Whiting Petroleum filed for Chapter 11 bankruptcy on April 1, 2020 in the United States Bankruptcy Court for the Southern District of Texas, Case No. 20-32021. In a Chapter 11 bankruptcy case, the debtor continues operations and attempts to restructure its debts as contrasted with a Chapter 7 bankruptcy case in which the debtor ceases operating and its assets are liquidated to pay creditors. Within a week of Whiting’s bankruptcy filing, numerous clients of the Vogel Law Firm that own mineral interests have reported that they did not receive expected royalty checks for March 2020.
As a general rule, bankruptcy debtors are strictly prohibited from paying prepetition debts (i.e., amounts incurred and owing by the debtor prior to the date of the bankruptcy filing) unless there is a specific order of the bankruptcy court allowing for the payment. Typical examples of prepetition debts that may be paid by a debtor, but only with the explicit permission of the bankruptcy court, are employee wages and insurance premiums. In a Chapter 11 restructuring bankruptcy case (such as Whiting Petroleum’s), the debtor is obligated to pay postpetition operating expenses (i.e., amounts incurred after the bankruptcy filing date) in the ordinary course of its business.
On the first day of its bankruptcy case, Whiting filed an emergency motion requesting that it be allowed to pay prepetition royalties (i.e., royalties owing to mineral owners prior to 3/31/20) to mineral owners. Whiting’s rationale for needing to pay mineral owners for prepetition royalties was that it exposed Whiting to enforcement actions by owners of mineral interests for breach of contract, conversion and other claims for damages for breach of oil and gas leases. Additionally, there was a risk that failing to pay royalties may be grounds for terminating an oil and gas lease which would be harmful to Whiting’s restructuring efforts. On April 1, 2020, the bankruptcy judge entered an order allowing Whiting to pay mineral owners for prepetition royalties. This is good news, but ND mineral owners should be cautioned that the order does contain certain language that would allow Whiting to seek disgorgement (return) of the royalties if the payments are deemed improperly made later on in Whiting’s bankruptcy case.
Based on the bankruptcy judge’s order, it is expected that North Dakota mineral owners will be paid for prepetition royalties (incurred before 3/31/20) owed by Whiting in the coming weeks and will also be paid for postpetition royalties (incurred after 4/1/20) in the ordinary course of business.
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