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Texas Supreme Court Held That The Reformation Statute For The Rule Against Perpetuities Could Apply To An Instrument Created By A Corporation Because Corporations Can Create Inter Vivos Trusts

In Yowell v. Granite Operating Co., the Texas Supreme Court reviewed the validity of an interest in a mineral lease regarding the rule against perpetuities (“Rule”). No. 18-0841, 2020 Tex. LEXIS 425 (Tex. May 15, 2020).  The court of appeals held the reserved overriding royalty interest (“ORRI”) in new leases violated the Rule and was not subject to reformation under the Property Code. The Texas Supreme Court held that the ORRI is a real property interest that violates the Rule and must be reformed, if possible, in accordance with section 5.043 of the Property Code. Regarding the Rule, the Court held:

The Texas Constitution prohibits perpetuities: “Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed . . . .” Tex. Const. art. I, § 26. A perpetuity is a restriction on the power of alienation that lasts longer than a prescribed period. ConocoPhillips Co. v. Koopmann, 547 S.W.3d 858, 866-67 (Tex. 2018). Our common law defines this period for real property conveyances, providing that “no [property] interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance.” Peveto v. Starkey, 645 S.W.2d 770, 772 (Tex. 1982).

Id. The Court then held that the ORRI did not vest and violated the Rule. The Court then turned to reformation. The Court noted Texas Property Code Section 5.043, which provides:

(a) Within the limits of the rule against perpetuities, a court shall reform or construe an interest in real or personal property that violates the rule to effect the ascertainable general intent of the creator of the interest. A court shall liberally construe and apply this provision to validate an interest to the fullest extent consistent with the creator’s intent.

(b) The court may reform or construe an interest under Subsection (a) of this section according to the doctrine of cy pres by giving effect to the general intent and specific directives of the creator within the limits of the rule against perpetuities.

(c) If an instrument that violates the rule against perpetuities may be reformed or construed under this section, a court shall enforce the provisions of the instrument that do not violate the rule and shall reform or construe under this section a provision that violates or might violate the rule.

(d) This section applies to legal and equitable interests, including noncharitable gifts and trusts, conveyed by an inter vivos instrument or a will that takes effect on or after September 1, 1969 . . . .

Tex. Prop. Code § 5.043. The Court held that this provision applied to many instruments and not just wills and trusts. Id.

The Court then addressed whether the statute could apply where a corporation was making a commercial instrument. “The court [of appeals] interpreted ‘inter vivos instrument’ to require that the conveying party have a true lifetime for the reformation statute to apply, noting that a corporation’s perpetual existence is shortened only if stated in its certificate of formation.” Id. The Court disagreed:

First, corporations can execute inter vivos instruments—trusts, for example. The Property Code articulates different methods a “property owner” may use to create a trust. Prop. Code § 112.001. One method is “a property owner’s inter vivos transfer of the property to another person as trustee for the transferor or a third person.” Id. § 112.001(2). Although this provision does not define either “property owner” or “person,” we know from other sections of the Property Code that a “settlor” is a “person who creates a trust.” Id. § 111.004(14) (emphasis added). And both the Property Code and the Code Construction Act define “person” to include a corporation. See id. § 111.004(10)(B) (defining person to include a corporation); Gov’t Code § 311.005(2) (“‘Person’ includes corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity.”). Thus, a corporation can be a settlor that creates a trust by an “inter vivos transfer of [its] property.” See Prop. Code § 112.001(2) (emphasis added). Because a corporation can make an inter vivos conveyance of property to create a trust, we decline to hold that the Legislature’s choice of the term “inter vivos” excludes corporate conveyances of property interests from the reformation statute. The court of appeals erred when it declined to reform a commercial instrument executed by Aikman—a corporation—on the ground that it lacked the ability to create an inter vivos instrument. 557 S.W.3d at 804.

Id. Because the reformation statute could apply to the instrument that created the ORRI, and because the parties disagreed on the creator’s intent, the Court remanded the case for further proceedings.

© 2020 Winstead PC.National Law Review, Volume X, Number 152

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About this Author

David Johnson Financial Litigator Winstead Law Firm

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the Texas Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. 

David's financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class...

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