August 25, 2019

Frederick Skillern: Real Estate Case Law — Titles and Title Insurance (4)

Editor’s note: This is Part 19 of a series of posts in which Denver-area real estate attorney Frederick Skillern provides summaries of case law pertinent to real estate practitioners (click here for previous posts). These updates originally appeared as materials for the 32nd Annual Real Estate Symposium in July 2014.

By Frederick B. Skillernfrederick-b-skillern

Whiting v. Atlantic Richfield
Colorado Supreme Court, March 3, 2014
2014 CO 16

Rule against perpetuities; options; reformation of option agreement under the USRAP, C.R.S. 15-11-106; common law rule does not void commercial option contract.

This is an important case that addresses much of the change in the law of the rule against perpetuities over the last 25 years. As the case came to Colorado Supreme Court the issue was twofold. First, the court accepted certiorari to examine whether the statutory right to reform a commercial contract under the Colorado version of the statutory rule against perpetuities is unconstitutional because it requires a court to reform a vested contract – in this case the right to declare one’s contract void under the common law rule against perpetuities. Second, the court sought to address as a matter of statutory interpretation whether the right of reformation only applied to what the statute refers to as “donative” transfers of property, as opposed to a commercial contract such as an option to purchase mineral rights.

The supreme court changed to focus of the case and addresses in its decision a different question, thereby avoiding the questions upon which certiorari was granted. It holds instead that the interest in question – a twenty-five year option to purchase mineral rights – does not violate the common law rule against perpetuities. As such, there is no need to resort to the reformation procedure provided in the statute.

ARCO entered into a deal in 1968 with a small oil company (Equity, now owned by Whiting) to explore Colorado shale oil development in Garfield County. It gave development money to Equity, and received a partial ownership interest in the mineral rights. Equity was given an option to repurchase ARCO’s interest within the 25-year term of the deal. In 1983, the agreement (including the option) was extended for another 25 years. The terms are summarized succinctly by the court:

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.

Equity exercised the option shortly before the deadline. ARCO claimed that the option was void under the common law rule against perpetuities. The trial court, in a decision affirmed by the court of appeals, agreed but applied the reformation provision in CRS § 15-11-1106(2) to add a “savings clause” in the manner outlined in the statute.

The result here is to put off for another day the constitutional validity of the reformation provision of the USRAP. The court instead finds that the common law has changed sufficiently to determine, consistent with past cases of the Colorado Supreme Court, that the purpose of the common law rule is not served by applying the “21 years after the death of lives in being test” to an arms-length transaction between sophisticated oil companies. More particularly, the court holds, in a well developed decision that explores the recent development of case law in considerable depth, the fact that the option right was revocable at will by ARCO demonstrates that the option was not preventing development of the land. For that reason, the underlying the policy of the common law rule would not be served by voiding the option simply because its term extended longer than 21 years.

The Real Estate Section of the CBA submitted an amicus brief in support of the lower court’s ruling and in support of the right to reform real estate contracts found to violate the rule. This is motivated in part by the obvious liability risks confronting lawyers who may unwittingly accompany their clients into the “RAP trap.” The risk areas center around long term options, rights of first refusal, and other rights or interests contained in deeds or leases that may “walk or talk” like an executory interest or a right of reversion. As a practice point, it is important in dealing with such interests to keep the USRAP in mind, as it treats “donative transactions” differently than commercial transactions.

Frederick B. Skillern, Esq., is a director and shareholder with Montgomery Little & Soran, P.C., practicing in real estate and related litigation and appeals. He serves as an expert witness in cases dealing with real estate, professional responsibility and attorney fees, and acts as a mediator and arbitrator in real estate cases. Before joining Montgomery Little in 2003, Fred was in private practice in Denver for 6 years with Carpenter & Klatskin and for 10 years with Isaacson Rosenbaum. He served as a district judge for Colorado’s Eighteenth Judicial District from 2000 through 2002. Fred is a graduate of Dartmouth College, and received his law degree at the University of Colorado in 1976, in another day and time in which the legal job market was simply awful.

Tenth Circuit: Employment Discrimination Settlement Agreement Enforceable; Extended Time to File Notice of Appeal Applies When Judgment Not Entered in Separate Document

The Tenth Circuit published its opinion in Walters v. Wal-Mart Stores, Inc. on Tuesday, January 8, 2013.

Bennie Walters brought employment discrimination claims against his former employer, Wal-Mart Stores, Inc. (“Wal-Mart”). The parties reached an apparent settlement during a settlement conference and signed a document entitled “Settlement Terms,” that set forth the key terms of the agreement, indicating a fuller agreement was to be prepared within 20 days. Walters later refused to sign the final agreement. The district court granted Wal-Mart’s motion to enforce the agreement and denied Walters’ motion for reconsideration but did not enter the judgment in a separate document. The court did, however, enter a “Minute Sheet” on the docket, but that unsigned document did not indicate that Wal-Mart’s motion had been granted.

Wal-Mart argued that Walters’ appeal was untimely because it was filed more than 30 days after the minute sheet entry and F.R.A.P. 4(a) requires a notice of appeal be filed within 30 days after a judgment is entered. F.R.C.P. 58(a) requires that a judgment must be set out in a separate document. The Tenth Circuit held that the unsigned minute sheet was not a separate judgment so Walters’ time for appeal was governed by F.R.C.P. 58(c)(2), which gave him 150 days to file a notice of appeal. The denial of Walters’ motion for reconsideration also did not start the clock. When no separate judgment has been entered, “an appellant remains entitled to the extended deadline for filing a notice of appeal even if he files a motion for reconsideration before the judgment is deemed ‘entered’ under F.R.C.P. 58(c).”

Once the court determined it had jurisdiction, it reviewed the district court’s decision to enforce the settlement agreement for abuse of discretion and found none. Under Oklahoma contract law, “[a] party generally may not repudiate a settlement agreement absent fraud, duress, undue influence, or mistake.” The court found no duress. The court also rejected Walters’ claim that he was improperly denied the 21 days to consider the settlement included in the final agreement. The provision was included in order to comply with the Older Workers Benefit Protection Act (“OWBPA”). Because the OWBPA 21-day consideration period for a valid waiver of an age discrimination claim does not apply to settlement of court cases, the agreement was not unenforceable on that basis. Because Walters did not challenge Wal-Mart’s compliance with OWBPA’s requirements that do apply to court cases, he waived that argument. The court affirmed the district court.

Colorado Court of Appeals: Legislative Override of Contractual Obligations Violates Constitutional Contracts Clauses

The Colorado Court of Appeals issued its opinion in Raptor Education Foundation, Inc. v. State of Colorado, Department of Revenue, Division of Motor Vehicles on Thursday, December 27, 2012.

Summary Judgment—Impossibility Doctrine—Contracts Clause of U.S. and Colorado Constitutions.

Plaintiff Raptor Education Foundation, Inc. (REF) appealed the trial court’s summary judgment in favor of defendant, the Colorado Department of Revenue, Division of Motor Vehicles (Department). REF also challenged the denial of its CRCP 59(d)(6) motion for a new trial. The judgment was reversed and the case was remanded for further proceedings.

This was a second appeal, following developments after the issuance of the opinion in the first appeal. Between December 1999 and February 2000, the parties executed a “letter of agreement” regarding specialty license plates. The Department agreed to sell the specialty plates only to members of the REF. Several months after the agreement, the Department informed REF that its request had been approved but that it would not restrict sales to its members.

REF sued, alleging breach of contract and violation of equal protection resulting from the Department’s sale to unqualified purchasers. A trial judge found the letter of agreement was not a valid contract, but did find a violation of equal protection and ordered sales to be made only to REF members in the future (2002 order). Both parties appealed. In the interim, the General Assembly passed legislation requiring the Department to restrict sales of the specialty plates to REF members. On the Department’s motion, the appeal was dismissed by a division of the Court of Appeals. The Court found that a contract existed between REF and the Department and held it was error to have found otherwise. The case was remanded for a determination of damages, and the parties eventually settled.

In 2009, the General Assembly amended CRS § 42-3-208 to allow members of the Rocky Mountain Raptor Program to also purchase the specialty plates (2009 amendment). REF sued, alleging breach of contract and violation of the 2002 order. As an affirmative defense, the Department cited the 2009 amendment. The parties filed cross-motions for summary judgment. The trial court entered summary judgment in favor of the Department, concluding that the 2009 amendment made it impossible for the Department to comply with its obligations under the contract with REF. REF filed a motion for a new trial pursuant to CRCP 59(d)(6), which was denied without comment.

On appeal, REF argued that the 2009 amendment violated the Contracts Clauses of the U.S. and Colorado Constitutions. The Court agreed. Both Constitutions prohibit the passing of any laws impairing the obligation of contracts. The Contracts Clauses are not absolute prohibitions but allow legislative action that promotes “the common weal, or . . . general good of the public, though contracts previously entered into between individuals may thereby be affected.” The U.S. Supreme Court has held that the inquiry is “whether the change in state law has ‘operated as a substantial impairment of a contractual relationship.’” [Gen. Motors Corp. v. Romein, 503 U.S. 181, 186 (1992)].In Romein, as here, where a contractual obligation of the government is at issue, the examination is more stringent.

REF and the Department entered into a contract whereby the Department would sell specialty license plates only to members of REF. The 2009 amendment impaired that contract. Neither the 2002 legislation nor the 2009 amendment was foreseeable when the parties entered into their contract because they regulated an area never before subject to regulation. The Court found that the 2009 amendment substantially impaired the contract and therefore breached the Contracts Clauses.

The trial court’s judgment in favor of the Department on the breach of contract claim was reversed and the Court remanded the case for assessment of damages. In addition, the trial court’s judgment in favor of the Department on REF’s claim for violation of the court’s 2002 order was reversed. Because the 2009 amendment was unconstitutional, the trial court also must determine on remand what damages should be assessed for violation of the 2002 order.

Summary and full case available here.