The Kings in the North! – North Dakota Operators Are Kings (For Now) When it Comes to Statutory Interest on Suspended Overrides By: D. Bradley Gibbs, edited by Rohit Raghavan & Brad McCamy
Do North Dakota operators have to pay suspense penalties on all types of late-paid interests? Not according to a recent line of decisions from the North Dakota Federal District Court. These cases interpret the North Dakota Suspense Statute as relieving operators of the obligation to pay statutory interest on suspended overriding royalty interests – and possibly working interests too. This article discusses why operators should proceed with caution when relying on this strict interpretation of the Suspense Statute. However, until the state courts or the legislature weigh in, North Dakota operators arguably wield the kingly power to suspend overrides – and working interests – for any reason or no reason at all!
Although the formalities vary by state, division orders typically include some combination of an effective date, a description of the property where the oil or gas is being produced, the type of production, the fractional or decimal interest claimed by the payee, the type of interest, an authorization to suspend payment in the event of a title dispute, the name and address of the payee, and the valuation and timing of settlements of oil and gas production. The effect of executed division orders also varies by state. In some states, division orders are a prerequisite to receiving revenue payments, 1 and in other states, they are mere nice- to-haves and of limited effect. 2 Most states’ statutory schemes pair a “division order statute” with a “suspense statute” in one or more code sections. A “suspense statute” [1] See, e.g ., Tex. Nat. Res. Code § 91.402(c); N.M. Stat. Ann. § 70-10-5.D; Utah Code § 40-6-9(8)(d). [2] See, e.g ., Mont. Code Ann. § 82-10-110(2) (“A division order does not relieve a lessee of any liabilities or obligations under the terms of the underlying oil or gas lease.”); N.D. Cent. Code § 47-16-39.3 (“Royalty payments may not be withheld because an interest owner has not executed a division order.”).
I. Division Order & Suspense Statutes Generally
The obligation to pay royalties on the sale of production from an oil or gas well generally arises on first production from the well. In many instances, an operator may circulate a document called a division order prior to the distribution of funds. A division order is an instrument executed by the lessor of an oil or gas lease to direct the payment of proceeds from the sale of hydrocarbons.
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N at i onal A ssociation of D i v i s i on O rder A nalys t s
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