Producers Oil Co. v. Gore, 54519

• Decision Date: 15 April 1980
• Docket Number: No. 54519,54519
• Citation: 610 P.2d 772,1980 OK 62
• Parties: PRODUCERS OIL COMPANY, Appellant-Plaintiff, v. Theodore GORE and Shirley K. Bernstein, Appellees-Defendants.
• Court: Oklahoma Supreme Court

Page 772

610 P.2d 772

1980 OK 62

PRODUCERS OIL COMPANY, Appellant-Plaintiff, v. Theodore GORE and Shirley K. Bernstein, Appellees-Defendants.

No. 54519.

Supreme Court of Oklahoma.

April 15, 1980.

Rehearing Denied May 19, 1980.

Certified Question from the United States Court of Appeals for the Tenth Circuit.

In a pending action the following questions have been certified by the United States Tenth Circuit Court of Appeals pursuant to the Uniform Certification of Questions of Law Act, 20 O.S.1979 Supp. § 1601 et seq.

(1) Does the Oklahoma Rule Against Perpetuities apply to the interest created by the preemptive option provisions of the oil and gas lease operating agreements described below?

(2) If the answer to the first question be in the affirmative, then, would it be within the power of a court in Oklahoma to reform the described provisions, either pursuant to statutory authority, 60 O.S.A. §§ 75-78, or under common law cy pres powers, so as to save them from invalidity under the Rule Against Perpetuities?

Answering the first question in the negative, we find it unnecessary to answer the second.

Holliman, Langholz, Runnels & Dorwart, Rosenstein, Fist & Ringold, Tulsa, for appellant-plaintiff; Frederic Dorwart, J. Michael Medina, and A. F. Ringold, Tulsa, of counsel.

Conner, Winters, Ballaine, Barry & McGowen, Tulsa, by John S. Athens, J. Denny Moffett and Douglas L. Inhofe, Tulsa, for appellees-defendants.

DOOLIN, Justice:

Producers Oil Company (Operator) is successor in interest to certain operating agreements covering oil and gas leases in Carter County, Oklahoma. Theodore Gore (Non-Operator) is the owner of an undivided 1/6 working interest in the leases covered by the agreements. The agreements, executed in 1956, contained the following provision:

15. "Should any Non-Operator desire to sell the interest, or any part thereof, owned by such Non-Operator in the oil and gas lease, or leases, hereinabove described, such Non-Operator shall promptly give written notice to Operator with full information concerning such proposed sale, including the name and address of the prospective purchaser (who must be ready, willing and able to purchase), the purchase price and all other terms of the offer. Operator shall then have an optional prior right for a period of ten days after receipt of the notice to purchase on the same terms and conditions, the interest which such Non-Operator proposes to sell. However, there shall be no preferential right to purchase in those cases where any Non-Operator wishes to mortgage its interest or to dispose of its interest by merger, reorganization, consolidation, sale of all of its assets, or sale or transfer of its interest to any company in which such party owns a majority of the stock, or to a trust or trusts created by such party. Nothing herein contained shall be construed as relieving the party offering such assignment or transfer of any obligations or liability which may have attached or accrued prior to the effective date of such assignment or which may be accruing on the effective date of any such transfer or assignment." (Emphasis supplied).

Paragraph 16 of the same agreement gave Non-Operator an identical right of first refusal of the Operator's interest.

In July of 1976, Non-Operator attempted to assign his interest to Shirley Bernstein without first offering it to Operator under the agreement. Operator brought an action in the Eastern District United States District Court seeking specific performance of this provision of the agreements, naming Non-Operator and Bernstein as defendants. The district court held the provision was void as violative of the common law rule against perpetuities and dismissed the action. Upon consideration of the appeal, the Tenth Circuit Court of Appeals certified the following questions of Oklahoma law to this court:

(1) Does the Oklahoma Rule Against Perpetuities apply to the interest created by the preemptive option provisions of the oil and gas lease operating agreements described below?

(2) If the answer to the first question be in the affirmative, then, would it be within the power of a court in Oklahoma to reform the described provisions, either pursuant to statutory authority, 60 O.S.A. §§ 75-78, or under common law cy pres powers, so as to save them from invalidity under the Rule Against Perpetuities?

Because we find the Oklahoma rule against perpetuities does not apply to contractual preemptive options in operating agreements under oil and gas leases and thus answer the first question in the negative, we find it unnecessary to answer the second.

While preemptive options or rights of first refusal are analytically similar to ordinary options to purchase, they are distinguishable for the purpose of this appeal. A preemption differs from an ordinary option; an option creates in the optionee a power to compel the owner of property to sell it at a stipulated price whether or not he is willing to sell; a preemption, or right of first refusal, does not give the preemptioner the power to compel the owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the person entitled to the preemption at a stipulated price, or as is the case here, at a price the Non-Operator is willing to sell to a third party. Upon receiving notice of the offer, the preemptioner may elect whether he will buy. If he decides not to buy, then the owner of the property may sell to anyone at his price. ¹

Unlike an option, under a preemption, an owner may elect to sell at any time he may choose and alienation is not hindered if no set price is made a part of the preemption. Such type of preemptive rights are generally held not to be restraints on alienation. ²

In contrast to rules against restraints on alienation, the rule against perpetuities, although aimed at preventing restrictions on alienation, is directed toward duration of the rights rather than toward absolute restraints. Thus slightly different considerations are involved.

As stated in Melcher v. Camp, 435 P.2d 107 (Okl.1967) the most universally accepted definition of the common law rule against perpetuities states "no interest (in property) is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest." Rights with no ascertainable duration are void. This rule concerns rights of property only, and does not affect the making of contracts. ³ If Operator's and Non-Operators' rights under the preemptive provision do not create property rights but are merely contractual, the rule would not apply.

Whether oil and gas leases create interests in property was answered in Melcher v. Camp, supra. Although an operating agreement is strictly contractual in nature, the preemptive rights included therein are rights to oil and gas leases and under Melcher an ordinary oil and gas lease conveys an interest in the land covered thereby. Accordingly the rule against perpetuities must be taken into consideration in determining the validity of the preemption.

The present case was originally heard in the United States District Court and was decided under Oklahoma law based on Melcher. In his decision, Producers Oil Company v. Gore, 437 F.Supp. 737, 742 (E.D.Okl.1977) the judge stated:

"The court is of the strong view that the rule against perpetuities should not apply to oil and gas operating agreements. From its inception in 1682, this court made rule of law, the genius of English judges, was designed to further alienability and to prevent the tying up of property within the family line for generation on generation. It could not have intended to apply it, it should not apply and no worthwhile social or economic purpose is served by applying it to this common, frequent and useful type of oil and gas transaction. The provision in question does not clog alienation."

We agree with this philosophy. Mineral leases and their accompanying operating agreements have built in duration. Oil and gas production cannot last indefinitely and rights are always terminable....