Face Challenges Confidently

711 ConocoPhillips Co. v. Koopmann 547 S.W.3d 858 (Tex. 2018)

Monday, July 8th, 2019

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

ConocoPhillips Co. v. Koopmann 547 S.W.3d 858 (Tex. 2018) (Rule against perpetuities) held that the rule against perpetuities is generally not applicable in oil and gas conveyances, if the termination of the prior estate is certain to occur and the next taker is ascertainable. The case also construed part of the division order statute and held that the statute did not bar a contractual claim for royalties and interest under the oil and gas lease. Under a deed dated December 27, 1996, Grantor reserved a fifteen-year term nonparticipating royalty interest (“NPRI”) which could be extended “as long thereafter as there is production in paying or commercial quantities” under an oil and gas lease. The deed also provided:

It is expressly understood, however, that if any oil, gas, or mineral or mining lease covering said land . . . is maintained in force and effect by payment of shut-in royalties or any other similar payments made to the lessors or royalty holder in lieu of actual production while there is located on the lease or land pooled therewith a well or mine capable of producing oil, gas, or other minerals in paying or commercial quantities but shut-in for lack of market or any other reasons, then . . . it will be considered that production in paying or commercial quantities is being obtained from the land herein conveyed.

In 2009, the current Lessee paid $24,000 to extend the lease term to October 22, 2012. The land was leased and pooled, but near the end of the fifteen-year term of the NPRI, and there was no actual production. When there was only four months left on the fifteen-year term of the NPRI, Grantor assigned a 60% interest in the NPRI to Lessee, “presumably as an incentive to motivate [Lessee] to begin drilling.” On December 7, 2011, Lessee tendered shut-in royalty payments to Grantee (Lessor), and it was undisputed that there was no actual production on December 27, 2011, the date the NPRI term ended. The parties offered conflicting summary judgment evidence as to whether there was a well capable of producing in paying quantities on that date. In February 2012, actual production commenced. Lessee contended that Grantee’s future interest in the NPRI under the deed was void under the rule against perpetuities (the “Rule”) and that Lessee’s activities satisfied the deed’s savings clause. That is, Lessee was aligned with Grantor to preserve the reserved NPRI, because Lessee owned 60% of the NPRI.

“The Texas Constitution prohibits perpetuities: ‘Perpetuities . . . are contrary to the genius of free government, and shall never be allowed.” Although the Constitution provides no definition of “perpetuities,” the Court has adopted the common law version of the Rule, which provides that “no interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance.” “The Rule requires that a challenged conveyance be viewed as of the date the instrument is executed, and the interest is void if by any possible contingency the grant or devise could violate the Rule.”

Under the Rule, Grantor’s interest in the NPRI was a vested fee simple, subject to an executory limitation. Grantee’s interest in the NPRI was a springing executory interest that would not vest until the conditions terminating Grantor’s present possessory interest were met (the lack of or cessation of production at some indeterminable time). Therefore, Grantee’s interest violated the Rule and was void.

However, the Court decided to carve out an exception for oil and gas conveyances. The purpose of the Rule is to prevent landowners from using remote contingencies to preclude alienability of land for generations. “But here, [Grantor’s] fee simple interest in the NPRI was certain to end, either because production in paying or commercial quantities ceased, . . . or the recoverable minerals were exhausted.” If Grantor had conveyed in fee simple absolute to Grantee, and then Grantee had conveyed the same term NPRI back to Grantor, in a separate conveyance, Grantee’s future interest in the NPRI would not violate the Rule because it would be classified as a vested possibility of reverter. Restraint on alienation is not an issue in the oil and gas context, and defeasible term interests in minerals actually promote alienability of land.

[I]t is appropriate to hold that in this oil and gas context, where a defeasible term interest is created by reservation, leaving an executory interest that is certain to vest in an ascertainable grantee, the Rule does not invalidate the grantee’s future interest. . . . We limit our holding to future interests in the oil and gas context in which the holder of the interest is ascertainable and the preceding estate is certain to terminate.

After holding the Rule did not void the Grantee’s interest, the Court turned to the issue of whether Lessee’s actions had perpetuated the NPRI under the savings clause. The Court held that “other similar payments” was ambiguous as a matter of law, summary judgment was inappropriate, and therefore remanded on the perpetuation of the NPRI.

“Other similar payments” could mean delay rentals, extension payments, or any payment made during the secondary term in lieu of production. “There are both similarities and differences between shut-in royalties, delay rentals, and paid-up leases, depending on the criteria used to compare them.” Therefore, the court determined that there is more than one reasonable interpretation of “other similar payments,” making the savings clause ambiguous.

In a separate issue, the Court held that the Natural Resources Code did not preclude a breach of contract claim. Grantee (Lessor) was pursuing a breach of contract claim under the Lease based on Lessee’s failure to timely pay royalties. Lessee contended there could be no breach-of-contract claim because Natural Resources Code § 91.402(b) permits payments to be withheld without interest when there is a title dispute. The Lease contained its own payment schedule and recited that “Lessee assumes all risk of title failures.” “Section 91.404(c) provided a cause of action for a payee if the payor d[id] not comply with the requirements set out in section 91.402, but this d[id] not mean that the statute abrogate[d] a common law claim for breach of contract when there [wa]s a controlling lease between the parties.” There is no clear language from the Legislature indicating intent for the statute to preclude a common law claim of breach of contract.

The significance of this case is that the rule against perpetuities does not apply in the oil and gas context if the termination of the prior estate is certain to occur and the next taker is ascertainable. Additionally, it determined the phrase “other similar payments” was ambiguous in a savings clause. It is also a significant holding that the division order statute (governing payment of royalties, suspension of payments and interest) does not bar a contractual claim for payment and interest under the oil and gas lease.