royalty payments? Assuming one has a well in production and is receiving checks, and the well remains in production, would the landowner continue to be paid the contracted amount each month? Or would landowners be just another "creditor" standing in line to perhaps receive less than full value of their royalties somewhere down the road? Are there any laws protecting landowners above more routine creditors in a bankruptcy situation? Just curious if anyone knows how this would work in Ohio? Thanks.

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Permalink Reply by william Allen. Ladd on March 30, 2020 at 1:16am

A very good question Dave.   I'll just bet you that many other members are asking the same question. And I would not be surprised if  many of these land owners have borrowed money with the idea that the expected royalty would make the payments.  And even now they are having a really tough time paying off those loans.      Granddad Ladd 

Permalink Reply by Nancy Mosley on March 30, 2020 at 3:57am

I have wells owned by companies that have gone bankrupt (Triad, Postrock come to mind). The royalty payment is one of the top priorites to be paid. As I remember, there was no or little disruption in payment. However, I remember talk from my parents about when Enron went bankrupt and payments were not made. Enron was not a well operator so a whole different thing.

I am not a lawyer, just giving what I remember.

Permalink Reply by bo boboski on March 31, 2020 at 12:40am

I know a farmer who got about $600,000. bonus for oil&gas lease. the bank got the check,because he owed that much on the farm and was in foreclosure proceedings. I'll bet, the trustee in a bankruptcy,will take any royalty money that is coming to person in the Bankruptcy.

Permalink Reply by william Allen. Ladd on March 31, 2020 at 3:09am

Id think that "TRUSTEE" would be in serious trouble if he took more then he is entitled to!

Granddad Ladd

Permalink Reply by Lori Huber on March 31, 2020 at 3:44am

Not a lawyer but, it would seem that in a bankruptcy, only the property of the person/company declaring is subject to seizure, as far as I understand it. Being that land owner royalty owners OWN their portion of the gas being sold in royalties, I wouldn't think that their percentage of ownership could be considered part of the bankruptcy. Of course, disposition of the company and its operations would definitely affect what is done with the wells and whether drilling and sales would continue, but I don't believe that they could seize the portion of royalties owned by those other than the company in bankruptcy. We have legal contracts filed and recorded showing what we own. If they stop producing gas of course, we would own a whole lot of nothing since we can't get it out of the ground and to market ourselves, but I can't imagine even the bankruptcy courts being able to seize what doesn't belong to the company. Wouldn't make any sense. None the less, bankruptcy can't be good for the company producing and selling your gas, unless another buys them out. Having had our lease (and royalties) bought out by several companies, I do know that the original lease terms hold regardless of who hold it.

Permalink Reply by Nancy Mosley on March 31, 2020 at 3:53am

My two experiences had different circumstances. Triad restructured and was sold (very sketchy on details) and Postrock was just plain sold but both times they (lawyers) sent lots of paperwork about it, updates etc, assuring that our royalty payments were protected. Maybe other situations would be different. I remember with the Postrock sale the paperwork was filed in the courthouse listing the wells sold. I think the Triad restructuring was a different legal thing.

If it were a small company and nobody wanted to buy it, that could have a whole different set of circumstances.

Permalink Reply by Jim Litwinowicz on April 6, 2020 at 7:02am

There are different types of bankruptcy.  One is a re-organization in which some debt is forgiven, some is re-negotiated with debt holders,  and/or payments are re-scheduled. Sometimes assets are sold off to pay down debt. If a lease is sold off, I would assume the lease is still in full affect. These companies then proceed on in business. In those I would think that royalties are the result of a contract and would be kept the same.

Another bankruptcy is to dissolve the company completely.  Sometimes another company will buy up the assets and if so, I would think the lease contract would hold. If the company is dissolved and no one buys the lease, then it would be null and void.  Then, if you are in a productive area, another company could offer a new lease and you go through the full negotiations again. But with prices so depressed and the economy in turmoil, it will most likely be some time before any company offers any new leases.

All just my opinion, I am not an attorney.  Consult with one should your lessor go belly up.

Permalink Reply by Robert Allingham on April 13, 2020 at 12:32pm

When Rex Energy went bankrupt royalties were still paid timely to me. It only makes sense (altho I'm no attorney) because the leases are what gives a company its greatest value. By honoring royalties and therefore keeping those drilling contracts current it gives a bankrupt company a greater value for a buyout or liquidation. Most leases can be dissolved for not paying leassors(landowners) and a company with no leases isn't very valuable as most of its equipment is either leased or owned by subcontractors. Of course there are exceptions to every rule but I would say the probabilities are great that royalties will continue to be paid during any type of bankruptcy. imho. 

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