Landowners Vanquished by the Discovery Rule

Gray Reed
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Gray Reed

[co-author: Jamie Mills]*

Is it worth spending extra dollars, days, and windshield time to discover what mischief your oil and gas operator might be making on your property? The landowner-plaintiffs in Mustafa v. Americo Energy would certainly say so.

The “discovery rule” offered them no help in their suit against their lessee for negligence when visible soil contamination occurred over two years before suit and was filed and the landowners had not visited the property in over six years. The two-year statute of limitations barred the landowners’ claim.

The events:

  • 2002 and 2004: Mustafa and Lahijani purchase land on which the Bash #1 well is located.
  • 2002: Americo acquires the 1937-era oil and gas lease on the land.
  • November 2008: Bash #1 ceases production, oil field equipment remains on the ground, readily visible.
  • February 2015: Contents of production tanks removed but tank bottoms containing sand, oil, and saltwater residue remain, leaving a noticeable area of stained soil.
  • March 2016: Landowners visit the property for the first time since 2010 and noticed a “white area” around the saltwater tanks near the Bash #1. Railroad Commission orders Americo to treat the soil and remove leftover debris. Commission informs Americo that the landowner had indicated numerous spills in the past.
  • June 2017: Tests indicate the property is contaminated from oil and gas operations.
  • October 2017: Landowners sue Americo for negligence and other claims for failure to take the “requisite steps to prevent leaks or pollution to the property once the wells became inactive.”

Americo pled the two-year statute of limitations and the landowners pled the discovery rule asserting that the statute should be tolled because they did not discover the alleged negligence until March 2016.

The trial court granted Americo’s motion for summary judgment on limitations.  The court of appeals reviewed whether Americo met its burden to: (1) conclusively prove when the cause of action accrued and (2) negate the discovery rule.

The discovery rule described

Generally, a cause of action accrues when a wrongful act causes some legal injury, even if the fact of injury is not discovered until later and even if all resulting damages have not yet occurred. Here, the landowners agreed that no activity on the land could have caused contamination after February 2015, so the injury occurred then at the latest. Because suit was filed in October 2017, the two-year statute would seemingly bar recovery.

On the other hand, the discovery rule, when applicable, defers accrual of a cause of action until the plaintiff knew, or exercising reasonable diligence should have known, of the facts giving rise to the cause of action. But the rule only applies when the nature of the injury is inherently undiscoverable and the evidence of injury is objectively verifiable. If exercising reasonable diligence would lead to the discovery of the injury, then it is not inherently undiscoverable, and thus the rule does not apply.

The landowners argued that owners like themselves cannot typically learn of contamination within the limitations period. They said they had no reason to visit the property and therefore did not have any way of discovering the issue.

The result

The Court found that due diligence requires both visual observation and an inquiry into the lessees’ activities. By not visiting their property in over six years, especially with the knowledge that numerous spills had occurred in the past, the landowners failed to exercise due diligence. Had they done so, they would have observed the stained soil left behind in 2015, leading them to investigate further and discover the contamination. The injury caused by Americo’s negligence was not inherently undiscoverable, and the discovery rule did not apply.

The dissent

The dissent believed the majority was incorrect to hold that injuries like these accrue when they occur and visiting the land just 13 months after operations are completed is a failure of the landowner to exercise due diligence. This is an unrealistic expectation for landowners, he says.

Your musical interlude.

*Jamie emerged victorious in  1L year at Baylor Law and is a Gray Reed summer associate.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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