Today we venture into Oklahoma, to be instructed on the Supreme Court’s treatment of the Rule Against Perpetuities. First, the Rule: No property interest is good unless it must vest, if all, not later than 21 years after some life in being at the creation of the interest.
In American Natural Resources LLC v. Eagle Rock Energy Partners LP, et al, Eagle Rock’s predecessor (Encore) and ANR entered into a participation agreement with an AMI. Eagle Rock drilled and completed 17 wells without allowing ANR to participate. In response to ANR’s tortious interference and breach of contract suit, Eagle Rock said that the Rule Against Perpetuities prevented enforcement of this option: “In all subsequent wells within the AMI, ANR shall have the right to participate in the prospect area with a . . . 25% working interest . . .”
ANR responded: The Rule doesn’t apply to operating agreements and doesn’t apply to the option because oil and gas production is always of limited duration.
The court’s analysis
The court observed that the Rule applies to property rights but not to contracts, which are personal, and found cases involving JOAs and leases that fell on both sides. The question was, Does this option provision create a property right subject to the Rule? The court’s answer was yes.
Options in mineral leases do not violate the Rule because leases and JOAs have a built duration not necessarily tied to the cessation of production. But this AMI was a stand-alone document, and the option applies to participation in wells drilled in the future, as well as existing leases. ANR could participate in future wells even if production ceased and then restarted. The option allowed ANR to participate in future wells if production ceased and then restarted under new leases and new JOAs. as well as existing leases. As such it is subject to the Rule.
An LLC is not a “life in being”
ANR argued that a single member limited liability company with a 30 year duration should be disregarded as an entity. The court responded: A corporation might be a person, but it is not a “life in being”. The only measurable “life in being” in the case of a corporation is a term not exceeding 21 years. A provision with an immeasurable life in being that vests or distributes after 21 years violates the Rule and is void. ANR asked the court to rely on the disregarded entity doctrine used for federal tax purposes. The court said they were not dealing with federal taxes, but with contractual rights. Thus, an Oklahoma LLC is a legal entity separate from its owners.
Speaking of Oklahoma, Leon Russell RIP.
For extra credit, learn more about the Dakota Access Pipeline.