In Re Walter Energy, United States Bankruptcy Court for the Northern District of Alabama, December 28, 2015, 2015 Bankr. LEXIS 4357

Where a royalty interest does not constitute a real property interest, an agreement related to such an interest may be rejected by a debtor under Sec. 365 of the Bankruptcy Code.

Dominion entered into a number of agreements with Walter Energy pursuant to which Dominion was conveyed an overriding royalty interest that Walter Energy agreed to administer for a fee. Due to the unprofitable nature of the operation of the interests, Walter Energy moved to reject the contracts under Sec. 365 of the Bankruptcy Code. Dominion argued that the royalty assignment was a conveyance of an interest in real property and not subject to rejection. The court discussed the “ownership in place” theory of minerals versus the “non-ownership” theory. Under the “ownership in place” theory, the holder of a mineral interest owns the minerals in place under his land. Under the “non-ownership” theory the minerals are now owned until reduced to actual possession. Since Alabama is a “non-ownership” state, the court held that the royalty assignment created a personal property interest subject to rejection. Since Texas is an ownership in place state, a debtor should not have the right to reject such a conveyance under Texas law.