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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