The recent Texas Supreme Court case of Barbara D. Cosgrove, Individually and as the Trustee of the Charles and Barbara Cosgrove Family Revocable Living Trust v. Michael Cade and Billie Cade is beneficial to energy companies entering into leases with mineral owners, as this case reiterates that mineral owners should be carefully reviewing their deeds to ensure that mineral reservations are properly included.  Specifically, the Court held “[p]lainly obvious and material omissions in an unambiguous deed charge parties with irrebuttable notice for limitations purposes.”  P. 2.  The discovery rule, which is a rule that tolls the statute of limitations until a party discovers the injury giving right to the claim, applies in limited situations where the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable.  The statute of limitations begins to run when a deed is executed and continues to run where a deed is properly recorded because it is publicly available. 

Factual and Procedural Background

Barbara Cosgrove (“Cosgrove”) purchased from Michael and Billie Cade (“Cades”) a two acre tract of land in 2006 through a trust.  The notarized deed did not reserve the mineral rights for the Cades, even though the Real Estate Contract’s Special Provisions clause provided for the reservation.  A closing document required both parties to cooperate and correct any errors and execute necessary documents to comply with the Real Estate Contract.  It was undisputed that the deed mistakenly, but unambiguously, failed to reserve the mineral rights.

Prior to the sale, the Cades had been leasing the mineral estate.  In 2010, the Cades demanded a corrective deed when the lessee alerted them to a “problem” with the deed’s mineral reservation.  The Cosgroves refused and responded that the statute of limitations barred any claims.  In 2011, the Cades sued Cosgrove for a declaratory judgment to reform the deed.  In Texas, a four-year statute of limitations governs deed reformation claims.  Cosgrove counterclaimed for a declaratory judgment that the Cades’ claims were barred by limitations.  The trial court issued summary judgment finding that the Cades’ claims were time-barred.  The court of appeals reversed stating the discovery rule delayed the accrual of limitations for the deed reformation claim.

Texas Supreme Court Holding

Texas law provides that there is a rebuttable presumption that a grantor has immediate knowledge of defects in a deed that result from mutual mistake.  As such, the limitations period on a claim to reform an incorrect deed begins as soon as the deed is executed, as the grantor has actual knowledge that the deed is incorrect. The Court, however, had not extended this rule to the case of a plain omission in an unambiguous deed, but did so in this case and reversed the appellate court’s holding.

The discovery rule, which is a rule that tolls the statute of limitations until a party discovers the injury giving right to the claim, applies in limited situations where “the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable.”  Id.

Therefore, the Court held where a deed is unambiguous, the “[p]arties are charged as a matter of law with knowledge of an unambiguous deed’s material omissions from the date of its execution, and the statute of limitations runs from that date.” P. 7.  The parties have actual knowledge of what a deed includes and excludes.  Where a reservation of rights, such as the Cades' mineral reservation, are excluded, presumption of knowledge is irrebuttable because the alleged error is obvious. 

Moreover, “obvious omissions are not inherently undiscoverable.”  Texas Property Code 13.002 puts all parties on notice, including the grantor, of the deed’s contents.  A mineral interest owner must read and inspect their deeds to ensure their mineral interests are properly reserved.  The Cades’ injury could not be deemed undiscoverable because the deed was publicly available.  “Section 13.002 establishes a lack of diligence in the discovery of a mistaken omission in an unambiguous deed as a matter of law.”  P. 9.  As the Court provided in the Hooks v. Sampson Lone Star, LP case earlier this year, “(1) reasonable diligence includes examining ‘readily available information in the public record,’ and (2) ‘reasonable diligence should lead to information in the public record.’”  P. 10.  The Cades could not argue they acted with reasonable diligence when they failed to notice a plain mistake when executing their deed, as the deed was readily available for inspection at the time of signing and in the public records for the remainder of the limitations period.

The Court found that the Cades’ remaining claims were not valid.

Conclusion

The Court has now expressly found the discovery rule does not toll the statute of limitations where an unambiguous deed includes plainly obvious and material omissions.  The statute begins to run at execution, where all parties are put on notice.  If a deed is properly recorded, Texas Property Code 13.002 imposes notice on the grantor of the deed’s contents.  Therefore, mineral owners should be especially careful to review deeds to ensure reservations are properly included.