634 Tregellas v. Carl M. Archer Trust No. Three, 507 S.W.3d 423 (Tex. App.—Amarillo 2016, pet. granted)

Tuesday, July 17th, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Tregellas v. Carl M. Archer Trust No. Three, 507 S.W.3d 423 (Tex. App.—Amarillo 2016, pet. granted) (ROFR, limitations, discovery rule, correction deed) analyzed the effect of the statute of limitations, discovery rule, constructive notice, and a correction deed in the context of an alleged breach of a right of first refusal to purchase minerals. On June 16, 2003, the Cook family (“Grantor”), which then owned both the surface and mineral estate in a tract in Hansford County, Texas (“Land”), conveyed the surface only to the trustees of various trusts (“Grantee”). In a separate but contemporaneous document, Grantor granted to Grantee a right of first refusal to purchase the minerals on the Land (“ROFR”). The ROFR stated that “in the event that [Grantor], and/or their successors and/or assigns, desire to sell any or all of the [Land], [Grantee], their heirs and assigns, shall have the right to purchase the [Land on the same terms offered] . . .” but “[t]his Right of First Refusal shall be subordinate to and [Grantor] or their successors or assigns . . . shall have the right to execute, to mortgage or otherwise encumber the [Land].” The parties aligned as successors-in-interest to Grantor and Grantee under the ROFR.

There were two separate sales. On March 28, 2007, Sharon and Rodney Farber, two of the family members included in Grantor, sold their undivided mineral interest in the Land by a mineral deed which was subsequently recorded on March 30, 2007 (“Farber Sale”). It was undisputed that Grantee was not notified about Grantor’s intention to make the Farber Sale and Grantee was not given an opportunity to purchase the mineral interest under the terms of the ROFR. On May 4, 2011, Grantee acquired actual knowledge about the Farber Sale and filed suit against Grantor the next day.

Grantor argued that the trial court erred in ordering specific performance of the ROFR regarding the Farber Sale because Grantee filed the suit outside the statute of limitations. The court agreed and reasoned that a suit for specific performance of an agreement for a ROFR is the same as a suit for specific performance of a contract. The statute of limitations for specific performance of a contract is four years after the cause of action accrues. When the cause of action accrues is a question of law. “Under the discovery rule, accrual of a cause of action is deferred until the injured party learned of, or in the exercise of reasonable diligence should have learned of, the injury-causing act.” The Texas Supreme Court has held that this rule should be applied to breach of contract suits only in rare cases because diligent parties “‘should generally discover any breach during the relatively long four-year limitations period provided for such claims.’”

As is true in this case, because of the requirements of the statute of frauds and the recording statutes, a conveyance of real property in violation of a right of first refusal is very likely to be reflected in a publicly-recorded instrument . . . . Once properly recorded, the instrument is subject to inspection by the public. And knowledge of the conveyance is likely to be readily available from other public sources like tax rolls and from commercial sources like abstractors.

That is, the injury was not inherently undiscoverable, and therefore the discovery rule is not applicable.

The deed on the Farber Sale was executed on March 28 and recorded on March 30, 2007. The court recites that the limitations period commenced when the injury was sustained on March 28, unless the accrual date was tolled. Apparently, the same result would follow if the deed was never recorded, and therefore the holding is that limitations on breach of a ROFR runs from the date of the deed, because there is usually a deed and it is usually recorded.

Grantee, on a motion for rehearing, argued that the court “failed to give effect to Texas case law that owners of property are under no duty routinely to search the deed records for later-filed documents impugning their title.” The court held that Grantee owned no interest in the minerals and the ROFR was merely a contractual right. Grantee also cited authority “for the proposition that Texas law provides that the holder of a right of first refusal has no duty to act until the holder receives notice of a sale in violation of the right.” Nevertheless, this court held that whether or not the discovery rule applied was categorical, and the breach was not inherently undiscoverable.

Because there is usually a deed and deeds are usually recorded, the court reasoned that the Grantee’s injury was of the type that generally is discoverable by the exercise of reasonable diligence. The application of the discovery rule is “categorical,” which means, under this decision, the cause of action for breach of ROFR’s on real property will run from an accrual date no later than the date the conveyance in breach is executed. To protect the holder’s interest, the holder is effectively required to continually check the deed records, which, of course, no one intends to do when a ROFR is created. This was a bench trial in which the trial court found all the elements necessary under the discovery rule and expressly held that Grantee had no duty to consult the public record. This court expressly did not base its decision on constructive notice, but only on the general limitation of the discovery rule that it may only be invoked when the injury is inherently undiscoverable. It should be noted that this was apparently a contractual ROFR, not recorded, and not an interest running with the land.

In 2008, Brenda Cook Smith, one of the members of Grantor, died, leaving her undivided mineral interest to her husband, Ed Smith, and son, Dalton Smith. The Smiths negotiated a sale of her mineral interest (“Smith Sale”) for $20,000, which was never completed. Once again, Grantee was neither notified of the intended sale nor given an option to purchase the mineral interest involved in this second sale.

After Grantee filed suit on the Farber Sale, the Smith Sale was revived and restructured as a loan using a deed of trust. There was a ninety day promissory note in the amount of $20,000, secured by a deed of trust on the mineral interest, a default, and a non-judicial foreclosure sale in August of 2012. Grantee first learned of the Smith Sale in November 2012 and amended the earlier petition against the Farber Sale to include the Smith Sale.

Grantor argued that there was no breach of the ROFR regarding the Smith Sale because Grantor transferred the mineral interest through a non-judicial foreclosure sale. The Texas Supreme Court has held “that the holder of a right of first refusal was not entitled to exercise the right at the time of a foreclosure sale of the land under a deed of trust,” but there may be an exception, if the deed of trust was “a subterfuge or device” used to sell the land. The court declined to consider whether that exception existed or applied in this case.

The court held that Grantor breached the ROFR because Grantor did not disclose that Grantor was willing to sell the mineral interest. A ROFR carries with it the right to receive notice of a third-party offer. Therefore, because Grantor did not give notice of Grantor’s willingness to sell, which was undisputed, Grantor breached the ROFR with the proposed 2008 Smith Sale, before the mineral interest was actually sold in 2011 by way of a foreclosure. The court affirmed the trial court’s granting of specific performance as to the Smith Sale, but reversed as to the Farber Sale.

After closing on the ROFR in 2003, Grantee discovered that the property description in the ROFR listed the incorrect county. Grantee’s attorney corrected the mistake and sent the new document to Grantor. Two family members signed the corrected document in February of 2004, and it was recorded in September of that year. None of the other family members responded or signed it.

Grantor argued that the ROFR violated the statute of frauds because it listed the wrong county and that the correction instrument was ineffective to cure the ROFR because it did not comply with Texas Property Code § 5.031. Section 5.031 makes a correction instrument recorded before September 1, 2011,

. . . that substantially complies with Property Code section 5.028 or 5.029 and that purports to correct a recorded original instrument of conveyance [is] effective to the same extent as provided in section 5.030 unless a court ‘renders a final judgment determining that the correction instrument does not substantially comply’ with section 5.028 and 5.029.

In this case, the court held that there was sufficient evidence to support the trial court’s finding that the 2004 correction instrument did substantially comply with section 5.028 and 5.029. Specifically, the correction was nonmaterial as defined by § 5.028. It was undisputed that the error in the county name was typographical and substantial compliance with the statute excuses these types of errors. Therefore, the court held that Grantee met the essential requirements of section 5.028 in their preparation and recording of the 2004 correction instrument, and the court did not reach the statute of frauds question.

The significance of the case is the holding that a cause of action for breach of a contractual ROFR on real property accrues no later than the date a conveyance in breach of the ROFR is executed, and the discovery rule does not apply.