THE FIRST BAPTIST CHURCH OF ROSWELL, THE HISTORICAL SOCIETY FOR SOUTHEAST NEW MEXICO, INC., and THE ROSWELL WOMAN’S CLUB, INC., individually and on behalf of a class of similarly situated persons and entities, Plaintiffs-Petitioners, v. YATES PETROLEUM CORP., a New Mexico corporation, Defendant-Respondent.
Docket No. 33,632
IN THE SUPREME COURT OF THE STATE OF NEW MEXICO
February 20, 2015
2015-NMSC-004
VIGIL, Chief Justice.
ORIGINAL PROCEEDING ON CERTIORARI, Charles C. Currier, District Judge
Sanders, Bruin, Coll & Worley, P.A. Kelly Mack Cassels Roswell, NM
Looper, Reed & McGraw, P.C. James J. Ormiston Houston, TX
for Petitioners
Hinkle, Hensley, Shanor & Martin, L.L.P. Andrew J. Cloutier Parker B. Folse Roswell, NM
for Respondent
Deborah J. La Fetra Sacramento, CA
for Amicus Curiae Pacific Legal Foundation
OPINION
VIGIL, Chief Justice.
{1} The opinion filed on September 15, 2014, is withdrawn, and the following is substituted for it. Defendant’s motion for rehearing is denied.
{2} This case presents the issue of whether payees who are entitled to interest on suspended oil and gas production proceed payments can contract away their statutorily mandated interest payments. Defendant Yates Petroleum Company (Yates) argues that Petitioners are not entitled to interest on the funds pursuant to a provision in Yates’ standard form division order and marketing agreement (form division order), which was signed by each Petitioner. According to Yates, its form division order allows it to withhold payment of oil and gas royalties pending the resolution of title issues, and when it eventually disburses royalties, to pay the proceeds without interest. The district court awarded interest payments from Yates to Petitioners on the basis that
I. BACKGROUND
{3} Petitioners and the class members on behalf of whom they sued each own interests under oil and gas leases located in the State of New Mexico on which Yates paid initial production revenues. Yates is the payor on the production proceeds from these leases. When these wells began to produce, Yates had proceeds to distribute to the interest owners. Yates sent form division orders to each Petitioner for signature, which required Petitioners to satisfy certain title requirements before they would be paid their share of the proceeds from the well. The form division order provided that in the event that a Petitioner failed to prove marketable title, “[Yates] is authorized to withhold payments without payment of interest until the claim is settled.” In late May and early June of 2003, Petitioners executed and delivered the division orders to Yates. Approximately three years later, Yates sent the initial payments to each Petitioner without interest.
{4} Petitioners demanded that Yates pay them interest on the payments that had been held in suspense accounts beyond the six month statutory deadline set forth in
{5} The district court concluded that
{6} Yates appealed the district court’s ruling, and the Court of Appeals reversed. Yates Petroleum Corp., 2012-NMCA-064, ¶ 1. The Court of Appeals reasoned that “the mere fact that the Legislature enacted or modified a statute providing for a benefit does not establish that the Legislature intended that the policy embedded in the statute will, in all cases, outweigh the parties’ right to contractually modify or waive the benefit.” Id. ¶ 22. Further, the Court of Appeals held that since the Legislature provided that parties could contract around the deadline provision in
{7} The Court of Appeals also cited this Court’s holding in Murdock v. Pure-Lively Energy 1981-A, Ltd., 1989-NMSC-048, ¶¶ 16-17, 108 N.M. 575, 775 P.2d 1292, for the proposition “that contractual agreements to waive compensatory interest during a title dispute are valid and enforceable.” Yates Petroleum Corp., 2012-NMCA-064, ¶ 24. The Court of Appeals reasoned that when the Legislature amended
{8} This Court granted certiorari, and for the reasons that follow, we reverse the Court of Appeals and affirm the district court. First Baptist Church of Roswell v. Yates Petroleum Corp., 2012-NMCERT-006. We hold that
II. DISCUSSION
{9} As the Court of Appeals stated, “[t]his case turns upon whether the right to interest on the proceeds from production codified in Section 70-10-4 outweighs New Mexico’s strong public policy favoring parties’ rights to contract.” Yates Petroleum Corp., 2012-NMCA-064, ¶ 6. This requires us to interpret
{10} Petitioners argue that
A. . . . In instances where payments cannot be made within the time period provided in
Section 70-10-3 NMSA 1978 , the payor shall create a suspense account on his [or her] books for such interest or may interplead the suspended funds into court.B. The person entitled to payment from the suspended funds shall be entitled to interest on the suspended funds from the date payment is due under
Section 70-10-3 NMSA 1978 . The interest awarded shall be the discount rate charged by the federal reserve bank of Dallas to member banks plus one and one-half percent on the date payment is due. Payment of principal and interest on the suspended funds shall be made to all persons legally entitled to the funds within thirty days from the date that the persons are determined to be entitled to the suspended funds by a final legal determination.
The statute has two requirements. Subsection A requires that when proceeds cannot be paid on time, the funds shall be held in a suspense account or interpleaded into court.
{11} Yates argues that by signing the form division order, Petitioners contracted away their statutory right to receive interest on suspended funds, and therefore it is relieved of the obligation to pay interest. Yates’ form division order reads:
If any claim is made which adversely affects title to any interest credited hereunder, or such title is unmarketable in the opinion of a licensed New Mexico attorney, the parties credited with such interest severally agree to furnish abstracts or other evidence of title acceptable to [Yates], and to cure any defects which render the title of the Interest Owners unmarketable, without expense to [Yates]. In the event of failure to furnish such evidence of marketable title, [Yates] is authorized to withhold payments without payment of interest until the claim is settled.
(Emphasis added.) This provision in Yates’ form division order contravenes the clear mandate expressed by the Legislature in
{12} Because this provision contravenes the requirements of
{13} Consistent with the principles of statutory interpretation, we glean from the language of the Act a strong public policy in favor of establishing the rights of interest owners. See Quynh Truong v. Allstate Ins. Co., 2010-NMSC-009, ¶ 37, 147 N.M. 583, 227 P.3d 73 (“The first and most obvious guide to statutory interpretation is the wording of the statutes themselves.” (internal quotation marks and citation omitted)). The Act sets terms for payment of oil and gas proceeds to interest owners. This evidences the Legislature’s acknowledgment of interest owners’ lack of bargaining power in oil and gas transactions. Yates’ own internal standard practice is a clear example of this imbalance in bargaining power. As a matter of standard practice, Yates unilaterally decided that it would not comply with the mandates of
{14} In acknowledging this disparity in bargaining power, the Legislature unequivocally established the basic terms by which oil and gas proceeds are to be paid. It did so in numerous sections of the Act.
{15} Principles of contract law usually enable parties to establish the terms of a contract. Yates argues that freedom of contract
{16} Yates relies on
The oil and gas proceeds derived from the sale of production from any well producing oil, gas or related hydrocarbons in New Mexico shall be paid to all persons legally entitled to such payments, commencing not later than six months after the first day of the month following the date of first sale and thereafter not later than forty-five days after the end of the calendar month within which payment is received by payor for production unless other periods or arrangements are provided for in a valid contract with the person entitled to such proceeds.
Yates argues that since the Legislature allows parties to determine when proceeds are paid, it intended to allow the parties to contract around the interest payments mandated by
{17} Because the Legislature explicitly allowed for contractual modification in
{18} Yates reads these two sections together, as did the Court of Appeals, to conclude that if the Legislature allowed a contractual waiver of the statutory right in
{19} While the parties may be free to agree when payment on production is due to the interest owners under
{20} This Court recognizes the need for certainty in business dealings. It is true that “[g]reat damage is done where businesses cannot count on certainty in their legal relationships and strong reasons must support a court when it interferes in a legal relationship voluntarily assumed by the parties.” Berlangieri, 2003-NMSC-024, ¶ 20 (internal quotation marks and citations omitted). However, Yates can hardly claim uncertainty when the Legislature
{21} For the foregoing reasons, we hold that
B. Murdock Is Distinguishable
{22} The Court of Appeals based its rationale in this case in part on this Court’s holding in Murdock, stating that “contractual agreements to waive compensatory interest during a title dispute are valid and enforceable.” Yates Petroleum Corp., 2012-NMCA-064, ¶ 24 (citing Murdock, 1989-NMSC-048, ¶¶ 16-17). The Court of Appeals noted that “when the Legislature amended the Act in 1991, it did not enact language prohibiting contractual agreements in division orders from waiving compensatory interest while a title question is being resolved.” Yates Petroleum Corp., 2012-NMCA-064, ¶ 24. Therefore, the Court of Appeals reasoned, “Murdock’s holding was in no way addressed or changed by the Legislature in the 1991 amendments.” Yates Petroleum Corp., 2012-NMCA-064, ¶ 24. As a result, the Court of Appeals concluded “that the Legislature did not intend the 1991 amendments to modify or conflict with Murdock’s holding.” Id. Yates asserts that this Court has held that contractual clauses waiving compensatory interest on suspended funds are valid, despite statutory language in
{23} In Murdock, we held that a division order provision, much like the one at issue in this case, permissibly waived statutory interest provided for by
{24} The important distinction between Murdock and the case now before us is that the Court is now called upon to analyze an entirely separate legislative mandate. In Murdock, we weighed the freedom of contract against a statutory interest provision that the Legislature intended to apply to commercial instruments and commercial transactions generally. In Murdock, this Court was not asked to, nor did it consider the clear public policy expressed in the Act when it considered the enforceability of the division order. This Court specifically acknowledged
{25} Finally, Murdock did not consider the principle of the freedom of contract in light of the very specific mandates of the Act, as we do here. Rather, its holding was based on a completely distinct, general statute that does not specifically address the uniqueness of oil and gas transactions. The Court of Appeals adopted Yates’ assertion that because the Legislature did nothing to abrogate the Murdock holding in subsequent amendments to the Act, it must have acknowledged the right to contract around
III. CONCLUSION
{26} We conclude that the provision waiving the statutory right to compensatory interest in Yates’ form division order is unenforceable because it contravenes a clear, strong public policy set forth in
{27} IT IS SO ORDERED.
BARBARA J. VIGIL, Chief Justice
WE CONCUR:
PETRA JIMENEZ MAES, Justice
RICHARD C. BOSSON, Justice
EDWARD L. CHÁVEZ, Justice
CHARLES W. DANIELS, Justice