Carl M. Archer Tr. No. Three v. Tregellas

Carl M. Archer Tr. No. Three v. Tregellas held that a conveyance of a mineral interest without notice to the holder of a right of first refusal is inherently undiscoverable, and the discovery rule applied to defer accrual of the cause of action until the holder knew or should have known of the injury. Owners of a tract of land in Hansford County, Texas conveyed the surface estate of the tract to the trustees of various trusts (“Trustees”). Grantors reserved the mineral estate but granted Trustees a right of first refusal (ROFR) to purchase the mineral estate in the event the Grantors desired to sell. Grantors later conveyed the mineral estate to Tregellas without notifying Trustees of the offer in advance of the sale. Over four years later, Trustees learned of the conveyance to Tregellas. Trustees brought a claim for breach of the ROFR and tortious interference. Trustees alleged that they presently desired to exercise their ROFR to purchase the previously conveyed mineral estate and requested specific performance. Tregellas argued that the four-year statute of limitations barred Trustees’ claims. Trustees argued that the limitations period began to run when they exercised their option, which was less than four years ago, and alternatively, that the discovery rule tolled the limitations period. The trial court ruled for Trustees and granted specific performance. Tregellas appealed, and the court of appeals reversed, holding (1) the breach of contract accrued upon conveyance to Tregellas and (2) the discovery rule did not apply. The Texas Supreme Court granted Trustees’ petitions for review of both judgments.

The Trustees’ contract claim is governed by the four-year statute of limitations, meaning the cause of action was required to be asserted within four years after the cause of action accrued. Under Texas law, a cause of action accrues and the statute of limitations begins to run “when a wrongful act causes some legal injury, even if the fact of injury is not discoverable until later, and even if all resulting damages have not yet occurred.” Trustees argued that the ROFR was breached at the time they attempted to exercise their option because Tregellas took the property subject to their ROFR, and the Trustees retained their option until they received notice of the conveyance. However, the Texas Supreme Court agreed with the court of appeals, and it confirmed that a ROFR is breached “when property is conveyed to a third party without notice to the rightholder.” Even if Trustees technically retained their ROFR after the Tregellas conveyance, they had lost the right to purchase the property as contemplated by the ROFR—before the sale to Tregellas.

The Court next turned to the discovery rule. The discovery rule is an exception to the general rule that a cause of action accrues when the legal injury is incurred. The discovery rule applies when an injury is “inherently undiscoverable.” In such cases, the limitations period begins to run when the plaintiff knows or should know of the facts giving rise to the cause of action. Texas courts define an inherently undiscoverable injury as one “‘unlikely to be discovered within the prescribed limitations period despite due diligence.’” The court of appeals ruled that the type of injury here was not inherently undiscoverable because a conveyance of real property is likely to be reflected in public records and therefore may be discovered by due diligence. The Texas Supreme Court noted two lines of cases on the subject. In the past, courts have applied the discovery rule to a property owner’s fraudulent lien claims despite the property records reflecting the lien because an owner has no reason to suspect an adverse claim. On the other hand, courts have refused to apply the discovery rule to royalty owners’ claims of underpayment of royalties because the owners must exercise due diligence to protect their contractual rights. In the present case, the Court described a ROFR as an interest that runs with the land, which is different from a personal contract, and concluded the discovery rule applies. Because Trustees did not and should not have known about the injury until it was discovered, the Court held the statute of limitations did not bar their claim and granted specific performance to Trustees.

Significance

The significance of the case is the holding that the holder of a ROFR for a mineral interest is not required to monitor the property records for an impairment of the ROFR to preserve the right to sue for breach of the ROFR.

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