Joint Operating Agreements: Default and Bankruptcy Texas and Oklahoma Series Presented by: Melissa Munson & Blake Jones
These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the authors and Steptoe & Johnson PLLC cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the authors or Steptoe & Johnson PLLC. While every attempt was made to ensure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.
Road Map I. DEFAULT a) Liability of the Parties b) Express JOA Remedies c) Enforcement of Default Remedies II. BANKRUPTCY a) Effect of Bankruptcy b) Assumption/Rejection of the JOA c) Risk Mitigation
Liability of the Parties • ART. VII(A) • Each party is responsible only for its shares of costs. • No party is liable to a third party to pay the debts of a co-party to the JOA. • The parties do not intend to create a partnership. • The parties do not have a fiduciary relationship. • But the parties have the obligation to act in good faith in their dealings with each other.
Liens and Security Interests • ART VII(B) – scope of collateral and obligations Each party grants a lien on its now-owned and after-acquired Leases and • Interests. Each party grants a security interest in now-owned and after-acquired • personal property. To secure performance, including: • Payment of expenses. • Proper disbursement of all monies paid. • Assignment or relinquishment of interest in Oil and Gas Leases. • Proper performance of operations. • Liens cover: • Leasehold, WIs, operating rights, RIs and ORRIs, now owned or after- • acquired. As-extracted hydrocarbons. • Accounts, contract rights, inventory, intangibles. • Proceeds and products of the above. •
Liens and Security Interests • ART VII(B) – perfecting the lien Under the JOA: • Each party is required to execute and acknowledge the recording • supplement. Either party is authorized to file the JOA or recording supplement as a • lien or financing statement. Perfecting the lien on real property: • Laws of the state where the Contract Area is located dictate how liens • are perfected. Recording the JOA versus the Recording Supplement. • Perfecting the lien on personal property: • The nature of the collateral determines the method of filing and • perfection. Generally the UCC requires filing financing statement with Secretary of • State. But consider as-extracted collateral. •
Liens and Security Interests • ART VII(B) – reps and warranties Each party represents and warrants to the others that the lien and security • interests granted are first and prior liens. This does not guarantee the priority of the liens. • To determine whether there are secured creditors, conduct due • diligence in applicable counties and Secretary of State recording offices. What if there is a higher priority perfected lien? • Determine scope of collateral. • Determine whether creation agreement permits JOA liens to take • priority. Negotiate a subordination agreement. • Determine whether additional collateral will be required. •
Liens and Security Interests • ART VII(B) – enforcing the security interest Parties with security interests are entitled to exercise rights as a secured party • under the UCC. Filing a lawsuit and obtaining a judgment is not an election of remedy and • does not otherwise affect a party’s lien rights. Non-defaulting parties may collect from the purchaser of the oil or gas the • proceeds the defaulting party would have been entitled to. If defaulting party fails to pay its share of expenses, interests or fees. • 2015 Form: or other financial obligations under the JOA. • If Operator improperly uses funds. • 2015 Form: the improper use of funds by any party. •
Liens and Security Interests • ART VII(B) – non-operator obligation • If a party fails to pay its share within 120 days after statement issued: • Operator can request • Non-defaulting parties, including Operator • To pay the unpaid amount • In proportion to their respective interests • Prevents the Operator from acting as the banker for all Non-operators. • The amount paid by a non-defaulting party is secured by the liens and security rights previously granted. • Each paying, non-defaulting party may independently pursue any available remedy. • Each paying, non-defaulting party is entitled to recover interest under Exhibit C - COPAS.
Liens and Security Interests • ART VII(B) – non-performance and waiver • Non-performing parties subject to foreclosure or execution proceedings waive: • Right of redemption. • Right of valuation or appraisement before sale. • Right to stay execution • Right to any required bond when receiver is appointed. • Each party grants to the others a power of sale as to any property subject to the lien. • Sale must be exercised in manner provided by applicable law. • Sale must be exercised in commercially reasonable manner. • Sale must be conducted with reasonable notice.
Advances • ART VII(C) • Operator can elect to require parties to pay their shares of estimated expenses in advance. • Requires submission of itemized statement and invoice. • Statement and invoice must be submitted on or before 20 th day of month preceding advance request month. • Each party must pay its share within 15 days after estimate is received. • 2015 Form: each party gets 30 days to pay. • If a party fails to pay its share of the estimate, the amount due bears interest. • Adjustments are made monthly between advances and actual expenses.
Advances • ART VII(C) • Advances are secured by Operator’s liens and security interests. • What kind of security could satisfy the advance payment requirement? • Letter of credit • Cash deposits • Surety bonds • Guarantees • Non-operator considerations • Use of funds and separate accounts • Return of unused funds and time limits • Interest • Limits on operations
Default and Remedies • 1. Suspension of Rights • 2. Suit for Damages • 3. Deemed Non-Consent • 4. Advance Payment • 5. Costs and Attorneys’ Fees
Suspension of Rights ART VII(D)(1) • • Deliver Notice of Default, which shall specify: • The default. • The action to be taken to cure the default. • That failure to take action will result in exercise of one or more remedies. • If default is not cured within 30 days of delivery of notice: • All rights of defaulting party may be suspended until the default is cured. • If Operator is in default, the Non-operators can appoint a new Operator. • Rights to be suspended include: • The right to receive information. • The right to elect to participate in subsequent operations. • The right to participate in current operations. • The right to receive proceeds of production from any well subject to the JOA.
Suit for Damages • ART VII(D)(2) • Suit for damages. • Any non-defaulting party can bring a lawsuit to collect amounts in default + interest. • The expenses for that lawsuit are a joint account expense. • Non-defaulting parties can seek consequential damages.
Deemed Non-Consent • ART VII(D)(3) • Deemed non-consent. • After the 30-day notice and cure period, non-defaulting party can deliver a written Notice of Non-Consent Election. • The defaulting party is deemed to have elected not to participate in any operation, to the extent of costs unpaid by such party. • The interest subject to this election is then offered to non- defaulting parties who can elect to acquire their proportionate share of the defaulted interest. • If a non-defaulting party goes this route, it cannot then sue for unpaid amounts.
Advance Payment • ART VII(D)(4) • Advance payment. • After the 30-day notice and cure period, Operator (or Non-ops, if Operator is in default) can require advance payment from the defaulting party of anticipated expenses, whether or not the expense was the subject of the previous default. • This includes the right to require advance payment of: • Estimated costs of drilling a well. • Completion of a well as to which election to participate has been made.
Costs and Attorneys’ Fees • ART VII(D)(5) • Costs and attorneys’ fees. • Non-defaulting parties are entitled to recover court costs, collection costs, and a reasonable attorneys’ fee, which is secured by the lien provided for under the JOA.
Other Remedies • Removal of Operator • Preferential Right to Purchase • Force Majeure
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