Murphy Exploration & Production v. Sun Operating Ltd. Partnership

• Citation: 747 So.2d 260
• Decision Date: 23 September 1999
• Docket Number: No. 98-CA-00429-SCT.,98-CA-00429-SCT.
• Parties: MURPHY EXPLORATION & PRODUCTION COMPANY and Como Petroleum Corporation v. SUN OPERATING LIMITED PARTNERSHIP.
• Court: Mississippi Supreme Court

747 So.2d 260

MURPHY EXPLORATION & PRODUCTION COMPANY and Como Petroleum Corporation v. SUN OPERATING LIMITED PARTNERSHIP.

No. 98-CA-00429-SCT.

Supreme Court of Mississippi.

September 23, 1999.

James Everitt Baine, El Dorado, AR, Thomas Mason, University, Kenneth Harmon, Walker L. Watters, Jackson, John A. Moore, Attorneys for Appellants.

Jefferson D. Stewart, John Jeffrey Trotter, Jackson, Attorneys for Appellee.

EN BANC.

WALLER, Justice, for the Court:

STATEMENT OF THE CASE AND FACTS

¶ 1. This appeal arises from a lawsuit filed by Appellants Murphy Exploration & Production Co. and Como Petroleum Corporation against Appellee Sun Operating Limited Partnership in the Second Judicial District of Jasper County Chancery Court. Sun, Murphy, and Como held interests as co-tenants in certain oil and gas leases.¹ The Operating Agreement under which the leases were developed provided that a cotenant shall provide prior notice of a sale to other co-tenants so that they could meet the proposed purchase price if they so desired.² Of further significance, the Operating Agreement states that "[t]his agreement may be signed in counterpart, and shall be binding upon the parties and upon their heirs, successors, representatives and assigns."

¶ 2. Sun sold its interest to a third party, Mississippi Oil Acquisitions, LLC, without giving notice to Murphy or Como, and Murphy and Como filed suit against Sun requesting specific performance of the preferential right to purchase. Sun asserted that the Rule Against Perpetuities invalidated Murphy and Como's preferential right to purchase. Sun filed a motion for summary judgment based on this proposition, the lower court granted the motion and dismissed the lawsuit, and this appeal ensued.

STANDARD OF REVIEW

¶ 3. This Court utilizes a de novo standard in reviewing a grant of summary judgment. Allen v. Mac Tools, Inc., 671 So.2d 636, 640 (Miss.1996); Owen v. Pringle, 621 So.2d 668, 670 (Miss.1993). "A trial court may grant summary judgment if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law." Roussel v. Robbins, 688 So.2d 714, 725 (Miss.1996). "The motion for a summary judgment challenges the very existence of legal sufficiency of the claim or defense to which it is addressed; in effect, the moving party takes the position that he is entitled to prevail as a matter of law because his opponent has no valid claim for relief or defense to the action, as the case may be." Brown v. Credit Ctr., Inc., 444 So.2d 358, 362 (Miss.1983).

STATEMENT OF THE LAW

¶ 4. The issue on appeal is whether the preferential right to purchase in the Operating Agreement is barred by the Rule Against Perpetuities. The Rule has its origin in an English decision rendered in the Duke of Norfolk's Case, 3 Ch. Cas. 1, 22 Eng. Rep. 931 (1682). The effect of the Rule is to defeat the intention of the parties for reason of overriding social policy. The Rule was designed to prevent undue accumulations of land and wealth in the hands of a few.

¶ 5. The transactions which caused the adoption of the Rule were "donative transactions" such as wills or deeds in which an owner of large amounts of capital or land passes his estate to his heirs or family members. In order to ensure that the property stayed within his family, a testator or grantor controlled the devolution of his property by directing the disposition thereof upon the happening of certain contingencies. The Rule was adopted to limit these donative transfers to prevent a patriarch from tying up the title to property for generations or in perpetuity by imposing restrictions on alienation. ¶ 6. Under the facts of this case, and based on sound precedent, we will not apply the Rule to the preferential right to purchase contained in the Operating Agreement because the instrument in question involves a leasehold interest in minerals and because free alienation of the subject interest was not restrained.

¶ 7. An analogous case interpreting Texas law sets out why public policy dictates the inapplicability of the Rule with respect to an option for first refusal in an oil and gas lease. In Weber v. Texas Co., 83 F.2d 807 (5th Cir.1936), the United States Court of Appeals for the Fifth Circuit analyzed a clause in an oil and gas lease which gave the lessee an option to purchase the lessor's royalty rights "at the best bona fide price offered by responsible third parties when and if offered for sale or transfer by lessor." Id. The court held:

The rule against perpetuities springs from considerations of public policy. The underlying reason for and purpose of the rule is to avoid fettering real property with future interests dependent upon contingencies unduly remote which isolate the property and exclude it from commerce and development for long periods of time, thus working an indirect restraint upon alienation, which is regarded at common law as a public evil. [citations omitted.]

The option under consideration is within neither the purpose of nor the reason for the rule. This is not an exclusive option to the lessee to buy at a fixed price which may be exercised at some remote time beyond the limit of the rule against perpetuities, meanwhile forestalling alienation. The option simply gives the lessee the prior right to take the lessor's royalty interest at the same price the lessor could secure from another purchaser whenever the lessor desires to sell. It amounts to no more than a continuing and preferred right to buy at the market price whenever the lessor desires to sell. This does not restrain free alienation by the lessor. He may sell at any time, but must afford the lessee the prior right to buy. The lessee cannot prevent a sale. His sole right is to accept or reject as a preferred purchaser when the lessor is ready to sell. The option is therefore not objectionable as a perpetuity.

Id. at 808.

¶ 8. This Court similarly held in Lloyd's Estate v. Mullen Tractor & Equipment Co., 192 Miss. 62, 4 So.2d 282 (1941), that a provision in an oil and gas lease for perpetual renewals of the lease, contingent upon the lessee's payment of annual rentals, neither violated the Rule nor constituted a restraint upon the power of alienation because, inter alia, "the leasehold interest in the minerals conveyed [could have been] assigned as often as desired." 192 Miss. at 76, 4 So.2d at 285. "[T]he lessor [was] not precluded by such a lease from disposing of the land at will nor [was] the lessee hindered in selling or assigning the lease...." 192 Miss. at 78, 4 So.2d at 286.

¶ 9. Texas courts have long held that the Rule is "only a means of preventing unreasonable restraints on alienation," and "if a preferential right to purchase does not operate to restrain alienation, but only dictates who shall have the first right to acquire property when and if the owner desires to sell it, then the agreement is not within the prohibition." Forderhause v. Cherokee Water Co., 623 S.W.2d 435, 438 (Tex.Civ.App.1981), rev'd on other grounds, 641 S.W.2d 522 (Tex.1982). See also Foster v. Bullard, 496 S.W.2d 724 (Tex.Civ.App.1973)

; Sibley v. Hill, 331 S.W.2d 227 (Tex.Civ.App.1960); Course-view, Inc. v. Phillips Petroleum Co., 258 S.W.2d 391 (Tex.Civ.App.1953). In Forderhause, the court stated:

The purchase right [a preferential right to purchase oil and gas] involved here does not constitute an unreasonable restraint on alienation. There is no fixed price. There is no absolute option unlimited as to time. There is only the right, exercisable whenever the owner desires to sell, to purchase the property by meeting any bona fide offer. The holder of the right cannot force or prevent a sale; neither can he fix the price for a sale. In those circumstances there is not such a restraint on alienation as would violate our public policy.

Forderhause, 623 S.W.2d at 439. Texas courts have consistently applied these principles in this manner even though the Texas Constitution contains a prohibition against perpetuities. See Tex. Const. art. I, § 26.

¶ 10. The Texas precedent is particularly persuasive because this Court has usually patterned its oil and gas rulings on sound Texas precedent. The Fifth Circuit has noted that "for oil and gas issues of first impression, the Mississippi Supreme Court has long held that it will typically follow decisions of the Texas courts, depending, of course, on `the soundness of the reasoning by which they are supported.'" Williamson v. Elf Aquitaine, Inc., 138 F.3d 546, 550 (5th Cir.1998) (quoting Phillips Petroleum Co. v. Millette, 221 Miss. 1, 72 So.2d 176, 182 (1954)

). In Williamson, the court determined that it was not necessary to certify an oil and gas question of first impression to this Court inasmuch as the issue could be resolved by applying Texas law. Williamson, 138 F.3d at 549. See also, e.g., Southwest Gas Producing Co. v. Seale, 191 So.2d 115, 122 (Miss.1966) (choosing remedy used by Texas courts for breach of gas and mineral lease covenant).

¶ 11. Similarly, Oklahoma courts have held that the Rule does not apply to a preemptive right contained in oil and gas operating agreements:

In the agreement herein involved, it is evident the preemptive right remains viable only as long as the lease itself remains in effect. No perpetuity is created as there is no way the right could continue after termination of the lease. If the lease expires, neither party would have anything to convey under the right of preemption.

Producers Oil Co. v. Gore, 610 P.2d 772, 776 (Okla.1980).

¶ 12. Even courts that have applied the Rule to preferential rights to purchase real estate have distinguished similar provisions contained in oil and gas leases, see, e.g., Ferrero Constr. Co. v. Dennis Rourke Corp., 311 Md. 560, 536 A.2d 1137, 1141 (1988),

because oil and gas leases have a limited...