The Kings in the North!—North Dakota Operators are Kings (for now) When it Comes to Statutory Interests on Suspended Overrides

Do North Dakota operators have to pay suspense penalties on all types of late-paid interests? Not according to a recent line of decisions from the North Dakota Federal District Court. These cases interpret the North Dakota Suspense Statute as relieving operators of the obligation to pay statutory interest on suspended overriding royalty interests—and possible working interests too. This article discusses why operators should proceed with caution when relying on this strict interpretation of the Suspense Statute. However, until the state courts or the legislature weigh in, North Dakota operators arguably wield the kingly power to suspend overrides—and working interests—for any reason or no reason at all!

I. Division Order & Suspense Statutes Generally

The obligation to pay royalties on the sale of production from an oil or gas well generally arises on first production from the well. In many instances, an operator may circulate a document called a division order prior to the distribution of funds. A division order is an instrument executed by the lessor of an oil or gas lease to direct the payment of proceeds from the sale of hydrocarbons.

Although the formalities vary by state, division orders typically include some combination of an effective date, a description of the property where the oil or gas is being produced, the type of production, the fractional or decimal interest claimed by the payee, the type of interest, an authorization to suspend payment in the event of a title dispute, the name and address of the payee, and the valuation and timing of settlements of oil and gas production. The effect of executed division orders also varies by state. In some states division orders are a prerequisite to receiving revenue payments,¹ and in other states they are mere nice-to-haves and of limited effect.²

Most states’ statutory schemes pair a “division order statute” with a “suspense statute” in one or more code sections. A “suspense statute” allows operators to place funds that have not been timely distributed in a “suspense account” to be held for the rightful distributees. If the late payments are improperly suspended, they will begin to accrue statutory interest. However, this penalty may be excused under a “safe harbor” provision. For example, the funds can often be held in suspense without accruing interest if: (i) there is a legitimate title dispute; (ii) the operator is relying in good-faith on a requirement in a title opinion; or (iii) an owner simply cannot be found with reasonable diligence.

In many states, suspense statutes and the right to receive interest on unpaid royalties are held to apply to more than just unleased mineral interests and lease royalty interests. They may cover a combination of royalty interests, nonparticipating royalty interests, unleased mineral interests, overriding royalty interests, and working interests. For example, the suspense statute in New Mexico applies to all persons entitled to the payment of “oil and gas proceeds,”³ including royalty interests, overriding royalty interests, and working interests.⁴ The Texas suspense statute defines a “payee” as “any person or persons legally entitled to payment from the proceeds derived from the sale of oil or gas . . .”⁵ This broad definition includes payments to working interest owners, royalty owners, and overriding royalty owners.⁶ The Montana statute applies to the payment of “royalties to the royalty owner or the owner’s assignee,” which may include overriding royalties.⁷

Despite this “majority” view on the types of interests that fall within the scope of a suspense statute, there is a recent line of federal court decisions in North Dakota that appear to limit statutory interest on suspended funds to mineral royalties only. These decisions are driven by a combination of the unique wording of North Dakota’s suspense statute and strict interpretation by the federal district court.

II. North Dakota’s Suspense Statute

North Dakota’s suspense statute is set forth in N.D. Cent. Code § 47-16-39.1 (hereinafter the “Suspense Statute”⁸), which provides in relevant part:

“The obligation arising under an oil and gas lease to pay oil or gas royalties to the mineral owner or the mineral owner’s assignee . . . is of the essence in the lease contract, and breach of the obligation may constitute grounds for the cancellation of the lease in cases in which it is determined by the court that the equities of the case require cancellation. If the operator under an oil and gas lease fails to pay oil or gas royalties to the mineral owner or the mineral owner’s assignee within [150] days after oil or gas produced under the lease is marketed and cancellation of the lease is not sought or if the operator fails to pay oil or gas royalties to an unleased mineral interest owner within [150] days after oil or gas production is marketed from the unleased mineral interest owner’s mineral interest, the operator thereafter shall pay interest on the unpaid royalties, without the requirement that the mineral owner or the mineral owner’s assignee request the payment of interest, at the rate of [18%] per annum until paid . . . (emphasis added)

This section does not apply if mineral owners or their assignees elect to take their proportionate share of production in kind, in the event of a dispute of title existing that would affect distribution of royalty payments, or if a mineral owner cannot be located after reasonable inquiry by the operator; however, the operator shall make royalty payments to those mineral owners whose title and ownership interest is not in dispute.”

Note that the North Dakota Suspense Statute creates a heightened obligation to timely pay royalties, as long as there is no legitimate title dispute, and the mineral owners can be found. Failure to pay lease royalties on time can lead to lease cancellation if “equitable.” Only one other state, Montana, takes this approach, which stands in contrast to the majority of states where the payment of royalties is a covenant rather than a condition of lease maintenance. Only in the event that a mineral owner or mineral owner’s assignee does not seek lease cancellation does the remainder of the statute apply.⁹

But who exactly falls within the robust protection of the North Dakota Suspense Statute? This is a question that has been posed in the federal district court numerous times in recent years. Of particular interest in the decisions outlined below is the Suspense Statute’s repeated use of the phrase “mineral owner or the mineral owner’s assignee.” What the legislature intended in including this phrase has been hotly contested, and the federal district court has consistently adhered to a narrow reading.

III. Au Revoir to Overrides—SunBehm Gas, Inc. v. Equinor Energy, LP¹⁰

In SunBehm Gas, the United States District Court for the District of North Dakota held that the Suspense Statute does not apply to the holders of overriding royalty interests. The court first noted that there is no North Dakota Supreme Court case specifically addressing the application of the Suspense Statute to overriding royalty interests.¹¹ Defendant Equinor argued that Plaintiff SunBehm, as the holder of an unpaid overriding royalty, was not entitled to 18% interest because it is not a “mineral owner” or a “mineral owner’s assignee.”¹² SunBehm countered that an override is: (i) a type of royalty; and (ii) is effectively a smaller carveout of the mineral estate, such that an overriding royalty owner is technically a “mineral owner’s assignee.”¹³

In rejecting SunBehm’s argument, the district court looked to the plain meaning of the Suspense Statute. An overriding royalty interest, it reasoned, is carved out of the net revenue interest under an oil and gas lease, and not directly from the mineral estate. Overriding royalty interest owners thus do not have an ownership interest in the minerals under the ground. Put differently, the right to a landowner’s royalty interest does not rise from the lease but from the ownership of the minerals, while an overriding royalty interest springs from the lease itself.¹⁴ This is—in the court’s view—a critical difference between overriding royalties and other types of royalties and takes overrides outside the scope of the Suspense Statute.

The court further held that attempting to argue that an overriding royalty owner is a “mineral owner’s assignee” is a “tortured construction” not supported by the plain language of the Statute.¹⁵ Unlike royalty interests and nonparticipating royalty interests, overriding royalties are not intrinsic to mineral ownership.¹⁶ Thus, the Suspense Statute applies only to royalties and nonparticipating royalties, and not to the timely payment of leasehold interests. Although not specifically addressed by the SunBehm Gas court, “leasehold interests” ostensibly includes working or net revenue interests in addition to overrides.

IV. Positive Treatment of SunBehm Gas—A Federal Line in the Sand

In the wake of SunBehm Gas, the Federal District Court has had several occasions to revisit its ruling – and has vindicated or possibly expanded its decision in each case. For example, two years later in Cont’l Res., Inc. v. Northland Royalty Corp., the court stated in dicta that it “doubts that [the Suspense Statute] extends to untimely payments owed with respect to working interests.”¹⁷ This is because the Statute, per the court, “on its face appears to apply only to payments of royalties.”¹⁸

In the 2023 case of Sandy River Res., LLC v. Hess Bakken Invs. II, LLC, Sandy River Resources (like SunBehm) attempted to collect the statutory 18% interest on unpaid overriding royalties.¹⁹ Sandy River contended that SunBehm Gas had been incorrectly decided, but the court disagreed. The court reiterated that when an oil and gas lease is executed by the mineral owner, it conveys to the operator a working interest and the right to develop the minerals. “An overriding royalty interest is carved out of the working interest [and] is not an ownership interest in the minerals themselves.” Thus, Sandy River “failed to plead a valid claim for relief under the [Suspense Statute] and an entitlement to the 18% late penalty with respect to overriding royalty interests.”²⁰

In 2024, yet another plaintiff sought relief under the Suspense Statute for unpaid overriding royalties. The Federal District Court in M G Expl., LLC v. XTO Energy Inc.²¹ held that “courts” have previously ruled that the Suspense Statute does not apply to overriding royalty interests. Interestingly, by “courts” the District Court could only have been referring to itself, as it is the sole judicial body that has applied the restrictive “SunBehm Rule.” Citing to its own rulings in SunBehm Gas and Sandy River, the court held that only a mineral owner or a mineral owner’s assignee—which does not include overriding royalty owners—can collect interest under the Suspense Statute.

Note that in M G Expl., LLC v. XTO Energy Inc., M G Exploration argued that the legislative history of N.D. Cent. Code § 47-16-39.1 supports applying the statute to overriding royalty interests. However, the court dismissed this argument, stating that it could not “consider extrinsic evidence, such as legislative history, unless it determines the statute is ambiguous.”²² The District Court has, to its credit, stayed consistent in its position that the Suspense Statute is unambiguous and should be narrowly applied.²³

V. A Brief Note on the Legislative History of Section 47-16-39.1

N.D. Cent. Code § 47-16-39.1 was first proposed in 1961 as S.B. 44, ch. 295. The bill was proposed because a number of landowners had reported an “unreasonable lag in royalty payments,” and that their “only recourse was to sue in court.” The comments to S.B. 44 indicated that the bill should also apply to overriding royalties. Although overrides were not expressly included in the final language of this early version of Section 47-16-39.1, they were seemingly contemplated as within the original definition of “royalties.”

In 2023, an attempt was made to amend Section 47-16-39.1 and several other code sections under HB 1520.²⁴ The proposed change expressly added overriding royalty interests to the Suspense Statute. This was in direct response to the SunBehm Gas decision and relied in part on written testimony from Dorchester Minerals, L.P. In arguing that overriding royalty interest owners should have the right to receive interest on wrongfully withheld payments, Dorchester argued that: (i) an override, like a royalty, is paid to the owner directly by the operator/payor and in the same manner; (ii) an operator can thus hold an override interest free for “years upon years”; and (iii) there is no logical reason a royalty and override should be treated differently.

Ultimately HB 1520 failed to pass by a large margin (yeas 10, nays 80) and died in chamber. However, based on its legislative history it seems that HB 1520’s failure may have been due more to the amendments to numerous other portions of the Century Code, and less to the proposed inclusion of overriding royalties in Section 47-16-39.1. The door may thus still be open to a future proposal to amend the Suspense Statute.²⁵

VI. So … Do I have to Pay Interest on Wrongfully Suspended Overrides or Not?

The obligation to pay royalties on leased or unleased mineral interests in North Dakota is of the essence in the lease contract, and great care should be taken to make these payments in a timely manner. However, the question of whether operators owe statutory interest on suspended override (and working interest) payments remains open under the North Dakota Suspense Statute.²⁶

The current operator-friendly scheme is subject to debate because the cases interpreting the Suspense Statute have only been considered at the federal trial court level. They are thus of little precedential value. As the SunBehm Gas court noted, there is still no North Dakota Supreme Court case specifically addressing the application of the Suspense Statute to overriding royalty interests and/or working interests. Until the Supreme Court steps in or the legislature amends the Suspense Statute, these federal trial court cases are the sole authority on the matter.

One current concern is that the SunBehm Gas line of cases could lead to a form of legal forum shopping to influence an outcome. It would behoove an operator sued for late overriding royalty or working interest payments to remove the lawsuit to federal district court as long as the court remains committed to its narrow interpretation of the Suspense Statute. Next time a similar case does land in the federal courts, perhaps a certified question to the North Dakota Supreme Court would be appropriate. State courts may find that there is some merit to the “tortured construction” that executing a lease “assigns” a mineral owner’s developmental rights to the lessee, and any carveout from that point forward could fall within the definition of a “mineral owner’s assignee.” What is evident for now is that the phrase “mineral owner’s assignee” in the Suspense Statute is ambiguous at best and will ultimately require Supreme Court or legislative clarification.

In the meantime, SunBehm Gas and its federal progeny support the argument that the slightly unusual phrasing of “mineral owner and mineral owner’s assignee” in the North Dakota Suspense Statute limits the recovery of statutory interest to mineral royalty (and nonparticipating royalty) owners only. When it comes to statutory interest, suspended overriding royalty and working interest owners may continue to be subjugated to the whims of the operators—the Kings in the North!

1. See, e.g., Tex. Nat. Res. Code § 91.402(c); N.M. Stat. Ann. § 70-10-5.D; Utah Code § 40-6-9(8)(d).
2. See, e.g., Mont. Code Ann. § 82-10-110(2) (“A division order does not relieve a lessee of any liabilities or obligations under the terms of the underlying oil or gas lease.”); N.D. Cent. Code § 47-16-39.3 (“Royalty payments may not be withheld because an interest owner has not executed a division order.”).
3. N.M. Stat. Ann. § 70-10-3.
4. N.M. Stat. Ann. § 70-10-2.B.
5. Tex. Nat. Res. Code § 91.401(1).
6. See Concord Oil Co. v. Pennzoil Exploration & Prod. Co., 966 S.W.2d 451 (Tex. 1998); Stable Energy, L.P. v. Newberry, 999 S.W.2d 538 (Tex. App.—Austin 1999, writ denied).
7. Mont. Code Ann. § 82-10-103(2). We note that there is little case law interpreting the Montana statutes. However, it is possible that the conspicuous use of the phrase “royalties to the royalty owner or the owner’s assignee” instead of North Dakota’s “royalties to the mineral owner or the mineral owner’s assignee” could very well be interpreted to include overrides. Whether statutory interest can be assessed on late payments to non-operated working interest owners in Montana is an open question.
8. We note that the first portion of N.D. Cent. Code § 47-16-39.1 is sometimes referred to as the “Prompt Pay” provision. We refer herein to the Prompt Pay provision and the “Safe Harbor” provision collectively as the Suspense Statute.
9. Some commentators state that “as a practical matter, the [lease cancellation portion of the Suspense Statute] may not be that useful. If the company missed a royalty payment, but later acknowledged the fact and paid the royalty plus interest, an equitable situation would then exist and the lease most likely couldn’t be cancelled. However, if the landowner could prove some kind of bad faith on the part of the company, he may have a case for cancellation.” Anderson, Ron, North Dakota Oil & Gas Leasing Considerations, Extension Bulletin 26 (Revised October 2006, available at https://www.dmr.nd.gov/oilgas/leasingconsiderations.pdf, last retrieved February 24, 2025).
10. 2020 U.S. Dist. LEXIS 73097 (D.N.D. Apr. 27, 2020).
11. Id. at 5.
12. Id.
13. Id.
14. Id. at 9.
15. Id. at 13.
16. Id.
17. 2022 U.S. Dist. LEXIS 184471, 35 (D.N.D. August 15, 2022); see also 2024 U.S. Dist. LEXIS 118048 (D.N.D. June 5, 2024).
18. Id.
19. 2023 U.S. Dist. LEXIS 20632 (D.N.D. February 7, 2023).
20. Id. at 6-7.
21. 2024 U.S. Dist. LEXIS 197544, 12 (D.N.D. October 30, 2024).
22. Id.
23. See, Colton v. Lime Rock Res. GP V, L.P., 2024 U.S. Dist. LEXIS 69370 (D.N.D. April 16, 2024) (“This Court has previously held Section 47-16-39.1 does not apply to overriding royalty interests.”); Hystad Ceynar Mins., LLC v. XTO Energy, Inc., 2024 U.S. Dist. LEXIS 19940 (D.N.D. February 5, 2024) (“Royalties are the only payments to which N.D.C.C. 47-16-39.1 applies.). See also, Northland Royalty Corp. v. XTO Energy, Inc., 2024 U.S. Dist. LEXIS 118048 (D.N.D. June 5, 2024) (In this case it was argued that just because the ownership of an overriding royalty interest is not an ownership in the minerals themselves does not mean the statute is inapplicable to an overriding royalty interest owner. It was further argued that the statute is at best ambiguous, and reasonable doubt exists as to how it should be interpreted. The federal district court rejected both views.). Sunbehm Gas was also cited by the Eighth Circuit Court of Appeals in Slawson Expl. Co. v. Nine Point Energy, LLC for the proposition that, although overriding royalty interests and working interests are interests in real property, overriding royalties are carved out of the working interest created by an oil and gas lease and thus the ownership interest arises from the lease, not from ownership of the subsurface minerals. 966 F.3d 775, 780 (8th Cir. 2020).
24. HB 1520 can be summarized as a Bill for an Act to create and enact a new subsection to section 38-08-04 and new sections 38-08-06.5 and 38-08-06.6 of the North Dakota Century Code, relating to jurisdiction of the industrial commission and payment for production from wells; to amend and reenact sections 38-08-02, 38-08-06.3, 47-16-39.1, 47-16-39.2, and 47-16-39.4 of the North Dakota Century Code, relating to royalties; and to provide a penalty.
25. None of the legislative history or proposed amendments to the Suspense Statute attempt to expand its reach to working or net revenue interests. Perhaps the rationale is that there is less ambiguity between operators who are actively developing the well, or that the operator and non-operators will negotiate an operating or co-development agreement (though this may seldom happen in practice).
26. Note that because overriding royalty interests may not fall within the protections of the Suspense Statute, overriding royalty owners would most likely need to sue under a breach of contract in a conveyance theory. Claims would thus potentially fall within the ten-year statute of limitations set forth in N.D. Cent. Code § 28-01-15. See, e.g., Powell v. Statoil Oil & Gas LP, 999 N.W.2d 203, 209 (N.D. 2023) (“Thus, we conclude as a matter of law that the ten-year statute of limitations, [N.D. Cent. Code] § 28-01-15(2), which in [Kittleson v. Grynberg Petro. Co., 876 N.W.2d 443 (N.D. 2016)] applied to a claim for underpayment of royalties under an oil and gas lease, applies here to the claim for untimely payment of royalties under the oil and gas lease. Because Plaintiffs claims accrued within ten years of commencing this action, their action is timely under [N.D. Cent. Code] § 28-01-15(2).”) Certain provisions of the Judicial Remedies code sections, relating to damages and interest on damages generally, might also be implicated. See, N.D. Cent. Code §§ 32-03-01, 04.