Question Submitted by: The Honorable Mike Sanders, State Representative, District 59

Question Submitted by: The Honorable Mike Sanders, State Representative, District 59

2015 OK AG 6

Decided: 09/01/2015

Oklahoma Attorney General Opinions

Cite as: 2015 OK AG 6 , __ __

¶0 This office has received your request for an Attorney General Opinion in

which you ask, in effect, the following question:

Title

52 O.S.2011, § 570.10 (D) specifies

an interest rate of 12 percent owed to non-operating owners of interest in an

oil and gas well's production when the holders of the proceeds from the first

sale of oil or gas fail to distribute the proceeds within the time periods

required by statute, unless the interest owner's title is unmarketable, in which

case the applicable interest rate is 6 percent. Does this statute violate the

special laws prohibition in Article V, Section 46 of the Oklahoma Constitution?

I.

Background

¶1 In most cases, the proceeds from an oil or gas

well are divided between the operator of the well, which typically leases the

mineral rights, and non-operating owners of interest in the well's production,

including royalty interest owners and investors. See In re SemCrude,

L.P. , 407 B.R. 140, 145-47 (Bankr. D. Del. 2009) (recounting the history of

oil and gas production, and regulation thereof, in Oklahoma). When the petroleum

production is first sold, either the lessee operator or the first purchaser

generally has the responsibility to distribute the proceeds of that sale to the

various interest owners. See Si M. Bondurant, To Have and to Hold: The

Use and Abuse of Oil and Gas Suspense Accounts , 31 Okla. City U. L. Rev. 1 ,

4 (2006) [hereinafter Bondurant].

¶2 For decades, oil and gas producers or first

purchasers would for various reasons delay or decline to distribute the proceeds

from the first sale to interest owners and use those funds for their own

purposes until they were ultimately distributed, if at all. Id. at 1.

Defects in the interest owner's title, liens against the title, failure to

execute a division order, or inability to locate the owner sometimes caused the

holder of the proceeds to suspend payments. Id. at 6. Often, however,

holders of the production proceeds would fail to make any reasonable efforts to

locate the interest owners or notify them of their interest, suspending payments

until they were demanded and, in the meanwhile, gaining the benefit of the

possession of those funds. Id. When payment was finally made, the holders

often refused to make interest payments on the funds withheld. Id. at

17-18. "In the inflationary times of the late 1970s and early 1980s when the

prime interest rate soared to 21.5%, there was a great incentive to delay

royalty payments" and "many producers routinely suspended royalties and delayed

payment for many months and even years to take advantage of the interest earned

during the float between the receipt of sales proceeds and disbursement of

royalties." Id. at 18. This not only deprived interest owners of the

time-value of the money owed to them, it also gave rise to "an ever increasing

case load of litigation between royalty owners and purchasers . . . precipitated

by the use of suspense accounts." Hull v. Sun Refining & Mktg. Co. ,

1989 OK 168 , ¶ 9, 789 P.2d 1272, 1277 .

¶3 These practices led many states to enact statutes specifying payment

timing after the first sale of oil or gas production and, in the event of

untimely payment, the applicable rate of interest. Bondurant, at 18. Oklahoma

passed such a statute in 1980, which is now codified at 52 O.S.2011, § 570.10 and was enacted "to

ensure that those entitled to royalty payments would receive proceeds in a

timely fashion," evincing legislative "intent that it shall be the public policy

in Oklahoma for royalty owners to receive prompt payment from the sale of oil

and gas products." Hull , 1989 OK ¶ 14, 789 P.2d at 1279 .

¶4 As currently written, 1 Section 570.10 requires that:

Proceeds from the sale of oil or gas production from an oil or gas well shall

be paid to persons legally entitled thereto:

a. commencing not later than six (6) months after the date of first sale, and

b. thereafter not later than the last day of the second succeeding month

after the end of the month within which such production is sold.

52 O.S.2011, §

570.10(B)(1). 2 The statute also specifies the timing of payments when

the amounts owed are small. For example, accumulated unpaid amounts less than

ten dollars may be held until production ceases, while amounts between ten and

one hundred dollars must be remitted at least annually. Id. §

570.10(B)(3). When proceeds are not "paid prior to the end of the applicable

time periods provided in [the] section, that portion not timely paid shall earn

interest at the rate of twelve percent (12%) per annum to be compounded

annually, calculated from the end of the month in which such production is sold

until the day paid," unless the reason for nonpayment is because the title to

the mineral interest is unmarketable, in which case the statutory interest rate

is 6 percent compounded annually. Id. § 570.10(D). 3 A "first purchaser or

holder of proceeds who fails to remit proceeds from the sale of oil or gas

production to owners legally entitled thereto within the time limitations set

forth" in the statute "shall be liable to such owners for interest" as specified

by the statute. Id. § 570.10(E)(1).

II.

Legal Principles

¶5 Article V, Section 46 of the Oklahoma Constitution prohibits the

Legislature from passing "any local or special law . . . . Fixing the rate of

interest[.]" A law is a "special law" if it "single[s] out less than an entire

class of similarly affected persons or things for different treatment."

Reynolds v. Porter , 1988 OK 88, ¶ 14 , 760 P.2d 816, 822 . Article V does not prohibit all

legislative classifications; a law that creates "a proper and legitimate

classification" is not special. City of Enid v. Pub. Emps. Relations Bd. ,

2006 OK 16, ¶ 13 , 133 P.3d 281, 287 . If there is "some distinctive

characteristic upon which a different treatment may be reasonably founded, and

that furnishes a practical and real basis for discrimination," the statute is

not a special law. Burks v. Walker , 1909 OK 317, ¶ 23 , 109 P. 544, 549 ; see also EOG Res . Mktg.,

Inc. v. Okla. State Bd. of Equalization , 2008 OK 95, ¶ 20 , 196 P.3d 511, 520-21 . Rather, a statute is a

special law if the classification it creates "is arbitrary or capricious" or

fails to "bear[] a reasonable relationship to the object to be accomplished" and

thus is "wholly unrelated to the object of the Act." City of Enid ,

2006 OK 16, ¶¶ 13, 16 , 133 P.3d

at 287-88 .

¶6 Under these standards, a statute that is a special law legislating one of

the subjects listed in Article V, Section 46 is "absolutely and unequivocally

prohibit[ed]." Reynolds , 1988 OK 88 ¶ 17 , 760 P.2d at 822-23 . In other words,

in a Section 46 analysis, "the only issue to be resolved is whether a statute

upon a subject enumerated in that section targets for different treatment less

than an entire class of similarly situated persons or things." Id. ;

see also Lafalier v. Lead-Impacted Cmtys. Relocation Assistance Trust ,

2010 OK 48, ¶ 26 , 237 P.3d 181, 192 .

III.

Analysis

¶7 Any constitutional analysis proceeds "with great caution" and starts with

"a presumption that every statute is constitutional." Lafalier ,

2010 OK 48 , ¶ 15, 237 P.3d at

188-89 . Thus, courts "indulge every possible presumption that an act of the

Legislature was constitutional." Adwon v. Okla. Retail Grocers Ass'n ,

1951 OK 43, ¶ 11 , 228 P.2d 376, 379 . "If there is any doubt as to the

Legislature's power to act in any given situation, the doubt should be resolved

in favor of the validity of the action taken by the Legislature." Draper v.

State , 1980 OK

117 , ¶ 10, 621 P.2d

1142, 1146 . As a corollary, "[r]estrictions and limitations upon legislative

power are to be construed strictly." Id. A law will be deemed

unconstitutional only if it "is clearly, palpably, and plainly inconsistent with

the Constitution." Lafalier , 2010 OK 48 , ¶ 15, 237 P.3d at 188 ; see also Zeier

v. Zimmer, Inc. , 2006 OK 98, ¶ 12 , 152 P.3d 861, 866 .

¶8 Section 570.10 specifies the time frames in which the holders of the

proceeds from the first sale of oil and gas must pay the rightful interest

owners. To encourage compliance with this statutory duty of prompt payment,

Section 570.10(D) provides a 12 percent rate of interest compounded annually for

nonpayment, unless the reason for nonpayment is because the title is

unmarketable. The statute thus sets forth a higher rate of interest for a class

of individuals--petroleum producers or first purchasers owing sums to royalty or

other interest owners with marketable title--as distinct from others failing to

make timely payment under contract. For all other contractual debts, "[t]he

legal rate of interest shall be six percent (6%) in the absence of any contract

as to the rate of interest," unless otherwise provided for by valid law.

15 O.S.2011, § 266. The question of whether

Section 570.10 violates Article V, Section 46 turns on whether the statute

"embrace[s] all of the class that should naturally be embraced" or whether,

instead, it "rest[s] on a false or deficient classification." City of

Enid , 2006 OK

16, ¶ 20 , 133 P.3d at 310 (Opala, J., dissenting) (citation omitted).

¶9 Given the immense importance of the industry and the unique legal

relationships involved, "[t]he State of Oklahoma . . . has extensively and

continuously regulated" the oil and gas industry. Seal v. Corp. Comm'n ,

1986 OK 34 , ¶ 45, 725 P.2d 278, 292 ; see also Oryx Energy Co. v.

Plains Res., Inc. , 1994 OK CIV APP 185, ¶ 3 , 918 P.2d 397, 399 . The relationships and property

interests involved in oil and gas leases are extraordinarily complex, involving

numerous parties over long periods of time, and the disparities in economic

power between oil producers or first purchasers and royalty or mineral interest

owners is often very wide. Consequently, it is reasonable that the Legislature

sought to "provide[] a comprehensive regulatory structure governing how interest

owners and operators work together at the wellhead, and . . . to hold operators

accountable to their interest owners." In re SemCrude , 407 B.R. at 154 .

¶10 As recounted above, the long history of petroleum producers or first

purchasers wrongfully withholding production proceeds for their own profit led

the Legislature to impose statutory timeframes within which payment must be made

and a 12 percent rate to incentivize compliance with the statute. The holder of

these proceeds thus possesses a "distinctive characteristic upon which a

different treatment may be reasonably founded, and that furnishes a practical

and real basis for discrimination." Burks , 1909 OK 317, ¶ 23 , 109 P. at 549 . This classification

applies to all those similarly situated--those responsible for the distribution

of petroleum production proceeds from the first sale--including both producers

and first purchasers. Having created a right to prompt payment to combat the

pervasive refusal to make contract payments to interest owners that was peculiar

to first sales in the petroleum industry, the Legislature was free to impose a

higher rate of interest to incentivize respect for that unique substantive

right. See State ex rel. Macy v. Bd. of Cnty. Comm'rs , 1999 OK 53, ¶ 9 , 986 P.2d 1130, 1143 ("[D]ifferent remedies may be based

upon legislatively drawn criteria that distinguish different causes of action .

. . based upon the nature of the substantive rights at issue."). Thus,

the class subject to the higher interest rate is not "false" or "deficient," but

rather embraces a natural and rational class of similarly situated persons.

City of Enid , 2006 OK 16, ¶ 20 , 133 P.3d at 297-98 (Watt,

C.J., Opala, Taylor, Colbert JJ., dissenting) (citation omitted). For the same

reasons, Section 570.10(D)'s rate of interest is not "arbitrary or capricious"

and bears "a reasonable relationship to the object" of the statute. Id.

(citation omitted). Accordingly, Section 570.10(D) is not a "special law" and,

therefore, cannot be in violation of Article V, Section 46. 4

¶11 Similarly, courts have upheld analogous laws setting a higher rate of

interest in the face of special law challenges when those laws were justified by

a rational and legitimate public policy. For example, a law allowing for a

higher rate of interest for judgments in workers' compensation suits is not an

unconstitutional special law because the Legislature reasonably imposed that

elevated rate to combat "frivolous appeals which . . . have often been

prosecuted by less conscientious employers and insurance companies to 'starve'

helpless victims of industrial injuries into early and cheap settlements."

Cyrus v. Vierson & Cochran, Inc. ,

1981 OK CIV APP 40 , ¶ 15, 631 P.2d 1349, 1354 . In the case of Section 570.10, a

similar history of abuse of modest interest owners by the holders of petroleum

proceeds justifies the 12 percent interest rate. As another example, courts in

other states with similar constitutional provisions have upheld elevated

interest rate laws when rationally justified, permitting, for example, elevated

interest rates on retail installment contracts because the costs of consumer

lending (including increased risk of default, volume, and servicing costs) are

higher than those for commercial loans to established businesses. See Cesary

v. Second Nat'l Bank of N. Miami , 369 So.2d 917, 920-21 (Fla. 1979);

Cecil v. Allied Stores Corp. , 513 P.2d 704, 710 (Mont. 1973); but see

Stanton v. Mattson , 123 N.W.2d 844, 846-48 (Neb. 1963). Similarly, the

common practice of unjustified impounding of proceeds in suspense accounts,

often requiring interest owners to institute costly litigation, creates a

greater risk of nonpayment that may justify a higher interest rate owed by oil

and gas producers and first purchasers. 5

¶12 For similar reasons, the disparate interest rates owed to those with and

without marketable title does not create a special law in violation of Article

V, Section 46, because the two groups are not similarly situated and the

Legislature has rationally decided that liability for nonpayment of proceeds

should be lower when the reason for nonpayment is legitimate questions

concerning title. See Tulsa Energy , Inc. v. KPL Prod. Co. (In re Tulsa

Energy), 111 F.3d 88, 90 (when title is unmarketable, "[p]ublic policy

requiring prompt payment of proceeds cannot spur on the party responsible for

payment, because he cannot be, and is not, required to pay until the other party

has cleared up his title"). Nor can it be said that those in the oil and

gas industry are subject to a special law on interest rates as compared to other

industries because other industries are not characterized by the same potential,

incentives, and history of refusal to timely pay sums due and the frequent

litigation that ensued. Even within the oil and gas industry, the special

relationships and problems of distribution of proceeds at the wellhead pursuant

to mineral leases sets these relationships in a different class than other

contracts for petroleum products. Finally, that Section 570.10 specifies

different time periods during which proceeds must be paid to interest owners

does not create a special law fixing a rate of interest because, though the

amount of interest due under the statute may vary depending on

when various dollar thresholds are met ( e.g. , $10, $25, or $100),

when interest does begin to accumulate, it does so at the same

rate across classes.

¶13 Even if there were doubt about the purposes of the statute, the effect of

its revisions, or the unique situation of the oil and gas industry that by

nature justifies its regulation as a class, those doubts must "be resolved in

favor of the validity of the action taken by the Legislature." Draper ,

1980 OK 117 , ¶ 10, 621 P.2d at 1146 .

Indulging "every possible presumption that [this] act of the Legislature was

constitutional," Adwon , 1951 OK 43, ¶ 11 , 228 P.2d at 379 , it cannot be said

that Section 570.10(D) is "clearly, palpably, and plainly inconsistent with the

Constitution," Lafalier , 2010 OK 48 , ¶ 15, 237 P.3d at 188 . Section 570.10(D)

does not "single out less than an entire class of similarly affected persons or

things for different treatment." Reynolds , 1988 OK 88, ¶ 14 , 760 P.2d at 822 . Rather, in light

of the unique history, relationships, and importance of the use of suspense

accounts by oil and gas producers and first purchasers to unjustifiably delay

payment to interest owners, the Legislature has recognized "a proper and

legitimate classification" by providing for a higher rate of interest when the

holder of proceeds delays distribution of sums to the rightful owner in

violation of the statute. City of Enid , 2006 OK 16, ¶ 13 , 133 P.3d at 287 . The

elevated rate of interest is not "arbitrary or capricious," but rather

facilitates compliance with the prompt payment requirements of the statute,

"bear[ing] a reasonable relationship to the object to be accomplished."

Id. ¶¶ 13-16, 133 P.3d at 287-88 (citation omitted).

¶14 It is, therefore, the official Opinion of the Attorney General that:

Title

52 O.S.2011, §

570.10 (D) is not a special law fixing the rate of interest in violation of

Article V, Section 46 of the Oklahoma Constitution because it does not single

out similarly affected persons for disparate treatment, but rather rests on a

proper and legitimate classification.

E. SCOTT PRUITT

Attorney General of Oklahoma

MITHUN MANSINGHANI

Deputy Solicitor General

FOOTNOTES

1 Section 570.10 was

originally enacted in 1980 as 52 O.S.Supp.1980, § 540. As part of the

Production Revenue Standards Act of 1992, which "provides a comprehensive

regulatory structure governing how interest owners and operators work together

at the wellhead, and serves to hold operators accountable to their interest

owners," In re SemCrude , 407 B.R. at 154 , the former Section 540 was

rewritten and recodified as new Section 570.10. 1992 Okla. Sess. Laws ch. 190, §

28.

2 For royalty proceeds from the sale of gas, proceeds

after the initial distribution must be paid "not later than the last day of the

third succeeding month after the end of the month within which such production

is sold[,]" with some exceptions. Id. § 570.10(B)(2)(b).

3 "Marketability of title shall be determined in

accordance with the then current title examination standards of the Oklahoma Bar

Association." Id. § 570.10(D)(2)(a); see also Hull ,

1989 OK 168 , ¶ 9, 789 P.2d at 1277 .

4 Because this Opinion concerns the constitutionality of

a statute, it should be considered advisory only. The Oklahoma Supreme Court

"alone has the power to authoritatively determine the validity or invalidity of

a statute." York v. Turpen , 1984 OK 26 , ¶¶ 10-12, 681 P.2d 763, 767 .

5 In 1985, the Legislature deleted from the statute the

phrase "as the penalty," which originally appeared after the specification of

the 12 percent rate. See 1985 Okla. Sess. Laws ch. 141, § 1;

see also Fleet v. Sanguine, Ltd. , 1993 OK 76 , ¶ 5 n.14, 854 P.2d 892 , 895 n.14. As a result, courts have

recognized that Section 570.10(D) is no longer construed as a penalty for

certain purposes, such as determining the statute of limitations for a claim for

the 12 percent interest or deciding whether the 12% rate precludes a punitive

damages award. See Purcell v. Santa Fe Minerals, Inc. ,

1998 OK 45 , ¶¶ 15-22 ,

961 P.2d 188, 192-93 ; Hebble v.

Shell Western E & P, Inc. , 2010 OK CIV APP 61, ¶ 22 , 238 P.3d 939, 946 . But it is clear from the text and

history of the statute, which has seen its core provisions maintained despite

several revisions, that the Legislature still intends that Section 570.10(D)

promote timely distribution of proceeds to oil and gas interest owners.

See Hull , 1989 OK 168 , ¶ 14, 789 P.2d at 1279 . Deletion of the

phrase "as a penalty" does not change the purposes of and justifications for

Section 570.10(D) and does not render it an irrational classification prohibited

by Article V, Section 46. Mere removal of three words does not render the law

unconstitutional.

Citationizer © Summary of Documents Citing This Document

Cite

Name

Level

None Found.

Citationizer: Table of Authority

Cite

Name

Level

Oklahoma Court of Civil Appeals Cases

Cite

Name

Level

1994 OK CIV APP 185 , 918 P.2d 397 , 67 OBJ 2128,

Oryx Energy Co. v. Plains Resources, Inc.

Discussed

2010 OK CIV APP 61 , 238 P.3d 939 ,

HEBBLE v. SHELL WESTERN E & P, INC.

Discussed

1981 OK CIV APP 40 , 631 P.2d 1349 ,

Cyrus v. Vierson & Cochran, Inc.

Discussed

Oklahoma Supreme Court Cases

Cite

Name

Level

1986 OK 34 , 725 P.2d 278 , 57 OBJ 1485,

Seal v. Corporation Com'n

Discussed

1988 OK 88 , 760 P.2d 816 , 59 OBJ 1987,

Reynolds v. Porter

Discussed at Length

1989 OK 168 , 789 P.2d 1272 , 60 OBJ 2358,

Hull v. Sun Refining and Marketing Co.

Discussed at Length

1993 OK 76 , 854 P.2d 892 , 64 OBJ 1847,

Fleet v. Sanguine, Ltd.

Discussed

1909 OK 317 , 109 P. 544 , 25 Okla. 353 ,

BURKS v. WALKER.

Discussed at Length

2006 OK 16 , 133 P.3d 281 ,

CITY OF ENID v. PUBLIC EMPLOYEES RELATIONS BOARD

Discussed at Length

2006 OK 98 , 152 P.3d 861 ,

ZEIER v. ZIMMER, INC.

Discussed

2008 OK 95 , 196 P.3d 511 ,

EOG RESOURCES MARKETING v. OKLAHOMA STATE BD. OF EQUALIZATION

Discussed

2010 OK 48 , 237 P.3d 181 ,

LAFALIER v. THE LEAD-IMPACTED COMMUNITIES RELOCATION ASSISTANCE TRUST

Discussed at Length

1980 OK 117 , 621 P.2d 1142 ,

Draper v. State

Discussed at Length

1951 OK 43 , 228 P.2d 376 , 204 Okla. 199 ,

ADWON v. OKLAHOMA RETAIL GROCERS ASS'N

Discussed at Length

1998 OK 45 , 961 P.2d 188 , 69 OBJ 2127,

PURCELL v. SANTE FE MINERALS, INC.

Discussed

1999 OK 53 , 986 P.2d 1130 , 70 OBJ 1820,

State ex rel. Macy v. Board of County Commissioners

Discussed

1984 OK 26 , 681 P.2d 763 , 55 OBJ 1013,

State ex rel. York v. Turpen

Discussed

Title 15. Contracts

Cite

Name

Level

15 O.S. 266 ,

Legal and Contract Rates of Interest

Cited

Title 52. Oil and Gas

Cite

Name

Level

52 O.S. 540 ,

Renumbered as 52 O.S. § 570.10 by Laws 1992, SB 168, c. 190, § 28

Cited

52 O.S. 570 .10,

Proceeds from Sale of Production

Discussed at Length