April 24, 2012 – 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 v. Yates Petroleum Corp., a New Mexico corporation, No. 30,359

1 printed pages contain little extracted OCR body text; searchable legal-body completeness has not been established for those pages.

OCR transcription for search; preserved printed pages are authoritative

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number:

Filing Date: _ April 24, 2012

NO. 30,359

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 dass of similarly situated persons

and entities,

Plaintiffs-A ppellees,
V.

YATES PETROLEUM CORP., a New
Mexico corporation,

Defendant- Appellant.

APPEAL FROM THE DISTRICT COURT OF CHAVES COUNTY
Charles C. Currier, District J udge

Looper Reed & McGraw, P.C.
James J. Ormiston
Houston, TX

Sanders, Bruin, Coll & Worley, P.A.
Kelly Mack Cassels
Roswell, NM

for Appellees

Hinkle, Hensley, Shanor & Martin, L.L.P.
Andrew J. Cloutier
Meagan M. Norris
Roswell, NM
for Appellant

OPINION
VIGIL, Judge.
{1} 	This case requires us to determine whether a contractual agreement to waive
interest on proceeds owed to mineral owners of the rights to a well is rendered void
by the New Mexico Oil and Gas Proceeds Payment Act (the Act), NMSA 1978,
Sections 70-10-1 to -6 (1985, as amended through 1991). We conclude that the Act
does not render such a contract void, and the district court having ruled otherwise, we
reverse.
BACKGROUND
{2} 	Defendant is the operator of the “Runnin’ AZH Com. No. 1 Well.” Plaintiffs
are owners of mineral rights to the well, and contend they are entitled to interest on
the proceeds they received from production of the well. Defendant began production
from the well in August 2002, and when proceeds were obtained from production,
Defendant retained a title attorney to identify the apparent owners of the mineral rights
to the well. Pursuant to the title opinion, “division orders” were sent to Plaintiffs in
May 2003, to be signed and returned. 	“A division order is a specialized contract
developed for the petroleum industry that provides authorization to a purchaser of oil
and gas to pay proceeds from production to the owners of production.” Murdock v.
Pure-Lively Energy 1981-A, Ltd., 108 N.M. 575, 579, 775 P.2d 1292, 1296 (1989).

2
For protection against potential liability for improper payments, “a purchaser typically
requires each person who is entitled to a royalty share in the production proceeds to
execute a division order that declares the portion of production to which he is
entitled.” 	Id. 	Another typical feature of a division order is that until a satisfactory
title determination is made, no interest is owed on withheld payments. Id. at 579-80,
775 P.2d at 1296-97.
{3} 	The division orders listed the title requirements to entitle Plaintiffs to proceeds
from the well, and specifically requested that each Plaintiff provide a copy of the trust
document establishing its right to the interest claimed. Each Plaintiff executed and
returned the division order, and Plaintiffs retained the same attorney among them to
assist them in satisfying the title requirements. Defendant accepts substitute or altered
division orders from interest holders, but all Plaintiffs in this case signed the division
order without making changes. Plaintiffs’ and Defendant’s counsel communicated
from 2004 through 2006, during which time Plaintiffs provided documents and other
materials, but not the requested trust document. In 2006, despite not being provided
a copy of the trust, Defendant placed Plaintiffs on pay status. 	Plaintiffs began
receiving payments, but since payment had not been made within the time limits of
Section 70-10-3 (1985), they also demanded interest on the proceeds under Section
70-10-4 (1991). Defendant refused to pay interest pursuant to a clause in the division
orders signed by Plaintiffs which authorizes payment without interest if the delay in

3
payment results from a question concerning Plaintiffs’ marketable title. The clause
states:
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 [Defendant], and to cure any defects which render the title of the
Interest Owners unmarketable, without expense to [Defendant]. In the
event of failure to furnish such evidence of marketable title, [Defendant]
is authorized to withhold payments without payment of interest until the
claim is settled.
(Emphasis added.)
{4} 	Plaintiffs filed a class action in the district court asserting their right to interest
on the proceeds notwithstanding the clause in the division order. The district court
certified the class and ruled that the agreement in the division order to withhold
payment without interest violates Section 70-10-4, and declared the agreement void.
Damages were awarded following a non-jury trial, and the district court entered a
declaratory judgment requiring Defendant in the future to pay interest on all proceeds
paid after the deadlines set forth in Section 70-10-3.
{5} 	Defendants appeal, contending that Section 70-10-4 does not prohibit the
parties from contractually agreeing to forego interest on payments if the delay in
payment results from a question concerning the seller’s marketable title.
STANDARD OF REVIEW

4
{6} 	This 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. 	Interpretation of a statute is a question of law
which we review de novo. 	See Morgan Keegan Mortg. Co. v. Candelaria, 1998-
NMCA-008, ¶ 5, 124 N.M. 405, 951 P.2d 1066.
{7} 	“In interpreting statutes, we seek to give effect to the Legislature’s intent, and
in determining intent we look to the language used and consider the statute’s history
and background.” 	Key v. Chrysler Motors Corp., 121 N.M. 764, 768-69, 918 P.2d
350, 354-55 (1996), aff’d in part, rev’d in part on other grounds by 2000-NMSC-010,
128 N.M. 739, 998 P.2d 575. 	When presented with a question of statutory
construction, we observe the following general principles: (1) the plain language of
the statute is the primary indicator of legislative intent; (2) we will not read into a
statute language which is not there, particularly if it makes sense as written; and (3)
when several sections of a statute are involved, they must be read together so that all
parts are given effect. See High Ridge Hinkle Joint Venture v. City of Albuquerque,
1998-NMSC-050, ¶ 5, 126 N.M. 413, 970 P.2d 599.

5
HISTORY OF THE ACT
{8} 	The Oil and Gas Proceeds Payment Act was originally enacted in 1985. 1985
N.M. Laws, ch. 55, §§ 1-5. In general, the Act addresses the timing and procedure
required of producers, “payors,” for the payment of proceeds from oil and gas
productions to interest holders of those minerals. Id.
{9} 	Section 70-10-3 (1985) directs when payments must be paid. In pertinent part,
payment is owed:
[C]ommencing 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.
Section 70-10-4, as originally enacted in 1985, provided:
A. 	Any delay in determining any person legally entitled to an
interest in the proceeds from production shall not affect payments to all
other persons entitled to payment. In instances where accrued payments
exceed one thousand dollars ($1,000) and cannot be made for any reason
within the time limits specified in the Oil and Gas Proceeds Payment Act
[70-10-1 to 70-10-5 NMSA 1978], the payor shall deposit all proceeds
credited to the eventual oil and gas proceeds owner to an escrow account
in a federally insured bank or savings and loan institution in New
Mexico, using a standard escrow document form which deposit shall
earn interest at the highest rate being offered by that institution for the
amount and term of such demand deposits. 	The escrow agent may
commingle money received into escrow from any one lessee or operator,
purchaser or other party legally responsible for payment. 	Payment of
principal and accrued interest from such accounts shall be paid by the
escrow agent to all persons legally entitled thereto within thirty days
from the date of receipt by the escrow agent of final legal determination

6
of entitlement thereto. Applicable escrow fees shall be deducted from
the payments.
B. 	Any payor who violates the provisions of this section is
liable to the person or persons legally entitled to proceeds from
production for the unpaid amount of such proceeds, plus interest at the
rate of eighteen percent per annum on the unpaid principal balance from
the date payment is due.
C. 	The prevailing party in any proceedings brought pursuant
to the Oil and Gas Proceeds Payment Act may be entitled to recover all
court costs and reasonable attorneys’ fees.
§ 70-10-4 (1985) (emphasis added).
{10} 	Thus, under Subsection (A), when payment was not made within the deadline
provided for in Section 70-10-3, the payor was required to deposit the amount owed
into a bank or savings and loan institution escrow account, where the funds earned
interest “at the highest rate being offered by that institution for the amount and term
of such demand deposits.” 	Section 70-10-4. 	We refer to this as “compensatory
interest.” In addition, Subsection (A) provided that the escrow agent was the one who
paid the principal amount owed, together with the compensatory interest to the person
legally entitled to the funds. 	Subsection (B) then provided that any payor who
violated the statute was liable not only for the principal, but also eighteen percent
(18%) interest. Herein, we refer to this as “penalty interest.”
{11} 	In Murdock, our Supreme Court addressed the enforceability of division orders
which contractually waive interest payments. 	108 N.M. at 580, 775 P.2d at 1297.

7
Murdock involved a payor’s refusal to pay interest on proceeds pursuant to a clause
in a division order nearly identical to the one at issue in this case. See id. at 579-80,
775 P.2d at 1296-97. As a result of questions concerning the payee’s title, payment
was delayed and the division order provided that under such circumstances, payor was
entitled to withhold payments without interest until title to the claim was resolved.
Id. at 580, 775 P.2d at 1297. The Court held that under the contract set forth in the
division order, no interest was owed to the payee. Id.
{12} 	In 1991, two years after Murdock, the Legislature amended portions of the Act.
1991 N.M. Laws, ch. 235, §§ 1-4. While the time for payment codified in Section 70-
10-3 was not changed, Section 70-10-4 was amended. As amended in 1991, Section
70-10-4 now provides:
A. 	Any delay in determining any person legally entitled to an
interest in the proceeds from production shall not affect payments to all
other persons entitled to payments. 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 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.

8
§ 70-10-4 (1991) (emphasis added).
{13} 	Thus, under the 1991 amendments to the Act, when there is a delay in
determining who is entitled to the proceeds which extends beyond the time limit set
forth in Section 70-10-3, the payor creates a suspense account on his books instead of
depositing the funds into a bank or savings and loan institution escrow account, which
the original Act required. Once a final legal determination is made that the payee is
entitled to the funds, the payee is entitled to be paid the principal plus statutory
interest. In addition, the 1991 amendments moved penalty interest from Section 70-
10-4 (1985) to Section 70-10-5 (1991).
THE DISTRICT COURT DECISION
{14} 	The district court first rejected Defendant’s argument that because Section 70-
10-4 of the 1991 Act uses the phrase, “legally entitled to the funds,” that the payor is
not obligated to pay interest on funds held in suspense until the title issues are
resolved. 	The district court noted that no such exception is stated in the statute.
“Rather, the plain meaning of the statute is that interest accrues on funds held in
suspense during the time title questions prevent disbursement. Once title is resolved,
both principal and accrued interest are payable.”
{15} 	The district court then addressed the waiver of interest the parties contractually
agreed to in the division orders, and concluded:

9
Section 70-10-4 establishes a mandatory requirement that payors pay
interest on suspended oil and gas accounts. [Section] 70-10-4 is positive
law, and [Section] 70-10-4 expresses strong public policy. 	The
provisions of [Section] 70-10-4 are incorporated in the [d]ivision [o]rder
here. Any contractual provisions that attempt to delete the mandatory
requirement to pay interest as provided in [Section] 70-10-4 are
unenforceable as violative of New Mexico public policy.
{16} 	Defendants argue on appeal that the 1991 amendments to the Act do not reflect
a legislative determination which deprives parties of the ability to modify the payment
of interest by contractual agreement. We agree.
ANALYSIS
{17} 	We agree with the district court that Section 70-10-4 (1991) plainly states that
interest accrues on funds held in suspense during the time title questions prevent
disbursement, and once title is resolved, both principal and accrued interest are
payable. 	However, this does not end the inquiry because the entitlement to
compensatory interest was phrased in mandatory terms under the 1985 statute, and
it is still phrased in mandatory terms under the 1991 amendments.
{18} 	The 1985 statute states that if payment is not made within the time specified
under Section 70-10-3 (and the amount owed exceeds $1000), the funds must be
deposited into an approved escrow account, “which deposit shall earn interest.”
Section 70-10-4(A) (1985). Once a final legal determination is made of entitlement,
“[p]ayment of principal and accrued interest from such accounts shall be paid” within
thirty days. Id. Under the 1991 amendments, if payment is not made within the time

10
specified under Section 70-10-3 (there is no longer a requirement that the amount
exceed $1000), the payor must create a suspense account. Section 70-10-4(A) (1991).
The person who is entitled to payment from the suspended funds “shall be entitled to
interest on the suspended funds” and once a final legal determination is made of
entitlement, “[p]ayment of principal and interest on the suspended funds shall be
made” within thirty days. Section 70-10-4(B) (1991). Thus, it does not appear that
the Legislature intended to treat the entitlement to compensatory interest differently
under the 1991 amendments.
{19} 	We must therefore address the dispositive question raised in this case: whether
the Act renders contractual agreements in division orders to waive compensatory
interest void and therefore, unenforceable. We conclude that the Act does not and
reverse the district court.
{20} 	“Our case law has repeatedly recognized that New Mexico has a strong public
policy of freedom to contract that requires enforcement of contracts unless they
clearly contravene some law or rule of public morals.” K.R. Swerdfeger Constr., Inc.
v. Bd. of Regents, Univ. of N.M., 2006-NMCA-117, ¶ 27, 140 N.M. 374, 142 P.3d 962
(alteration, internal quotation marks, and citation omitted). “Great 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.” United Wholesale Liquor Co. v. Brown-Forman Distillers

11
Corp., 108 N.M. 467, 471, 775 P.2d 233, 237 (1989) (internal quotation marks and
citation omitted). Thus:
Whether a contract is against public policy is a question of law for the
court to determine from all the circumstances of each case. It is clearly
to the interest of the public that persons should not be unnecessarily
restricted in their freedom to make their own contracts, and agreements
therefore are not to be held void as being contrary to public policy,
unless they are clearly contrary to what the legislature or judicial
decision has declared to be the public policy, or they manifestly tend to
injure the public in some way.
Berlangieri v. Running Elk Corp., 2002-NMCA-060, ¶ 11, 132 N.M. 332, 48 P.3d 70
(internal quotation marks and citation omitted), aff’d on other grounds by 2003-
NMSC-024, 134 N.M. 341, 76 P.3d 1098. 	While we jealously guard the right to
contract, “if a contractual clause clearly contravenes a positive rule of law, it cannot
be enforced.” Acacia Mut. Life. Ins. Co. v. Am. Gen. Life Ins. Co., 111 N.M. 106, 107,
802 P.2d 11, 12 (1990).
{21} 	We first look to the plain language of the statute to determine if the Legislature
has prohibited contractual agreements to waive the payment of compensatory interest
under Section 70-10-4. See Tri-State Generation & Transmission Ass’n v. D’Antonio,
2011-NMCA-015, ¶ 16, 149 N.M. 394, 249 P.3d 932, cert. granted, 2011-NMCERT-
002, 150 N.M. 617, 264 P.3d 129. We find nothing in the plain language of Section
70-10-4 which explicitly articulates a fundamental public policy that payment of
compensatory interest is deemed to be of such importance, required in the public

12
interest, that its payment cannot be waived. The lack of explicit language prohibiting
contractual rights with the explicit allowance of contractual modification of the date
proceeds are owed weighs in favor of a determination that the Legislature did not
intend to prevent parties from contracting in this circumstance. See K.R. Swerdfeger
Constr., Inc., 2006-NMCA-117, ¶ 24 (declining to find a strong public policy
prohibiting the delegation of a statutory duty based “simply on the absence of
language expressly allowing delegation”). 	Further, the Legislature is capable of
directing that specific contracts or contractual provisions violate New Mexico public
policy, and did not do so in the Act. 	See NMSA 1978, §§ 56-7-1(A) (2005), 56-7-
2(A) (2003), 56-7-3(A) (2007) (providing that indemnification agreements releasing
parties from negligence in specified industries are “void, unenforceable and against
the public policy of the state”).
{22} 	We therefore turn to the history and background of the statute while considering
the object and purpose the Legislature intended to accomplish under the statute. See
Tri-State Generation & Transmission Ass’n, 2010-NMCA-015, ¶ 16. 	The Act as
originally enacted, and as amended in 1991, states in mandatory terms that the payee
is entitled to compensatory interest if payment is not made within the time specified
in Section 70-10-3 (1991). However, this does not, by itself, prevent the parties from
contracting to modify that right. See United Wholesale Liquor Co., 108 N.M. at 471,
775 P.2d at 237 (“The voluntary relinquishment of a statutory protection is consistent

13
with our policy favoring the right to contract.”). In other words, 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. See Electric
Gin Co. v. Firemen’s Fund, Ins. Co., 39 N.M. 73, 73, 39 P.2d 1024, 1024 (1935)
(stating that a contract providing for a twelve-month statute of limitations in a fire
insurance policy was not void for violating public policy codified in New Mexico’s
six-year statute of limitations for suits on written contracts); K.R. Swerdfeger Constr.,
Inc., 2006-NMCA-117, ¶¶ 2, 26 (concluding that a statute which requires the owner
of land containing underground facilities (cable television lines, oil and gas pipelines,
and utility lines) to locate and mark on the surface the actual location of the
underground facilities does not constitute an explicit statement of fundamental policy
such that parties cannot delegate by contract the duties imposed by the statute); In re
Tulsa Energy, Inc., 111 F.3d 88, 91 (10th Cir. 1997) (concluding that the waiver of
compensatory interest under a division order was not against the public policy of
Oklahoma because compensatory interest compensates for the use of money, but a
waiver of penalty interest does violate Oklahoma public policy because its purpose is
to compel compliance with the statue).
{23} 	Importantly, when the Act was originally passed in 1985, the Legislature
specifically granted a contractual right to alter the date payment is due in Section 70-

14
10-3 (1985), and Section 70-10-3 was not altered by the 1991 amendments to the Act.
Section 70-10-3 specifies when payment is to be made, “unless other periods or
arrangements are provided for in a valid contract with the person entitled to such
proceeds.” Id. As Defendants point out, the date from which compensatory interest
accrues under Section 70-10-4 is directly determined by the date the proceeds are
owed under Section 70-10-3. By granting the parties freedom to contractually change
the date when proceeds are owed under Section 70-10-3, they are also granted
freedom to determine when compensatory interest commences under Section 70-10-4.
Allowing the parties to contractually agree whether compensatory interest will be paid
pursuant to Section 70-10-4, as the parties did in this case, is consistent with allowing
the parties to contractually agree when payment is due under Section 70-10-3. 	See
Att’y Gen. v. N.M. Pub. Regulation Comm’n, 2011-NMSC-034, ¶ 10, 150 N.M. 174,
258 P.3d 453 (“[T]wo statutes covering the same subject matter should be harmonized
and construed together when possible, in a way that facilitates their operation and the
achievement of their goals.” (internal quotation marks and citation omitted));
Quantum Corp. v. State Taxation & Revenue Dep’t, 1998-NMCA-050, ¶ 8, 125 N.M.
49, 956 P.2d 848 (stating that the statute or statutes whose construction is in question
are to “be read in connection with other statutes concerning the same subject matter”).

15
{24} 	Further, 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. Moreover, Murdock
expressly held in 1989 that contractual agreements to waive compensatory interest
during a title dispute are valid and enforceable. Murdock, 108 N.M. at 579-80, 775
P.2d at 1296-97. 	Murdock’s holding was in no way addressed or changed by the
Legislature in the 1991 amendments. We may therefore properly conclude that the
Legislature did not intend the 1991 amendments to modify or conflict with Murdock’s
holding. 	See Sims v. Sims, 1996-NMSC-078, ¶ 24, 122 N.M. 618, 930 P.2d 153
(“[W]e presume the legislature was well informed about the existing common law
before the statute was enacted and did not intend to enact a statute that conflicted with
the common law. 	This rule of construction is a recognition that any law is passed
against the background of all the law in effect at the time. 	If no aspect of the
background of law is clearly abrogated, it is presumed to be consistent with, if not
incorporated into, new legislation.” (citation omitted)).
{25} 	Finally, we do not perceive that allowing the parties to contractually waive
compensatory interest in the division order “manifestly tend[s] to injure the public.”
See Berlangieri, 2002-NMCA-060, ¶ 11. On the contrary, the parties are entitled to
agree when payments will be made under Section 70-10-3. 	Here, the parties
contractually agreed in the division orders that when there is a good faith question of

16
title, the interest holder agrees to provide the payor with abstracts or other evidence
of title acceptable to the payor and to cure any defects which render the title
unmarketable. 	Consistent with their right under Section 70-10-3, the parties also
contractually agreed that “[i]n the event of failure [of the interest holder] to furnish
such evidence of marketable title, [the payor] is authorized to withhold payments
without payment of interest until the claim is settled.” 	Thus, the failure to accrue
compensatory interest is attributable to the interest holder’s delay in proving
marketable title, and not any action of the payor.
{26} 	Consistent with the foregoing, we hold that the contractual waiver of
compensatory interest contained in the division orders in this case does not violate
New Mexico public policy and is enforceable. In light of this disposition, it is not
necessary for us to address other issues raised by Defendant.
CONCLUSION
{27} 	The order of the district court is reversed, and the case is remanded for further
proceedings consistent with this Opinion.
{28} 	IT IS SO ORDERED.
______________________________
MICHAEL E. VIGIL, Judge
WE CONCUR:

RODERICK T. KENNEDY, J udge

J. MILES HANISEE, Judge

17