Texas District Court Finds Unclaimed Oil and Gas Royalties Are Not Property of the Estate

By: Bradley Lehman, Esquire

McElroy Deutsch

A recent opinion from the U.S. District Court for the Southern District of Texas, on appeal from the bankruptcy court in the District, is likely to have broad applicability in pending and future energy producer bankruptcy cases. In Oklahoma State Treasurer v. Linn Operating, Inc., 6:17-CV-0066, 2018 WL 1535354 (S.D. Tex., March 29, 2018), the Chapter 11 plan filed by Linn Operating LLC, an Oklahoma-based oil and gas producer, provided that the claims of owners of the approximately $1 million in unclaimed royalties held by the debtor would be discharged upon confirmation of the plan and the debtor would retain the funds. The bankruptcy court confirmed the plan, and the State of Oklahoma filed an adversary action against the debtor seeking turnover of the unclaimed royalties to the state. The bankruptcy court dismissed the complaint, finding that the adversary case was merely a post-confirmation collateral attack on the debtor’s plan.

Oklahoma appealed the dismissal of its adversary case to the Southern District of Texas, and Judge Kenneth M. Hoyt entered an opinion reversing the bankruptcy court’s decision. The District Court found that, as a matter of state law, unclaimed oil and gas royalties are held in trust by the producer for the owners of the royalties. Therefore, the unclaimed royalties were never property of the debtor’s bankruptcy and were not subject to the bankruptcy court’s jurisdiction or to confirmation of the debtor’s Chapter 11 plan.