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Illinois

Minerals

ICG Natural Resources, LLC v BPI Energy, Inc, 399 Ill App 3d 554, 926 NE2d 446, 339 Ill Dec 214 (5th D 2010).

Facts:ICG Natural Resources, LLC (ICG) acquired coal-bed-methane rights to more than 60,000 acres of land through an "Asset Purchase Agreement" created pursuant to a bankruptcy. ICG's predecessor to these rights had signed two 99-year leases in favor of Addington Exploration LLC, which itself was succeeded by Nytis Exploration Company (Nytis). Under these leases, the lessee has no obligation to actually develop the resources or make any royalty payments unless the mineral is produced.

On November 2, 2004, Nytis assigned development rights on these leases to BPI Energy, Inc (BPI). BPI paid Nytis $100,000 for this interest, but did not inform ICG of its involvement. In 2006, BPI conducted core tests and in January 2007, BPI began the permitting process and drilled several wells. Although BPI was required to notify the owner, ICG, when it began the permitting process, BPI did not inform ICG of any of its activities until it sent ICG a letter on March 22, 2007. On April 9, 2007, ICG filed a complaint seeking a declaratory judgment that the leases in question were null and voidab initio.

BPI moved for summary judgment on several grounds. First, BPI claimed that ICG's ownership interest, per the Asset Purchase Agreement, was subject to "Permitted Liens" which included the two leases in question. BPI also asserted that it had already spent hundreds of thousands of dollars in development and had already paid the consideration cited by the lease, one dollar "and other good and valuable consideration." However, during the trial, employees of Nytis testified that no consideration had ever been paid in exchange for the leases.

The trial court granted BPI's motion for summary judgment, stating that the case law cited by ICG concerning coal leases was antiquated and upholding long-term leases where the lessee has already invested hundreds of thousands of dollars was not against public policy. ICG appealed.

Holding:Reversed. The court granted ICG's motion for summary judgment and declared the leases void. The ruling upheld the long standing rule in Illinois that "royalty" leases, or leases where the lessee has no obligation to develop or pay anything to the owner, are voidab initiobecause they lack mutuality, are unconscionable and are against public policy.

The trial court had refused to follow this principle, asserting that it is "old law" and unsuited to today's demand for energy development. In refuting the "old law" theory, the appellate court pointed out that the ban on royalty leases was upheld in 1979 byDavis v Nokomis Quarry, Inc, 77 Ill App 3d 1011, 397 NE2d 216. In that case, the court found that a lease to pay $1,000 per year for 40 years starting in 1967 did not violate the requirement of mutuality. However, while so ruling, that court restated the ban on royalty leases. Furthermore, the court pointed out that if the trial court was correct about the need for rapid energy development, then royalty leases that allow a developer to sit on unused mineral rights for a century are the last type of lease that should be upheld.

BPI alternatively argued that the leases should be upheld for the following reasons: (1) because it was abono fidepurchaser of value; and (2) because the Asset Purchase Agreement through which ICG took the land stated that their interest was subject to the leases, thus implicating the doctrine of estoppel. The court rejected both arguments; having found the leases voidab initio, neither BPI's purchase nor the Asset Purchase Agreement could create rights where none ever existed. BPI also argued that its expense of hundreds of thousands of dollars in development should grant them an interest through partial performance and detrimental reliance. However, citing the small amount of money spent in relation to the total acreage of the leases, and considering that BPI's performance took place without properly notifying ICG as required by state regulations, the court found BPI's arguments unpersuasive.

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[Last update: 12-14-10]