In an opinion favorable to the average mineral interest holder who does not regularly check county records, the Texas Supreme Court in Archer v. Tregellas, 17-0093, 2018 WL 6005071 (Tex. Nov. 16, 2018), held that the discovery rule deferred the statute of limitations for a breach of contract claim asserted by holders of a right of first refusal. Without notifying the rightholders, the grantor of the right of first refusal conveyed the mineral interest to a third-party grantee who had notice of the right of first refusal. The rightholders sought specific performance from the third-party grantee, who maintained that the statute of limitations barred the rightholders’ claim for two reasons: (1) the rightholders’ cause of action accrued the moment the grantor conveyed the interest without providing notice to the rightholders, and the rightholders filed suit more than four years after the conveyance, and (2) the discovery rule did not apply to the case, because the rightholders’ injury was not inherently undiscoverable. After agreeing with the grantee’s first assertion, the Court turned its focus to the discovery rule.
The discovery rule defers the accrual of a cause of action until the injured party knew or should have known of the facts from which the cause of action arises. The rule applies only when a party demonstrates that its injury is objectively verifiable and that the nature of the injury is inherently undiscoverable. While the parties agreed that the injury was objectively verifiable, they disputed the discoverability of the injury.
An injury is inherently undiscoverable when it is “unlikely to be discovered within the prescribed limitations period despite due diligence.” Because the inherently undiscoverable determination is made on a categorical basis, the question was not whether the rightholders in Archer could have discovered their injury by exercising due diligence, but rather whether the injury was the type of injury that would be discovered with diligence.
The grantee maintained that the injury was not inherently undiscoverable, reasoning that because the conveyance at issue was recorded, a holder of a right of first refusal exercising due diligence would discover such a conveyance in the public records. The Court rejected this argument, emphasizing that (1) the grantor had a contractual duty to provide notice of an offer to the rightholders, (2) when a grantor has such a duty, the rightholder has a duty to act (i.e., to elect or decline to purchase the interest) only when the grantor communicates its intention to sell or discloses the offer to the rightholder. According to the Court, the rightholders’ injury was inherently undiscoverable, because “a rightholder who has been given no notice of the grantor’s intent to sell or the existence of a third-party offer generally has no reason to believe that his interest may have been impaired,” and thus a diligent rightholder would not “continuously monitor public records for evidence of such an impairment.” Notably, the Court limited its holding to instances in which the grantor of a mineral interest failed to provide notice to a holder of a right of first refusal.
An interesting feature of this case is the fact the Court granted specific performance — not against the grantor of the right of first refusal — but against the third-party grantee of the mineral interest. This outcome is due to the rule that a grantee who has notice of a right of first refusal regarding the conveyed interest stands in the shoes of the grantor and takes the interest subject to the right of first refusal. Thus, a court may compel a grantee to convey title to the holder of the right of first refusal when the grantee had notice of the right.
Conrad Hester and Skyler Sikes
Thompson & Knight LLP
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