31May

SCOTX Applies Discovery Rule to Breach of Pref Right Despite Disclosure in Deed Records

Carl M. Archer Tr. No. Three v. Tregellas, Nos. 17-0093, 17-0094, 2018 Tex. LEXIS 1153 (Tex. 2018)

Rights of first refusal (sometimes called preferential rights to purchase, or “pref rights”) are routinely found in oil and gas title, joint operating agreements, farmout agreements, and other instruments common to the industry. Even AAPL’s Model Form-610 Operating Agreement includes an optional pref right provision. Pref rights can destroy pending deals, or even unravel deals after they have already closed.

Oil and gas companies should exercise care in evaluating rights of first refusal burdening their interests or prospective interests, including analysis of the triggering conditions and notice provisions. Otherwise, as was recently illustrated in the Texas Supreme Court case, Carl M. Archer Tr. No. Three v. Tregellas, Nos. 17-0093 ~, 17-0094, 2018 Tex. LEXIS 1153 (Tex. 2018), limitations defense may not be available.

In 2003, the Cook family sold the surface estate of a tract of land to the Archer Trusts, reserving the minerals. In a separate transaction, the Cooks conveyed to the Trusts a right of first refusal to purchase the reserved minerals, if and when the Cooks decided to sell. In relevant part, the right of first refusal stated:

…in the event that [the grantors]… desire to sell any or all of the above described property, [Trustees]…shall have the right to purchase the property, at the same price and on the same terms and conditions as offered by any other bona fide buyer.

In 2007, two members of the Cook family sold their interests, but failed to provide any notice to the Trusts. In 2011, the Trusts discovered the sale and immediately filed suit against the purported purchasers (the Tregellas family), seeking specific performance consistent with the right of first refusal agreement.

The Tregellas asserted multiple defenses, including a limitations defense. In analyzing that defense, the Court focused on two issues: accrual of the cause of action and the discovery rule. The Court concluded that the accrual date for limitations purposes occurred on the date the Cook’s conveyed the minerals, and therefore the claims were time-barred unless the discovery rule applied to postpone the accrual date.

The Court indicated that the discovery rule applies “when the nature of the injury is inherently undiscoverable.” Here, the Court indicated that the standard for determining whether the breach of the right of first refusal was “inherently undiscoverable” was whether the Trusts’ injury could have been discovered through the exercise of reasonable diligence. While the injury could have been discovered from a review of the deed records, the Court rejected the notion that the Trusts had a duty to “continually monitor public records for evidence” of a sale violating the terms of the agreement. Instead, the Court concluded that without the notice required under the right of first refusal provision, the Trusts had no reason to suspect that the right had ever been breached. The Court concluded that the discovery rule applied, deferring the accrual date of the cause of action.

Ryan Lammert
Ryan represents oil and gas exploration and production companies, saltwater disposal operators, landowners, and electric cooperatives before multiple state agencies, including the Railroad Commission of Texas, the Public Utility Commission of Texas, and the State Office of Administrative Hearings. Ryan also assists clients with a wide range of oil and gas transactional matters, including lease negotiation, joint operating agreements, production sharing agreements, and farmout agreements. By understanding the interplay between administrative regulations and oil and gas law, he is able to provide sound, efficient, and effective legal advice.
Ryan Lammert

© Copyright 2012-2018, McGinnis Lochridge LLP. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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