Legal Risks and Capital Resilience in Master Limited Partnerships: A Case Study of Sandridge Mississippian Trust I

Master limited partnerships (MLPs) have long been touted for their tax advantages and high-yield potential, but their structural complexities and exposure to legal and market risks demand rigorous scrutiny. The recent legal developments involving Sandridge Mississippian Trust I offer a compelling case study to evaluate how unresolved litigation can impact capital resilience and unit valuation, while also highlighting the broader vulnerabilities inherent in MLP structures.

Legal Risks in MLPs: A Persistent Challenge

MLPs operate in a regulatory and legal environment that amplifies their exposure to litigation. For instance, the 2014 oil price crash forced numerous MLPs to cut distributions, shattering investor expectations of stable income streamsMaster Limited Partnerships: A Decade Of Challenges and Resilience^[1]. Similarly, the 2017 tax reform eroded MLPs' competitive edge by reducing the corporate tax rate, diminishing their tax-deferred advantagesMaster Limited Partnerships: A Decade Of Challenges and Resilience^[1]. These systemic risks are compounded by operational challenges, such as the Federal Energy Regulatory Commission (FERC) altering pipeline tax cost policies, which increased operational costs for some MLPsMaster Limited Partnerships: A Decade Of Challenges and Resilience^[1].

Sandridge Mississippian Trust I exemplifies these risks. From 2015 to 2025, the Trust faced securities litigation alleging operational mismanagement by its sponsor, SandRidge Energy, Inc., including improper well swaps and breaches of the “reasonably prudent operator” standardThe Rewards and Risks of Investing in Master Limited Partnerships^[3]. These claims culminated in a 2022 class-action settlement of $13.9 million for unitholdersSandRidge Mississippian Trusts I and II - Wohl & Fruchter LLP^[5], underscoring the financial toll of prolonged legal battles.

Capital Resilience and the Sandridge Case

Capital resilience in MLPs often hinges on their ability to manage liquidity and external financing. Unlike corporations that reinvest retained earnings, MLPs typically rely on debt or equity issuance to sustain distributions8 Master Limited Partnership Risks^[2]. This fragility was evident in Sandridge Mississippian Trust I's dissolution process. In November 2020, the Trust terminated operations after four consecutive quarters of insufficient cash available for distribution (falling below $1 million)SandRidge Mississippian Trust I - MarketScreener.com^[6]. By April 2021, it sold its royalty interests for $4.85 million, with proceeds withheld to cover potential litigation liabilitiesSandRidge Mississippian Trust I - MarketScreener.com^[6].

The September 2025 legal update marks a pivotal resolution. On September 11, 2025, the court granted summary judgment in favor of the Trust in Duane & Virginia Lanier Trust v. SandRidge Mississippian Trust I, effectively ending the litigation unless appealed by October 14, 2025Master Limited Partnerships: A Decade Of Challenges and Resilience^[1]. If no appeal is filed, the Trust will distribute its remaining cash—including the 2021 withheld proceeds—to unitholders, followed by unit cancellation and formal dissolutionMaster Limited Partnerships: A Decade Of Challenges and Resilience^[1]. This outcome stabilizes the Trust's capital structure, eliminating uncertainty around litigation liabilities and enabling a clean exit for investors.

Implications for Unit Valuation and Distribution Stability

The resolution of Sandridge's litigation directly impacts unit valuation and distribution dynamics. Prior to the legal update, the Trust's units were delisted from the NYSE due to falling below minimum price requirementsSandRidge Mississippian Trusts I and II - Wohl & Fruchter LLP^[5], reflecting eroded investor confidence. The final distribution, however, signals the end of speculative uncertainty, potentially boosting liquidity for unitholders.

Historically, MLPs facing similar legal challenges have seen volatile unit valuations. For example, during the 2014 downturn, some MLPs experienced unit price declines of over 70%Master Limited Partnerships: A Decade Of Challenges and Resilience^[1]. In contrast, Sandridge's structured wind-down—coupled with the recent favorable court ruling—provides a more predictable path for unitholders. The Trust's decision to withhold 2021 sale proceeds as a litigation reserve also highlights the importance of capital preservation strategies in mitigating legal risksSandRidge Mississippian Trust I - MarketScreener.com^[6].

Broader Lessons for MLP Investors

Sandridge's case underscores the need for investors to assess MLPs through a dual lens of legal exposure and capital resilience. Key takeaways include:
1. Litigation as a Catalyst for Liquidity: Resolved legal disputes can unlock trapped capital, as seen in Sandridge's planned final distribution.
2. Structural Vulnerabilities: High debt loads and reliance on external financing make MLPs susceptible to market downturns8 Master Limited Partnership Risks^[2].
3. Tax Complexity: MLP distributions reported via K-1s complicate tax compliance, adding a layer of risk for individual investorsThe Rewards and Risks of Investing in Master Limited Partnerships^[3].

Comparative examples reinforce these insights. For instance, Kinder Morgan's 2017 conversion to a C corporation triggered tax liabilities for unitholders, illustrating how structural changes can disrupt distribution stabilityMaster Limited Partnerships: A Decade Of Challenges and Resilience^[1]. Conversely, entities like Enterprise Products Partners LP have demonstrated resilience by adapting to market shifts while maintaining high yieldsMaster Limited Partnerships: A Decade Of Challenges and Resilience^[1].

Conclusion

Sandridge Mississippian Trust I's legal resolution in September 2025 provides a textbook example of how litigation can both destabilize and ultimately clarify an MLP's capital structure. While the Trust's journey reflects the inherent risks of MLPs—particularly in energy-dependent sectors—the structured wind-down and favorable court ruling offer a model for managing legal uncertainties. For investors, the case reinforces the importance of due diligence on legal exposure, capital preservation strategies, and the broader macroeconomic forces shaping MLP performance.