Oil/Gas/Division Orders and Forced Subordination Agreement
Recently I received a package from Chesapeake Energy regarding an earlier agreement with Chesapeake for gas drilling rights on my lot in Bedford, Texas 76022. After several years, I received this packet from them telling me that in-order for me to receive my production proceeds; I must submit a signed subordination agreement from my mortgage company.
I contacted my mortgage company and they advised that they do not sign subordination agreements with Chesapeake Energy do to prior legal problems with them and their forms.
My question is: When I signed the drilling agreement with Chesapeake, there was nothing mentioned or required about a subordination agreement. Additionally, my mortgage company advised that even if they would sign and agree to this agreement, there would be a $300-400 filing fee with state. She also advised that the various gas drilling have tried to force these agreements after the mortgage crisis hit.
Chesapeake Energy is involved in major litigation with the City of Ft. Worth, the DFW Airport and other groups involving their business practices. Can Chesapeake refuse to pay me my production proceeds unless there is a signed subordination agreement. What are your thoughts and/or suggestions about this situation?
Sandy, thanks for giving me the opportunity to answer your questions. You gave quite a bit of information raising several questions, so I'll take it one piece at a time.
Am I right in assuming the "earlier agreement with Chesapeake for gas drilling rights on my lot in Bedford, Texas" means you signed an oil and gas lease with Chesapeake? I further assume that you own both the surface and the mineral rights to that lot?
Do you have a copy of the plat map from the Texas Railroad Commission website (it will be available as a PDF document there--you can print it for your records and/or save it to your computer). Is your lot part of the drillsite spacing unit? If it is outside the "drillsite" but inside the unit boundaries, the title requirement for the mortgage subordination agreement should have been satisfied before the well was spud. The fact they are demanding it only now that the well has started to produce tells me that your lot is not part of the drillsite spacing unit so the financial risk to Chesapeake is much less than it would be if your lot is part of the drillsite.
From another angle, before agreeing with them that a loan subordination is required, pull out your mortgage papers from when you closed on the loan mortgaging that lot. Read it very carefully--does the Deed you signed over to the bank actually use the words "all right, title and interest" in the legal description given, that you are agreeing to use as collateral on the loan? Does it say anywhere in the legal description (usually at the end) "less and except" anything? And here's the really important question: does it contain a sentence anywhere in it that says that you are agreeing that all royalties or other income from the property are payable to, or are to be paid to, the mortgage company? If the answer to this last question is "no" then their demand for a mortgage subordination can be deemed unreasonable.
Now as for the assertion by the bank that there will be a $300-$400 filing fee you will have to pay, this is not correct. You can only be required to help secure a signed mortgage subordination agreement--if it is reasonable to require it of you before you can be paid royalties--you are NOT required to make sure it is filed of record anywhere. That is 100% the responsibility of Chesapeake, period.
My last piece of advice I want to add is that, as a professional division order analyst, it is never necessary for a mortgage subordination agreement to be prepared by the oil company and signed by the bank. If your mortgage is being held by or serviced by a big bank (JPMorgan Chase, Wells Fargo, etc.)these large banks have their own mortgage subordination agreement form they can use, limited only to royalties or other income from a mortgaged property. They can sign it and send it to you unrecorded, and you can forward it to Chesapeake using certified mail.
As for Chesapeake holding your money: they absolutely cannot hold it indefinitely. If this were my problem, I would start by writing a letter to my mortgage holder asking them to provide a signed mortgage subordination agreement to me using their own form. I would tell them that I need it for my records (which you really should have a copy for your records). That would give them the chance to tell me if they have the right to take my royalties to help satisfy the loan. I would make sure that at the bottom of the letter I put "cc: Chesapeake Energy Corporation, Attn: Division Order Department, PO Box 18496, Oklahoma City, OK 73154-0496" and make sure that a copy of the letter is also mailed to that address. This would place Chesapeake on notice that I am making a good faith effort to comply with their requirement. I would give the bank 30 days to reply, and if they don't, then I would next send a demand letter directly to Chesapeake saying that I am invoking the Texas statutory interest rate and demand that all sums due and payable to me from the date of first production forward be paid to me within 30 days along with all statutory interest due, or I will seek termination of my lease for breach of contract. This should serve to jolt them into making the reasonable business decision to assume the financial risk and begin paying you (it has always worked like a charm for companies I've worked for during the past 35 years).
Please let me know if you have any new questions based on all the new information I've given, or if you want to respond to my questions to see if there's any new information you need based on your answers. Good luck!