Daily Development for
Wednesday, January 28, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
TRUSTS; INCOME: Owner of life estate in trust is not entitled to oil and gas royalties as produced, as opposed to only interest on such royalties, because Uniform Principal and Income Law applies to marital deduction trust.
Hynson v. Jeffries, 697 So.2d 792 (Miss.App. 1997).
Testator established a trust for his wife for life with remainder to his grandchildren. Part of the trust corpus consisted of oil and gas properties with operating leases. The facts are unclear as to whether additional leases were or would be entered into after the trust was established. The terms of the trust provided specifically, that the wife was to receive the trust "income," but the court concluded that the trust language was not specific enough to compel the conclusion that the term "income" included the royalties or was limited to interest income on the royalty proceeds.
Because of this problem (which the court for some reason refuses to call an "ambiguity"), the court turned to what it characterized as established common law principles, exemplified in Mississippi by Martin v. Eslick, 90 So. 2d 635 (Miss. 1956). Martin, according to the court, holds that the general rule is that a life tenant of oil producing property may not receive the royalties produced by that property, but only the interest. To conclude otherwise, under this thinking, would lead to waste of the expectation of the remainderpersons. This interpretation had influenced the Chancellor below to find for the remainder interests.
The court then pointed to a somewhat contradictory rule, also recognized in Mississippi in a case decided prior to Martin, which adopted the "open mines doctrine," basically holding that where a life tenant has an interest consisting of an already operating mine, the life tenant can enjoy the proceeds of the minerals extracted from the mine if such extraction is carried out basically at the same rate as existed prior to the creation of the life estate, although to open a new mine or to increase production might constitute waste.
The synthesis of these two cases would appear to result in the life tenant having a common law argument that royalties from existing oil and gas leases would flow to her, but the court carefully avoided reaching that conclusion, perhaps because Martin represented the more recent authority, and that in a state supreme court opinion.
Instead, the court pointed out that the Mississippi legislature, following Martin, had adopted the Uniform Prinicpal and Income Law, which compelled a trustee to administer a trust so that oil and gas royalties and similar interests shall be allocated between remainder interests and life tenants according to a formula. The formula applies to royalty income as to mining and drilling established before the commencement of the trust and after.
The statute applies "in the absence of any contrary terms in the trust instrument." The chancellor had concluded that the trust instrument did provide for the division of royalty income, and consequently did not apply the statute. The court concluded here, however, that the express trust language did not fully resolve the issue of the trustor's intent unless one resorted to common law construction of the intent language. Because, in its view, the trust language did not control, there was an "absence of contrary terms." Thus, the statute, and not the common law interpretation of the language, ought to control.
Comment: The interpretation of when the Uniform Act applies is, of course, the most interesting part of the case. If the language of the trust was not ambiguous, and court decisions had clearly interpreted that language one way or another, the court should have followed those decisions. The trust was drafted by a skilled drafter and it obviously was the intent of that drafter to use words in their ordinary legal meaning. The court refused to hold that the trust instrument was ambiguous, so the editor has some difficulty understanding why it is not appropriate to resort to common law interpretation of the language. Had the court found that the trust instrument indeed did answer the question of how the income should be allocated, then there should have been no resort to the Uniform Act.
It appears that the court did not use the common law interpretation because it saw a conflict in the Mississippi precedent. It clearly regarded the Martin doctrine as overstated, and did not seem to view it as overruling the "open mines doctrine," but it was between a rock and hard place when faced with a statement in an opinion by a higher court. Thus, it appears, the Mississippi court "dodged a bullet," but in doing so may have let the bullet fly into the future as difficult precedent for courts interpreting the applicability of the Uniform Act. Good results and good precedent should both emanate from court decisions, even though it sometimes is hard work to achieve that result.
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