Nonjudicial Foreclosures Under Joint Operating Agreements
Consider this…
If an Operator is faced with a Non-Operator working interest owner who isn’t paying his share of production costs pursuant to their Joint Operating Agreement (“JOA”), shouldn’t there be a streamlined process to either supplant that nonpaying party or obtain his interest? Under Texas law, the default remedy in such a scenario is a judicial foreclosure, which requires pleading to a court for an order to foreclose the nonpaying party’s interest. If that sounds like a more lengthy, tedious, and, ultimately, more expensive process than a typical Operator is willing to undertake, it certainly can be. That is why most JOA’s include nonjudicial foreclosure as an alternative and more straightforward method to achieve a foreclosure that does not require court intervention.
Before we discuss the process for nonjudicial foreclosures in the context of a JOA, it’s important to note that any JOA party seeking to foreclose on the interest of another JOA party will be limited to the default judicial foreclosure remedy unless the JOA explicitly provides nonjudicial foreclosure as a remedy to its parties. Further, any specific instructions within a JOA regarding the process of executing a nonjudicial foreclosure will take precedence over the general execution process discussed in this post.
The General Process
Now, generally, the first step for any nonjudicial foreclosure is to give the nonpaying JOA party a chance to cure the default before initiating a foreclosure. This can be achieved by sending a notice of default via certified mail that provides at least 20 days to cure the default.
Once the 20-day cure period has lapsed, a 21-day notice of sale must also be sent to the nonpaying party, as well as posted at the courthouse and filed with the county clerk in the county where the relevant interest is located. Additionally, it’s common for nonjudicial foreclosures to require a substitute trustee to oversee the process; in which case an Appointment of Substitute Trustee must also be filed with the county clerk upon the appointment.
After the 21-day notice period has passed, a public sale of the foreclosed interest may take place, at which point a new party may acquire the interest or the foreclosing party may purchase the same. If the price at which the interest is sold is less than the amount owed by the nonpaying party, then the foreclosing party will still have the right, for two years, to sue the nonpaying party for the deficiency.
At the completion of the sale, the Trustee or Substitute Trustee of the foreclosure will execute a Trustee’s Deed to the purchaser on behalf of the nonpaying party, and the purchaser, at that point, will be the record title owner of the interest.
Going forward…
Again, this is a generalized description of the nonjudicial foreclosure process, which involves some more mechanics than what can be reasonably summarize in this post. In particular, Texas law requires that the notice of sale and the sale of foreclosed property itself conform with certain statutory requirements, the nonconformance with which can lead not only to voidance of the sale but also costly litigation. Further, depending on provisions within the JOA a foreclosing party is subject to, there may be additional aspects of their specific foreclosure process that haven’t been covered here. Accordingly, foreclosing parties should engage an attorney to properly facilitate the foreclosure and avoid liability.
Finally, if you are considering/negotiating/entering a JOA, it may be worthwhile to seek legal counsel in order to ensure that a clause providing for nonjudicial foreclosure is included as an option for remedy under the agreement.
If you have questions about pursuing a nonjudicial foreclosure or providing yourself the option for this remedy in a JOA, please contact us and connect with our team of attorneys that are experienced in this area of the law.