Texas Law Update: Statute Of Limitations, The Discovery Rule, And Fraudulent Concealment

Texas Law Update: Statute Of Limitations, The Discovery Rule, And Fraudulent Concealment

On January 13, 2023, the Texas Supreme Court issued its opinion in Marcus & Millichap Real Estate Investment Services of Nevada, Inc. v. Triex Texas Holdings, LLC, __ S.W.3d __, 2023 WL __ (Tex. Jan. 13, 2023) (per curiam) (“Triex”). The opinion addresses the discovery rule and fraudulent concealment, being legal principles used by litigants to extend the statute of limitations for what would be a stale claim. Importantly, the Triex opinion adds color to the Texas Supreme Court’s opinion of Berry v. Berry, 646 S.W.3d 516 (Tex. 2022) (“Berry”). In Berry, the Court brought Texas law back to plumb on the subject of limitations and the discovery rule. In Triex, the Court leans on Berry and reaffirms its key principles of law. This Insights blog aims to capture the key points from both.

A. Purposes, Burdens of Proof, and Accrual of Statutes of Limitation

Statutes of limitations exist to compel the assertion of claims within a reasonable period. “‘It is based on the theory that the uncertainty and insecurity caused by unsettled claims hinder the flow of commerce.’” Computer Assocs. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996) (quoting Safeway Stores, Inc. v. Certainteed Corp., 710 S.W.2d 544, 545 (Tex.1986)).

Defendants bear the initial burden of pleading, proving, and securing findings on the affirmative defense of statute of limitations. To avoid its application, a party must then both plead and prove the discovery rule or fraudulent concealment. If a party fails to plead and prove the date on which accrual occurred by way of the discovery rule, the “legal injury” determines when a cause of action accrues.

Limitations begin to run upon accrual of the cause of action. In the context of a breach of contract and breach of a fiduciary duty, the legal injury generally accrues on the date of the alleged breach. Under Texas law, claims for breach of contract, fraud, and breach of fiduciary duty are subject to four-year statutes of limitation.

B. The Discovery Rule Exception to Otherwise Strict Limitations Periods

In Berry, the Texas Supreme Court reaffirmed the long-standing rule that the “discovery rule is a narrow exception” that is only applied in “exceptional cases” and that “[a]pplications of the rule should be few and narrowly drawn.” Berry, 646 S.W.3d at 524. In addressing a claim for breach of fiduciary duty and the discovery rule, the Court in Berry set forth these fundamental principles of Texas law:

The statute of limitations for breach of fiduciary duty is four years. Generally, a claim accrues when the defendant’s wrongful conduct causes the claimant to suffer a legal injury. A legal injury occurs—and the statute of limitations begins to run—“when facts come into existence that authorize a party to seek a judicial remedy.” A cause of action accrues when the injury occurs, “even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred.” . . .

[Under the discovery rule] “the statute of limitations does not begin to run until the claimant knew or should have known of facts that in the exercise of reasonable diligence would have led to the discovery of the wrongful act.” . . . . The discovery rule exception 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.” The discovery rule is a narrow exception that is only applied in “exceptional cases.” Applications of the rule “should be few and narrowly drawn.”

Whether the plaintiff “should have known” of the facts giving rise to the claim is an objective inquiry. The question is whether the injury incurred is “inherently undiscoverable.” “An injury is inherently undiscoverable if it is by nature unlikely to be discovered within the prescribed limitations period despite due diligence.” . . . [T]he discovery rule [does] not apply where the plaintiff is “given some indication” of an impairment of his rights “and thus has reason to monitor whether that has occurred.” . . .

[T]he discovery rule can be invoked when “a person to whom a fiduciary duty is owed is either unable to inquire into the fiduciary’s actions or unaware of the need to do so.” But those owed a fiduciary duty are not altogether absolved of the usual obligation to use reasonable diligence to discover an injury. Although the presence of a fiduciary relationship can affect application of the discovery rule, it remains the case that “a person owed a fiduciary duty has some responsibility to ascertain when an injury occurs.” “[W]hen the fact of misconduct becomes apparent it can no longer be ignored, regardless of the nature of the relationship.”

Id. at 526 (internal citations to quoted Texas Supreme Court and other opinions omitted for brevity’s sake) (emphasis added).

The Texas Supreme Court has repeatedly stated that the discovery rule is limited to exceptional cases so as to avoid defeating the purposes behind the limitations statutes. The Court prescribes a “categorial” analysis to determine whether the discovery rule applies. That analysis looks to the type of injury alleged rather than focusing on whether the particular injury at issue was discoverable.

The Texas Supreme Court rarely applies the rule to defer the accrual of breach of contract claim. This is so because, in business transactions, due diligence requires that each party protect its own interests. See Via Net v. TIG Ins. Co., 211 S.W.3d 310, 314 (Tex. 2006). “‘In an arm’s-length transaction the defrauded party must exercise ordinary care for the protection of his own interests and is charged with knowledge of all facts which would have been discovered by a reasonably prudent person similarly situated. And a failure to exercise reasonable diligence is not excused by mere confidence in the honesty and integrity of the other party.’” Thigpen v. Locke, 363 S.W.2d 247, 251 (Tex. 1962) (quoting Courseview, Inc. v. Phillips Petroleum Co., 312 S.W.2d 197 (Tex. 1957)); see also HECI Exploration Co. v. Neel, 982 S.W.2d 881 (Tex.1998) (refusing to allow the discovery rule to extend limitations of royalty interest owners’ claims regarding adjoining operators infliction of damage on a common reservoir).

C. Fraudulent Concealment Exception to Otherwise Strict Limitations Periods

Although under proper circumstances, the fraudulent concealment doctrine may toll the statute of limitationsA party asserting fraudulent concealment must establish an underlying wrong, and that “the defendant actually knew the plaintiff was in fact wronged, and concealed the fact to deceive the plaintiff.” BP Am. Prod. Co. v. Marshall, 342 S.W.3d 59, 67 (Tex. 2011). Much like the discovery rule, the fraudulent concealment doctrine only extends the statute of limitations until the fraud is discovered or could have been discovered with reasonable diligence. Determining whether there has been a fraudulent concealment involves a fact-specific analysis to include the due diligence performed, the sophistication of the party claiming fraud, any active concealment of wrongdoing by the defendant, and the nature of the relationship between the parties.

D. Triex Adds Color to Berry

In Triex, Triex Texas Holdings, LLC (“Triex”) asserted causes of action for fraud and breach of fiduciary duty against Triex’s real estate consultant, Marcus & Millichap Real Estate Investment Services of Nevada, Inc. (“M&M”). The claim regarded allegations that M&M misrepresented or failed to disclose material facts relating to Triex’s purchase of a gas station and lease to a third-party (based on M&M’s evaluation and advice) in 2008. The claim against M&M was filed in March 2017, being about one month after deposition testimony in the lawsuit against the defaulted tenant implicated M&M’s misrepresentation or wrongdoing at the time the transaction closed. However, it was undisputed that Triex knew it was injured in the transaction in December 2012 when the M&M-recommended tenant defaulted on the lease of the gas station.

M&M asserted that Triex’s claims were barred by the four-year statute of limitations. The trial court agreed, despite Triex pleading that it did not know of, nor should it have known of the actions and omissions of M&M or the injuries sustained from M&M’s conduct until February 2017. Triex appealed, and the court of appeals reversed, concluding that a fact issue existed as to whether Triex knew or should have known in December 2012 that the claimed injury was the result of wrongful acts committed by M&M. M&M petitioned review by the Texas Supreme Court to determine whether the discovery rule deferred accrual of Triex’s cause of action until it knew that M&M caused Triex’s injury.

The Court held that it did not.

Leaning heavily on Berry, the Court reaffirmed that the discovery rule is a “narrow exception” to the legal injury rule that 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.. The discovery rule applies when the injury is inherently undiscoverable, and that determination is made on a categorical basis rather than on the facts of the individual case. Triex at pg. 5. The key is whether the injury is one that could be discovered through the exercise of reasonable diligence.

The Court noted that M&M may have owed fiduciary duties to Triex, and that the discovery rule may have applied to a point. “Here the discovery rule applies, but it does not save Triex’s claims.” Triex at pg. 6. According to the Court, Triex failed to exercise reasonable diligence, and the discovery rule does not permit claims to linger until a claimant learns of actual causes and possible cures. The Court found that, in December 2012, Triex had actual knowledge of its injuries and became aware of the need to inquire into M&M’s actions. When the fact of M&M’s misconduct and Triex’s alleged injury became apparent in December 2012, Triex was required to exercise reasonable diligence to discover M&M’s allegedly wrongful acts. Triex’s evidence indicated that it knew M&M’s conduct fell below a standard of care, which then spurred a legal obligation to make further inquiry, if Triex wanted to preserve a timely claim. Triex failed to do so and instead waited over four years after December 2012 to bring M&M into the lawsuit.

The Court noted that Triex did not plead fraudulent concealment. Even if it had, the Court noted, Triex was aware of facts that, if pursued, would have led to the discovery of M&M’s alleged misrepresentations.

Insights. Dilatory litigants often frivolously plead the discovery rule when a claim is or may be barred by a statute of limitations, hoping that the court will afford the latitude necessary to avoid summary dismissal of the claim based on the applicable statute of limitations. By Berry and Triex, the Texas Supreme Court expresses a strong and unequivocal intention to limit application of the discovery rule and fraudulent concealment to defeat a defense of limitations. This is so even in claims arising from a fiduciary relationship. It has long been the expectation, under Texas law, that a person owed a fiduciary duty has some responsibility to ascertain when an injury occurs, and in any case, an injured party must undertake reasonable due diligence in pursuing a claim. Berry and its latest progeny, Triex, illustrate that dilatory pursuit of claims—especially following discovery of injury—is ill-advised, and the discovery rule and fraudulent concealment may be unavailable to save the claims from dismissal based on the applicable statute of limitations.

The Triex and Berry opinions are linked below.

Have a question? Contact Cory Halliburton, Freeman Law, Texas.

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