McDougal v. Sabine River Land Co.

Cite as 2015 Ark. App. 281
ARKANSAS COURT OF APPEALS
DIVISION I
No. CV-14-1087
Opinion Delivered April 29, 2015
FREDDY MCDOUGAL and LINDA APPEAL FROM THE INDEPENDENCE
MCDOUGAL COUNTY CIRCUIT COURT
APPELLANTS [No. CV-2011-127-4]
V. HONORABLE TIM WEAVER,
JUDGE
SABINE RIVER LAND COMPANY,
a Texas corporation and XTO ENERGY,
INC., a Texas corporation
APPELLEES AFFIRMED
LARRY D. VAUGHT, Judge
Appellants Linda and Freddy McDougal appeal from the order entered by the
Independence County Circuit Court granting the motions to dismiss filed by appellees
Sabine River Land Company (SRLC) and XTO Energy, Inc. (XTO). We affirm.
In May 2013, the McDougals filed a complaint for declaratory relief against SRLC
and XTO. In the complaint, the McDougals alleged that on or about January 11, 2005, they
and SRLC entered into an oil and gas lease (first lease) of their real property located in
Independence County. The McDougals’ complaint stated that they originally believed that
the lease had a five-year term, although it actually had a ten-year term. The complaint further
alleged that SRLC advised the McDougals that the first lease was invalid after it discovered
that a third party, Ruby McDougal, owned a life estate in the property. On or about March
29, 2005, Ruby McDougal conveyed her interest to the McDougals, and on March 30, 2005,
Cite as 2015 Ark. App. 281
the McDougals signed a second oil and gas lease (second lease) provided to them by SRLC.
The second lease had a five-year term. A year later, on or about March 31, 2006, SRLC
assigned its interest in the first lease to XTO, and XTO recorded the assignment on April 6,
2006.
The McDougals’ complaint alleged that in 2010, when they believed the second lease
was near expiration, they contacted XTO to inquire whether it planned to renew the lease.
At that time XTO informed the McDougals that it had been assigned the first lease, that the
first lease was valid, and that it had a ten-year term. In response, the McDougals, relying on
the validity of the second lease, filed the complaint for declaratory judgment, requesting that
the circuit court determine which lease was valid.
On August 22, 2011, XTO filed a motion for summary judgment arguing that as a
matter of law it was the bona fide purchaser because (1) it had no notice or knowledge of the
second lease at the time it purchased the first lease from SRLC, and (2) its assignment of the
first lease was recorded first. XTO also filed a counterclaim on August 22, 2011, alleging that
the McDougals breached their warranty to defend title and seeking monetary damages for
that breach. XTO further requested declaratory relief, declaring it to be relieved of all
obligations to explore or develop the leased premises, entitling it to suspend all royalties or
other payments to the McDougals until the matter was resolved, and to an automatic
extension of the lease for a period equal to the duration of the litigation.
On August 29, 2011, the McDougals filed an amended complaint for declaratory
judgment and, in the alternative, a complaint for breach of contract against SRLC. The new
breach-of-contract allegation was that SRLC knowingly assigned the first lease to XTO when
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it (SRLC) knew the lease was invalid. Both SRLC and XTO moved to dismiss the
McDougals’ amended complaint, arguing that it was barred by the five-year statute of
limitations set forth in Arkansas Code Annotated section 16-56-111 (Repl. 2005).
After a hearing, the trial court entered an order granting the motions to dismiss of
SRLC and XTO. It found that the McDougals’ cause of action for breach of contract
accrued when they “first could have maintained an action to a successful conclusion,” which
the trial court found was “the date they knew of the conflicting terms [in the leases], which
would have been the date they signed the second lease on March 30, 2005.” Finding that the
McDougals’ May 13, 2011 complaint for declaratory relief was filed beyond the five-year
statute-of-limitations period, the trial court found their causes of action were barred as a
matter of law. The circuit court dismissed the McDougals’ claims, and the McDougals timely
appealed.
In a previous opinion, McDougal v. Sabine River Land Co., 2014 Ark. App. 210, this
court dismissed the McDougals’ appeal without prejudice for lack of a final order because
the circuit court’s order had not disposed of XTO’s counterclaims. The circuit court
subsequently entered a new “Final Judgment” that repeated its previous finding that the
McDougals’ claims were barred by the statute of limitations and again granted appellees’
motions to dismiss. The new order contains a Rule 54(b) certificate stating that XTO’s
counterclaims are now moot, unless this court reverses the dismissal of the McDougals’
complaint. Therefore, the circuit court found that there was no just reason for delay of this
appeal based upon the unresolved counterclaims.
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In reviewing a circuit court’s decision on a motion to dismiss, we treat the facts
alleged in the complaint as true and view them in the light most favorable to the plaintiff.
Deer/Mt. Judea Sch. Dist. v. Kimbrell, 2013 Ark. 393, at 11, 430 S.W.3d 29, 39. In testing the
sufficiency of a complaint on a motion to dismiss, all reasonable inferences must be resolved
in favor of the complaint, and the pleadings are to be liberally construed. Baptist Health v.
Murphy, 2010 Ark. 358, 373 S.W.3d 269. Our standard of review for the granting of a motion
to dismiss under Rule 12(b)(6) is whether the circuit judge abused his or her discretion. St.
Vincent Infirmary Med. Ctr. v. Shelton, 2013 Ark. 38, 425 S.W.3d 761.
The only issue on appeal is whether the circuit court abused its discretion in
dismissing the McDougals’ complaint based upon the expiration of the statute of limitations.
The circuit court found that the five-year statute of limitations for contracts in writing
codified at Arkansas Code Annotated section 16-56-111(a)1 applied to the McDougals’
declaratory-judgment action. On appeal, the McDougals argue that, because they were not
alleging any breach of contract2 or misrepresentation, there was no triggering event to cause
the statute of limitations to begin to run. The McDougals also argue that the statutory period
did not begin to run until they were made aware that the appellees intended to rely upon the
1
The circuit court’s order incorrectly stated that the applicable statute was found in
section 15-56-111(a). The applicable statute of limitations is section 16-56-111(a).
2
At the hearing, the McDougals’ attorney stated that they did not claim any
misrepresentation or breach of contract. On appeal, the McDougals acknowledge that their
amended complaint raised a breach-of-contract claim but argue that it was pled “in the
alternative,” and that they were only seeking declaratory relief. The McDougals later state in
their brief that “the [McDougals] do not argue or allege that either the first or second lease
was breached by [SRLC or XTO].”
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first lease rather than the second lease, which the McDougals say was not until they
contacted XTO in 2010 to inquire about renewal.
First, we note that the McDougals cannot avoid application of the relevant statute of
limitations by disavowing the underlying substantive legal claims upon which their
declaratory-judgment action is based. The Arkansas Supreme Court has explained that
declaratory judgment was unknown in the common law; it first became available in Arkansas
by Act 274 of 1953, which conferred authority on the courts to hear declaratory-relief
actions. Martin v. Equitable Life Assur. Soc. of the U.S., 344 Ark. 177, 180, 40 S.W.3d 733, 736
(2001). Prior to that time, courts were not authorized to render declaratory judgments.
Christy v. Speer, 210 Ark. 756, 197 S.W.2d 466 (1946). A declaratory judgment declares rights,
status, and other legal relationships whether or not further relief is or could be claimed. Ark.
Code Ann. § 16-111-103(a) (1997). However, declaratory-judgment actions are intended to
supplement rather than supersede ordinary causes of action. City of Cabot v. Morgan, 228 Ark.
1084, 312 S.W.2d 333 (1958). “A declaratory-relief action is not a substitute for an ordinary
cause of action. Rather it is dependent on and not available in the absence of a justiciable
controversy.” Martin, 344 Ark. at 180–82, 40 S.W.3d at 736–37 (quoting Donovan v. Priest, 326
Ark. 353, 931 S.W.2d 119 (1996)).
In Martin, the Arkansas Supreme Court noted that, although Martin argued that the
statutory-limitations period should not apply to a declaratory-judgment action, “Martin has
mistaken declaratory judgment for a cause of action. Statutes of limitation control when a
cause of action may be pursued.” Martin, 344 Ark. at 182, 40 S.W.3d at 737; McEntire v.
Malloy, 288 Ark. 582, 707 S.W.2d 773 (1986). The court explained that, although Martin
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erred in pleading this case as seeking declaratory judgment, the trial court properly treated it
as if it were an ordinary civil case alleging misrepresentation. Therefore, in Martin, the trial
court interpreted the declaratory-judgment action as possibly raising either a tort or contract
cause of action and applied the longer of the two limitations periods. Our supreme court
approved of this approach, stating that, where a party has erred in using the declaratory-
judgment procedures, his case will still be reviewed. Martin, 344 Ark. at 181, 40 S.W.3d at
736.
In keeping with Martin, the circuit court treated the McDougals’ complaint for
declaratory relief as if it were raising a breach-of-contract issue and applied the relevant
statute of limitations. The McDougals have attempted to distinguish Martin by arguing that
they are not raising either a breach-of-contract or misrepresentation claim. This argument
fails because it would leave the McDougals without any justiciable controversy upon which
to base their declaratory-judgment action.3 The Arkansas Supreme Court has repeatedly held
that a declaratory-judgment action is available only where the case involves a present
justiciable controversy in which a claim of right is asserted against one who has an interest in
contesting it. Martin, 344 Ark. at 182, 40 S.W.3d at 737; Andres v. First Ark. Dev. Fin. Corp.,
230 Ark. 594, 324 S.W.2d 97 (1959). Therefore, in accordance with Martin, we find that the
circuit court appropriately treated the McDougals’ claim as raising contract-enforcement
issues and applied the relevant statutory period.
This is not to say that the facts as presented fail to rise to the level of a justiciable
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controversy. We simply note that a party may not avoid the application of a relevant statute
of limitations by disavowing all relevant underlying legal theories for its declaratory-
judgment action.
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Arkansas Code Annotated section 16-56-111(a) provides for a five-year statute of
limitations for all “actions to enforce written obligations, duties, or rights.” The test for
determining when a breach-of-contract action accrues is the point when the plaintiff could
have first maintained the action to a successful conclusion. Dupree v. Twin City Bank, 300 Ark.
188, 777 S.W.2d 856 (1989); Phillips v. Union Pac. R.R. Co., 89 Ark. App. 223, 226, 201 S.W.3d
439, 441 (2005). The circuit court found that the limitations period began to run when the
parties knew or should have known of the existence of two competing leases with differing
terms, which would have been at the time they signed the second lease. This analysis is
reasonable, given the McDougals’ insistence that there was no subsequent breach or
misrepresentation to trigger the statute. The McDougals’ own theory of the case was simply
that two competing contracts existed, requiring the court to determine which of the two
contracts was valid and controlling. The court reasoned that, under such a theory, the
McDougals would have known about the existence of both contracts when they signed the
second one, giving them all the necessary information to pursue their claim at that time.
The McDougals argue that, prior to becoming aware of the assignment of the first
lease and XTO’s intention to rely upon it, they had no reason to bring a cause of action. We
affirm the dismissal of the McDougals’ complaint because, even if we accept for the sake of
argument that the statute of limitations did not begin to run until the McDougals were put
on notice that appellees intended to rely upon the first lease, the McDougals’ complaint was
nevertheless time-barred. SRLC assigned the lease on March 31, 2006, and XTO recorded
the assignment on April 6, 2006. Once a deed or other instrument indicating an interest in
real estate is filed with the appropriate county clerk, it serves as “constructive notice to all
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persons from the time the instrument is filed for record.” Ark. Code Ann. § 14-15-404(a)(1).
The Arkansas Supreme Court has succinctly described the rule in this way: where a man has
sufficient information to lead him to a fact, he shall be deemed cognizant of it. Waller v.
Dansby, 145 Ark. 306, 310, 224 S.W. 615, 617 (1920). Here, the McDougals had previous
knowledge of the fact that they had executed two competing leases and were put on notice
of the assignment of the first lease at the time it was recorded. Therefore, even under their
theory that the statute of limitations did not begin to run until they were made aware of
appellees’ reliance on the first lease, the McDougals’ claim was untimely because it was
brought more than five years after the assignment was recorded.
Affirmed.
HOOFMAN and BROWN, JJ., agree.
Randall W. Henley, for appellants.
Millar Jiles, LLP, by: G. Michael Millar; and Hardin, Jesson & Terry, PLC, by: Robert M.
Honea, for appellees.
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