Certiorari to the Colorado Court of Appeals. Court of Appeals Case No. 09CA1081.
In this case, the supreme court considers whether a nondonative, commercial option entered into prior to the passage of the Statutory Rule Against Perpetuities Act is subject to reformation under section 15-11-1106(2), C.R.S. (2013). As a threshold matter, the court examines whether the option violated the common law rule against perpetuities, and concludes that it does not. Because the commercial option negotiated by the parties was fully revocable, it posed no practical restraint on alienation, and did not violate the common law rule against perpetuities as that rule was construed in supreme court case law prior to passage of the Statutory Rule Against Perpetuities Act. The court holds that because the option did not violate the common law rule against perpetuities, no reformation was necessary. Accordingly, the supreme court affirms the judgment of the court of appeals on different grounds, and does not reach the questions of whether section 15-11-1106(2) provides for reformation of nondonative, commercial instruments, or whether the lower courts' application of that section to the option here was unconstitutionally retrospective.
Attorneys for Petitioner: Davis Graham & Stubbs, LLP, Shannon Wells Stevenson, Elizabeth H. Titus, Denver, Colorado.
Attorneys for Respondent:, Welborn Sullivan Meck & Tooley, PC, Kathryn Haight, Keith D. Tooley, Denver, Colorado.
Attorneys for Amicus Curiae Colorado Bar Association: Benjamin, Bain, Howard & Cohen, LLC, James W. Bain, Greenwood Village, Colorado; The Sweetser Law Firm, P.C., Daniel A. Sweetser, Denver, Colorado.
[¶1] We granted certiorari review to address a doctrine that has been described as " long cherished by law school professors and dreaded by most law students: the infamous rule against perpetuities."
Byke Constr. Co. v. Miller, 140 Ariz. 57, 680 P.2d 193, 194 (Ariz. Ct. App. 1984). Specifically, we have been asked to determine whether section 15-11-1106(2), C.R.S. (2013), which provides for reformation of nonvested property interests to avoid the harsh consequences of the common law rule against perpetuities, requires a court to reform a revocable option negotiated as part of a commercial contract entered into before May 31, 1991 (the effective date of the Statutory Rule Against Perpetuities Act).
[¶2] The common law rule against perpetuities was developed to curb excessive " dead-hand control" of property retained in families through intergenerational transfers. Restatement (Third) of Prop.: Servitudes § 3.3 cmt. b (2000); 2A
Cathy Stricklin Krendl et al., Colo. Prac., Methods of Practice 214 (6th ed. 2012). Like rules against restraints on alienation, the rule against perpetuities stems from a general policy that frowns upon the withdrawal of property from commerce.
See Atchison v. City of Englewood, 170 Colo. 295, 306, 463 P.2d 297, 302 (1969). The rule against perpetuities furthered this policy by voiding property interests that may vest too remotely. Under the common law rule, a non-vested property interest is void unless it is certain to vest, if at all, within twenty-one years after the death of a life in being at the time the interest was created.
See Cambridge Co. v. E. Slope Inv. Corp., 700 P.2d 537, 539 (Colo. 1985).
[¶3] At issue here is section 15-11-1106(2), which appears in the Statutory Rule Against Perpetuities Act (" Act" ). See § § 15-11-1101 to -1216, C.R.S. (2013). In Colorado, the Act--which was modeled on the Uniform Statutory Rule Against Perpetuities (" USRAP" ) -- supersedes the common law rule for nonvested property interests created after May 31, 1991. § 15-11-1107(2), C.R.S. (2013). The common law rule still applies to nonvested property interests created prior to that date. Id. Under the Act, all donative transfers created after May 31, 1991 (with the exception of trusts and powers of appointment) are valid so long as the property
interest created vests or terminates within ninety years of its creation. § 15-11-1102.5, C.R.S. (2013). The statutory rule thus adopts a " wait and see" approach under which no interest is invalid unless and until it actually fails to vest within the statutory period.
[¶4] Section 15-11-1106(2) of the Act is a reformation provision that requires courts, upon request, to reform nonvested interests created prior to May 31, 1991 to bring them into compliance with the common law rule. The parties before us dispute whether section 15-11-1106(2) applies broadly to permit reformation of all nonvested property interests that predate the Act, or whether it applies more narrowly to reform only the types of nonvested interests that remain subject to the statutory rule against perpetuities, thus precluding reformation of the commercial option at issue here. Regardless of the breadth of interests potentially subject to reformation, section 15-11-1106(2) applies only to reform interests that are determined in a judicial proceeding to " violate this state's rule against perpetuities as that rule existed before May 31, 1991."
[¶5] In this case, the trial court concluded that the revocable option at issue here, granted as part of a negotiated commercial agreement, violated the common law rule against perpetuities. Pursuant to section 15-11-1106(2), the court inserted a savings clause to prevent the option from being voided by the common law rule and ruled that the option holder was entitled to specific performance of the reformed option. The court of appeals affirmed the trial court judgment, concluding that the trial court properly applied section 15-11-1106(2) to reform the option.
Whiting Oil & Gas Co. v. Atlantic Richfield Co., 321 P.3d 500, 2010 WL 3432211, at *4-5 (Colo. App. No. 09CA1081, Sept. 2, 2010). In so doing, the court of appeals expressly declined to reach the question of whether the revocable option was subject to the common law rule. [WL] at *4.
[¶6] We granted review to examine whether section 15-11-1106(2) authorized the trial court to reform the option at issue here. In so doing, we consider, as a threshold matter, whether the option violated the common law rule, and conclude that it did not. The commercial option negotiated by the parties posed no practical restraint on alienation because it was fully revocable at any time before its exercise. Therefore, the option did not violate the common law rule against perpetuities as that rule was construed in our case law prior to passage of the Act. Because the option here did not violate the common law rule against perpetuities, it was valid as originally negotiated by the parties and no reformation was necessary. Accordingly, we affirm the judgment of the court of appeals on different grounds and do not reach the Petitioner's arguments that section 15-11-1106(2) does not provide for the reformation of nondonative, commercial instruments, or that the lower courts' application of that section to the option here was unconstitutionally retrospective.
[¶7] Beginning in 1968, Petitioner Atlantic Richfield Company (" ARCO" ) and Respondent Equity Oil Company (now known as Whiting Oil & Gas) (" Equity" ) entered into a series of agreements to develop oil shale on a number of properties, including a property in western Colorado known as the Boies Block. An option contained within one of these agreements is the source of the current controversy.
[¶8] In 1968, ARCO and Equity entered into an agreement (" 1968 Agreement" ) in which ARCO committed two million dollars to fund Equity's research into methods of recovering oil shale from several properties. In return, Equity conveyed a partial interest in the properties to ARCO, thereby allowing ARCO to share in any future profits from oil shale production. Specifically, and as relevant here, Equity conveyed half of its undivided fifty-percent interest in the Boies Block to ARCO. The 1968 Agreement further provided that if oil shale was not in commercial production by 1983, Equity would convey an additional interest in the Boies Block to ARCO (" Additional Conveyance" ).
By 1982, Equity's research had not led to commercial production of oil shale. In 1983, following a year of negotiations, ARCO and Equity agreed to an amendment postponing the Additional Conveyance. That 1983 amendment is at issue here. As an incentive to complete its research, ARCO granted Equity a non-exclusive option (" 1983 option" ) to buy back the interest in the Boies Block that ARCO had previously acquired from Equity as part of the 1968 Agreement. Pursuant to the 1983 amendment, Equity's right to exercise the option would not expire until 11:59 p.m. on February 1, 2008. Importantly, the parties agreed that " ARCO shall retain the sole and exclusive right to cancel this Option at any time during its term," with the exception that Equity was granted a right of first refusal if ARCO received an offer from another party to buy its interest in the Boies Block. The parties' agreement set an initial price at which the 1983 option could be exercised, but provided for annual market-based adjustments tethered to the annual percentage change in ARCO's published benchmark price for West Texas sour crude oil.
[¶10] Equity's research never led to commercial production of oil shale from the properties. In the early 2000s, Equity sought to acquire ARCO's interest in the Boies Block after discovering that the property contained valuable reserves of natural gas. In 2003, ARCO rejected an initial offer by Equity to purchase the Boies Block for $10,000, but took no action to revoke the 1983 option. Then, in 2006, Equity attempted to exercise the 1983 option. The 1983 option had not considered natural gas production in its exercise price valuation, instead tying the exercise price to ARCO's West Texas sour crude benchmark. When Equity attempted to exercise the option in 2006, the purchase price for the property--as determined by the option's valuation formula--was significantly below the property's 2006 market value. ARCO refused to convey the interest in the Boies Block to Equity.
[¶11] Equity sued ARCO for specific performance of the 1983 option. ARCO moved for judgment on the pleadings, arguing that, as a matter of law, the 1983 option was void ab initio because the twenty-five year option period violated the common law rule against perpetuities. In response, Equity argued that the common law rule against perpetuities does not apply to cancelable or revocable interests. Equity argued that because the 1983 option could be cancelled at ARCO's sole and exclusive discretion, the option imposed no practical restraint on ARCO's property interests and did not violate the policies of the common law rule. Alternatively, Equity argued that even if the 1983 option violated the common law rule, the court was required to reform the option by inserting a savings clause pursuant to section 15-11-1106(2).
[¶12] The trial court denied ARCO's motion for judgment on the pleadings. The court agreed with ARCO that the twenty-five year option, as written, violated the common law rule against perpetuities because it could be exercised more than twenty-one years after the parties entered into the 1983 amendment. However, the court denied judgment on the pleadings because the option could be reformed under section 15-11-1106(2).
[¶13] Following a bench trial on the remaining issues in the case, the court reformed the option pursuant to section 15-11-1106(2) by inserting a savings clause terminating the option " unless it is exercised no later than twenty-one years after the death of [former Equity president] Paul M. Dougan." The trial court concluded that Equity was entitled to specific performance of the reformed option, and imposed a constructive trust on ARCO's ...