A call from your land manager: the operator on a producing JOA filed Chapter 11 overnight. Wells are still flowing. A revenue check was supposed to land next week. The JOA gives you the right to remove a defaulting operator. What now?
Every operator bankruptcy is different. Leverage, urgency, and the right response turn on the case's posture, the contracts in play, the size of the working-interest position, and what the non-operator wants out of the case --- recovery of arrears, continued operations, replacement of the operator, or an exit. The framework below describes the recurring issue set; sequencing and strategy in any real case should be worked out with counsel.
The Automatic Stay
The “automatic stay” takes effect the moment the petition is filed. 11 USC §362. It bars certain actions, including those to collect prepetition claims, acts to obtain estate property, and enforcement of liens against estate assets. The stay is not absolute --- Section 362(b) carves out more than two dozen exceptions, including police-and-regulatory enforcement --- but may not help a non-participating working interest owner.
Without a court order, suing the operator for unpaid distributions, unilaterally invoking the JOA's change-of-operator clause, or foreclosing on a contractual operator's lien risks sanctions.
The stay protects the debtor and the debtor's property; it does not generally protect a non-debtor’s independent claims against another non-debtor. Edge Petroleum Operating Co. v. GPR Holdings, L.L.C. (In re Aurora Natural Gas, L.L.C.), 483 F.3d 292 (5th Cir. 2007). That carve-out matters where a non-operator has direct privity with a downstream gatherer or purchaser. In the more common arrangement, the operator collects under a marketing or division-order regime, the proceeds flow through the operator, and the claim runs against the estate.
Where Your Revenue Sits
When the operator files, undistributed production proceeds may sit in the operator's bank account, commingled with everything else. Texas law offers at least three recovery theories, each with real limits.
The trust theory will be difficult. A standard JOA may not, by itself, create a trustee-type relationship between operator and non-operators under Texas law. Wilson v. TXO Production Corp. (In re Wilson), 69 B.R. 960 (Bankr. N.D. Tex. 1987). Property of the estate generally will not include property held by the Debtor in trust, but it requires both a state-law trust and the ability to trace specific funds through any commingling --- both typically out of reach when the operator runs a general operating account. See Diamond Offshore Co. v. Bennu Oil & Gas (In re ATP Oil & Gas Corp.), 540 B.R. 294, 305-306 (Bankr. S.D. Tex. 2015).
The JOA lien theory turns on perfection. Wilson explained that an unrecorded lien may be ineffective against the debtor-in-possession's strong-arm powers under Section 544(a). The lesson runs both directions: a non-operator's contractual lien under the JOA generally requires recording the memorandum of operating agreement in the county real property records, with a UCC-1 covering personal-property collateral.
The statutory lien theory was rewritten in 2021. Tex. Bus. & Com. Code § 9.343, the former producer-protection statute, was repealed effective September 1, 2021, and replaced by Tex. Prop. Code Chapter 67, the Texas First Purchaser Lien Act. Chapter 67 gives interest owners an automatically perfected real-property lien on production and proceeds held by a first purchaser. The shift from a UCC Article 9 security interest to a real-property lien was deliberate: it avoids the choice-of-law trap that defeated Texas producers in In re First River Energy, L.L.C., 986 F.3d 914 (5th Cir. 2021), and In re SemCrude, L.P., 864 F.3d 280 (3d Cir. 2017) --- both holding the Delaware-organized purchaser's home-state UCC controlled. Two practical points: the new lien runs against a first purchaser, not the operator, so it does not address the most common predicament (operator commingled the revenue); and for legacy production sold before September 2021, the SemCrude / First River trap remains in play.
Section 365: Assume, Reject, or Assign
JOAs are executory contracts under the Countryman test --- both sides have continuing material obligations for the life of production. Argonaut Ins. Co. v. Falcon V, L.L.C. (In re Falcon V, L.L.C.), 44 F.4th 348, 352-53 (5th Cir. 2022) (discussing the Countryman test); Wilson, 69 B.R. at 962-63 (applying test to JOAs). The debtor-operator must elect to assume, reject, or assume and assign.
If the operator assumes the JOA, it must cure existing monetary defaults --- including unpaid revenue distributions and disputed joint-interest billings --- and provide adequate assurance of future performance. For a non-operator owed real money, the cure requirement is meaningful leverage. For a non-operator more concerned about who is running the wells, it may not be the right focus. Two complications often surface: (a) whether the JOA can even be assumed-and-assigned over non-operator objection raises a live Section 365(c)(1) question, particularly where the proposed assignee lacks the technical or financial qualifications the JOA implicitly contemplates; and (b) Countryman is applied contract-by-contract, so assumption of the JOA may not automatically resolve related agreements (gas balancing, marketing, accounting procedures, AMI, surface use).
If the operator rejects the JOA, rejection is treated as a prepetition breach giving rise to a general unsecured damages claim --- but it does not extinguish the non-operator's real-property interest in the underlying leases. Co-tenancy rules apply: a producing co-tenant must account for the share of net production proceeds, less reasonable operating expenses. The bankruptcy court generally lacks post-confirmation jurisdiction over a state-law breach claim on an assumed contract arising after the plan is consummated. Disputes over how an assumed JOA is being performed will typically be litigated in state court.
Replacing the Operator
Many AAPL Model Form JOAs let non-operators designate a successor when the current operator defaults, becomes insolvent, or files bankruptcy. Inside bankruptcy, exercising that right is harder than the JOA reads.
Removing the operator and shifting operational control is arguably an exercise of control over estate property under Section 362(a)(3); so a stay-relief motion under Section 362(d) should be a gating step. The familiar arguments --- safety, regulatory noncompliance, declining production from deferred maintenance --- can succeed on strong facts, but courts may be reluctant to disrupt a functioning debtor's operations without a serious record. Whether to push for relief, negotiate with the DIP for distribution and operating milestones, or wait out the plan process depends on the facts and goals.
Even with stay relief, the operator change is not effective until the Railroad Commission approves it. The successor needs an active Form P-5 with adequate financial assurance covering the transferred wells; the transfer is processed through Form P-4. A qualified successor --- often a service operator or affiliate --- usually has to be identified well in advance.
When the debtor proposes a Section 363 sale, the JOA's transfer restrictions, consent rights, and preferential-right-to-purchase provisions become the fight. Bankruptcy courts have reached divergent results on whether midstream dedications create covenants running with the land that survive rejection or a 363(f) sale and will be state specific.
Issues Worth Working Through Early
These questions come up in most operator Chapter 11s. Whether and when to act on any of them depends on facts and goals.
· Cash collateral and DIP financing. The cash management, DIP, and cash collateral orders often dictate whether post-petition distributions to non-operators occur. They move quickly, frequently on shortened notice.
· JIB review and recoupment. Disputed joint-interest billings can support setoff and recoupment under Sections 553 and 558. Recoupment (obligations arising from one transaction) is treated differently and is generally not subject to the stay.
· Gas balancing. Underproduced and overproduced positions may become claims; timing and form depend on the balancing agreement and the operating outlook.
· Bar date and proofs of claim. Chapter 11 bar dates are set by court order, commonly 70--90 days post-petition under Federal Rule of Bankruptcy Procedure 3003(c)(3), but extended in many more complex Chapter 11 cases and set by court order. Scheduled amounts may not be accurate.
· Take-in-kind elections. Most JOA elections are commonly prospective and require notice. The mechanism can offer property-side strengths going forward but imports its own burdens (transportation, balancing, regulatory custody) and is not a workaround for prepetition commingling.
· P&A tail. Where the case ends with under-bonded wells, plugging liability can flow back to non-operators as co-tenants --- often the dominant financial exposure on played-out fields.
These issues interact, and the right course in any case turns on the contracts, the financial picture, the proposed plan or sale, the regulatory posture, and what the non-operator is trying to accomplish. Early coordination between bankruptcy counsel and the operating team tends to pay off; the decisions that shape recovery often get made in the first few weeks.