Property Class Notes 3/10/04

We’re going to omit pp. 218-249.

Statutory reform of the Rule Against Perpetuities

O.R.C. § 2131.08. Statute against perpetuities.

(C) Any interest in real or personal property that would violate the rule against perpetuities, under division (A) of this section, shall be reformed, within the limits of the rule, to approximate most closely the intention of the creator of the interest. In determining whether an interest would violate the rule and in reforming an interest, the period of perpetuities shall be measured by actual rather than possible events. * * *

Section (C) is a combination of two reform elements: cy pres (which applies to the law of charitable trusts) and wait-and-see. For example, the March of Dimes used to raise money to treat polio. Once polio was cured, they changed to birth defects. But you need to get permission from the court to do that. The doctrine of cy pres says that if things go on for a long time, it might be impossible to accomplish the original purpose, so you reform the original document to keep with the testator’s intent. So this is a doctrine of reform, trying to keep with the testator’s intent.

The second thing is that the statute adopts “wait-and-see”. In determining if the Rule has been violated, you don’t indulge in all the crazy assumptions like the fertile octogenarian and the unborn widow: you actually wait and see what happens. You judge the validity of the gift by actual events, not possible events.

So first: we’ll find if the gift violates the common law Rule Against Perpetuities. If not, you’re done. If so, we figure out what the potential problem is, which tells us how long we have to wait. Then we wait and see if the contingent remainder vests or fails too remotely. If we wait all that time to find out if the gift actually violated the Rule Against Perpetuities, then we reform it at the date we find it in violation in order to bring it into compliance, taking into account the testator’s intent. By that time, the testator will be dead.

Options and rights of first refusal

We haven’t talked about these, but an option is a right to purchase something at a certain price at a future time. A right of first refusal is a promise to first offer certain property to a certain person before it’s made available for anybody else. These may have Rule Against Perpetuities problems! For example, what if the parties are corporations? Traditionally, the courts have applied the Rule Against Perpetuities and have struck down options and rights of first refusal if they didn’t end or have to be exercised within 21 years. Wait and see applies to these and cures most of the problems. Usually, the parties didn’t intend for these things to be perpetual, and wait and see cures their ills.

Wait and see doesn’t make things easier! If anything, according to Braunstein, it makes matters more complicated!

The Uniform Statutory Rule Against Perpetuities

This version of the Rule says that you just wait some fixed period (like 90 years) regardless of any lives in being. You just wait that period of time from the creation of the gift! Then you void any contingent remainders that linger. There are plusses and minues! You have to wait a long time, and these interests are guaranteed to hang around a long time even if they eventually fail!

Whether you like this version depends on how you feel about the marketability of land and how you feel about “dead hand control”.

The Illinois statute

This statute reflects a more piecemeal approach. This statute tries to limit the most extreme applications of the Rule Against Perpetuities, but otherwise tries to leave the common law Rule intact.

Practice problems revisited using Illinois and Ohio statutes

1. “Orville to Andy and his heirs so long as the land is farmed; but if it is not farmed to Bonnie and her heirs.”

a. Under Illinois law: This gift doesn’t seem to be affected, and the executory interest in Bonnie and her heirs would still violate the Rule Against Perpetuities.

b. Under Ohio law: Since Ohio law measures by actual rather than possible events, I think we will wait and see whether the land is still being farmed 21 years after the death of the last life in being at the time of this gift (Braunstein suggests it would be 21 years after Andy died). If it is still being farmed, I think the gift must be reformed to destroy the contingent remainder. The remainder has to vest in someone (maybe becoming possessory) or just end. Orville maybe wanted to keep the land as a farm, but he’s only allowed to control the land 21 years after Andy, Bonnie and himself are all dead. We would need more information about what Orville really wanted.

4. “Orville to Adam for life, then to Adam’s children for life, and then to Adam’s grandchildren who survive their parents.”

a. Under Illinois law: I can’t see a different effect. If we knew how old Adam was, we might have help. If Adam is over 65 or infertile, then he can’t have any more children and thus the gift to the grandchildren would be invalid.

b. Under Ohio law: The weird situation that could destroy the gift to the grandchildren won’t actually do so unless that weird situation comes to pass (i.e. all Adam’s children die, then Adam has a kid and dies and then the kid has a kid and it takes more than 21 years to find out if the kid survives the parent). We could reform the gift so that it’s to the children living at the time of Adam’s death and then the grandchildren living at the time of the children’s death. In all likelihood, though, even though this would violate the Rule Against Perpetuities in theory, it won’t offend in practice and so we’ll let it stand unless actual facts prove otherwise. If Adam dies without any afterborn children, then you’re done. If he did have an afterborn child, you’ll have to wait and see whether the gift to the grandchildren who survive their parents becomes vested within the lifetime of any of the lives in being at the time of the creation of the instrument.

5. “‘Orville to Arvid for life, then to his widow, and then to his children who survive her.’ Assume that Arvid is 89 and is married to Bella, his wife of 65 years, and that they have three children.”

a. Under Illinois law: We have lots of help! First off, we can assume that Arvid can’t have any more children under subparagraph (c)(3)(B), and that any widow is already born under subparagraph (c)(1)(C). So all the gifts are okay because we are assured that the widow will be a life in being.

b. Under Ohio law: It’s exceedingly unlikely that, among other things, Arvid will get remarried and have another kid. If this really unlikely thing doesn’t happen, then we have no Rule Against Perpetuities problem. But note that we have to wait for a lot of stuff! How might we reform this one? Maybe we would say that the property only goes to those children who were in existence at the time of the gift.

7. “Orville to Abby for life, then to her children who reach the age of 30.”

a. Under Illinois law: No problem! Under subparagraph (c)(2), we simply change the “30” to a “21” and it’s good!

b. Under Ohio law: If Abby doesn’t die until her children are already over 30, then there’s no problem. Actually, as long as any children left at her death are at least 9 years old, the gift will surely be good. If there are any children younger than that, we can reform the gift such that the children only have to reach 21, for example, or we can put the property in trust until the children reach 30.

O.R.C. § 2131.09 says if you create a trust with a trustee who can create a fee simple absolute in Ohio, then the Rule Against Perpetuities doesn’t apply. Now it’s possible if you just create equitable interests and if the trustee or trust property is domiciled in Ohio and you comply with all the formalities of the statute, then you can set up a trust that will exist perpetually. You can basically create a fee tail again! Wacky! What this statute does is address one problem: free alienability of land. We have solved that problem because the trustee must be empowered to convey a fee simple absolute. That’s fine. But what the statute doesn’t address in a way Braunstein likes is dead hand control. If it’s your property, you can now tie it up essentially forever.

These statutes started in Alaska and have spread around over the land decade or so. Alaskan banks were trying to generate business for their trust departments. The banks lobbied the legislature to validate these trusts, as long as you have an Alaskan trustee. Then there’s a race to the bottom!!! Ohio banks lobby for their own law because they’re worried that they’ll lose out to the Alaskan banks!

Notice that you must have a lot of money in order for a trust to last that long. You need a big honking trust to be able to continue to pay the trustee over a really, really long period of time.

Final review problems

1. “Oswald to Adams for life, then to Adam’s heirs.”

a. Classify the interests: Adams has a life estate, Adams’s heirs have a contingent remainder in fee simple absolute and Oswald has a reversion in fee simple absolute.

b. Apply the Rules: There is no Rule Against Perpetuities problem. However, the Rule in Shelley’s Case applies. In one instrument, Adams is given a life estate, the “heirs” are given a remainder, and the two estates are legal.

c. Reclassify: Adams has a fee simple absolute. Oswald and the heirs get nothing.

2. “Oswald to Andres for life, then to Boswell and his heirs, but if Andres dies without children, to Chambers and her heirs.”

a. Classify the interests: Andres gets a life estate. Boswell gets a vested remainder subject to divestment (or subject to total divestment or subject to a condition subsequent or subject to an executory limitation). Chambers gets an executory interest in fee simple absolute.

b. Apply the Rules: It doesn’t appear that there are any problems with any of the rules.

3. “Oswald to Annie and the heirs of her body, then to Bob and his heirs.”

a. Classify the interests: Annie has a fee tail and Bob has a vested remainder in fee simple absolute. (Note that a fee tail is not a vested fee simple.)

b. Apply the Rules: Does the fee tail still exist? If not, how would we recharacterize? In Ohio, if Annie is survived by issue, the issue would have a fee simple absolute.

4. “Oswald to Arthur for life, then to Arthur’s children for life.”

a. Classify the interests: Arthur has a life estate and Arthur’s children have either a contingent remainder for life (if there are no children now) or a vested remainder subject to open for life (if there’s already at least one child). Oswald has a reversion in fee simple absolute.

b. Apply the Rules: No problems!

5. “Oswald to Alice when she graduates from veterinary school (Alice is a first-year veterinary med student).”

a. Classify the interests: Oswald has a fee simple subject to an executory limitation, and Alice has a springing executory interest in fee simple absolute.

b. Apply the Rules: No problems!

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