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ConocoPhillips v. Koopmann: does a reserved term royalty interest violate the Rule Against Perpetuities?

Last week the Texas Supreme Court issued its opinion in ConocoPhillips Co. v. Koopmann, No. 16-0662. Its opinion rejected Burlington’s argument based on the Rule Against Perpetuities.

Strieber sold 120 acres in Dewitt County to Koopmann, reserving one-half of the royalty for a term of 15 years and as long thereafter as there is production in paying quantities.  The 15-year term ended on December 27, 2011.  At that time the 120 acres was under lease to Burlington. Burlington included the 120 acres in a pooled unit and drilled a well in 2011, but the well was not producing on December 27. Prior to that time, Strieber conveyed to Burlington 60% of her reserved term royalty, “presumably as an incentive to motivate Burlington to begin drilling.”  The parties – Koopmann on one side, contending the term royalty had expired, and Strieber and Burlington, on the other, contending it had not — then joined suit.

Burlington and Strieber contended that the interest the Koopmanns claimed – the one-half-of-the-royalty that would be owned by her on expiration of the 15-year term – was void because it violates the Rule Against Perpetuities.  In effect, they argued that the royalty reserved by Strieber should remain in effect indefinitely because of the Rule.  The court disagreed, holding that the future interest conveyed to Koopmann was “vested” and therefore did not violate the Rule.  After a detailed discussion of the Rule and its application, the court followed more modern scholarship that construes the Rule based on its purpose and intent rather than by archaic application of terms and concluded that application of the Rule in this instance would not serve the Rule’s purposes.

Oil and gas attorneys will be greatly relieved at this result, since it is and for many years has been common for grantors to reserve term royalties in conveyances of their land. The rule advocated by Burlington would have made all such royalty reservations perpetual.

The court also rejected another creative Burlington argument.  The Koopmanns’ claims included a breach of contract claim against Burlington for failure to pay the royalties due under their oil and gas lease.  Burlington argued that this claim was barred because their exclusive remedy was under Chapter 91 of the Natural Resources Code.  Burlington cited section 91.402 which provides that payments of royalty must be made within 120 days after the end of the month of first sale of production but allows a company to withhold royalty payments without interest when there is “a dispute concerning title that would affect distribution of payments;” and section 9.404(c), which gives a royalty owner a cause of action for nonpayment of royalties and interest as required in section 91.402.  Burlington argued that the legislature, by adopting this statute, intended that royalty owners’ only cause of action for failure to pay royalties was under section 91.404(c). Again, the court disagreed. It held that the statute did not clearly indicate legislative intent to abrogate a common-law cause of action, and the Koopmanns could therefore sue for breach of contract.

The court held that there were unresolved fact issues as to whether a payment made by Burlington to extend the lease was effective also to extend the term royalty and remanded the case to the trial court.

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