Interest Paid on Past Due Royalties

The Texas Supreme Court is going to hear a case in which the issue is whether the interest to be paid on past due royalties is simple or compound interest.

In the case of Samson Exploration, LLC v. Bordages, 662 S.W.3d 501 (Tex. Civ. App.—Beaumont 2022, pet. granted September 1, 2023), the lessors executed a number of oil and gas leases with Samson. The leases provide for an 18% late-charge penalty on past-due royalties to be calculated each month but do not expressly state whether the interest should be compound or simple.

The specific language in the lease is:

C. All past due royalties (including any compensatory royalties payable under Paragraph VI.B.) shall be subject to a Late Charge based on the amount due and calculated at the maximum rate allowed by law commencing on the day after the last day on which such monthly royalty payment could have been timely made and for every calendar month and/or fraction thereof from the due date until paid, plus attorney’s fees, court costs, and other costs in connection with the collection of the unpaid amounts. Any Late Charge that may become applicable shall be due and payable on the last day of each month when this provision becomes applicable.

The trial court and the Court of Appeals agreed with the lessors and entered a judgment against Samson based on compound interest. Samson has appealed, claiming that Texas law disfavors compound interest and that allowing compound interest would be allowing “late charges on late charges”. The lessors respond that the plain language of the lease authorizes compound interest.

Obviously, the difference between simple and compound interest is substantial. My guess is that the Supreme Court will go with compound interest based on the language in this lease. Keep in mind that the opinion is going to be specific to the language in these particular leases, and whatever the holding is, it will apply to leases with substantially the same language.