In Texas, the Discovery Rule defers accrual of a cause of action, and thus delays the running of the statute of limitations, until a party knows or, if exercising reasonable diligence, should have known about the facts that form the foundation of that cause of action. The Discovery Rule applies and gives a party relief when, among other things, the cause of action is inherently undiscoverable.
To put it plainly, the law will not punish a party for failure to timely assert a cause of action if the party could not be expected to know about it. It's truly rare when a party receives an email stating "just wanted to let you know, I'm breaching my fiduciary duty to you right now." That's just not how bad actors work—instead, they will go to great lengths to hide their breach.
The Discovery Rule reflects that reality and provides some relief by delaying the running of the statute of limitations. The Rule is not, however, a blank check for a party to avoid the statute of limitations; just as we expect bad actors to hide their bad acts, we also expect a party to know if they are damaged and to find out why—also known as the "exercise of reasonable diligence." A party who does not exercise reasonable diligence—for instance, a party who ignores damage, or the cause of its damage—cannot avail itself of the rule.
There are some contexts, though, in which the law does not require a party to exercise diligence strenuously. The Supreme Court of Texas has long held that injuries arising out of a fiduciary duty are inherently indiscoverable because fiduciaries are presumed to possess superior knowledge. In that context, proper "exercise of reasonable diligence" is more of a forgiving walk than an all-out sprint.
But that mild walk is not indefinite. In a recent case, Marcus & Millichap Real Estate Investment Service of Nevada, Inc. v. Triex Texas Holdings, LLC, and Bryan Weiner (https://search.txcourts.gov/SearchMedia.aspx?MediaVersionID=6d41249d-842a-4aa9-aaab-23cf6eb900c4&coa=cossup&DT=OPINION&MediaID=b9de09a4-d04a-488d-9788-c639025dbade), the Supreme Court of Texas confirmed that a plaintiff must still exercise a little to keep its cause of action healthy and alive. If it does not, there is a point where a party's failure to exercise (no matter how far removed from that party's new year's resolutions) can jump the Discovery Rule and begin to run the statute of limitations.
In Marcus & Millichap, one party sold a gas station to the other. Marcus & Millichap, a broker, represented both parties. As part of the sale, the buyer leased the gas station back to the seller. Marcus & Millichap made certain representations to the buyer during the negotiation and sale. Four years later, the seller defaulted on the lease. Three years after that, the buyer sued. A year later, after depositions pointed a finger at Marcus & Millichap alleging it boosted the price of the gas station, made misleading statements, and suppressed relevant information about the gas station's value.
After these facts were discovered, the buyer added Marcus& Millichap to the suit, claiming a breach of fiduciary duty, among other claims. Marcus & Millichap moved to dismiss the causes of action as barred by the statute of limitations; the buyer asserted the Discovery Rule in defense.
The crux of the issue is how long the Discovery Rule protected the buyer. Recall that, as broker, Marcus & Millichap had a fiduciary duty to the buyer (and the seller). So under Texas law, when should the statute of limitations run?
- When Marcus & Millichap took the acts and made the statements in the course of the sale;
- When the seller defaulted on the lease; or
- When the buyer discovered Marcus & Millichap's alleged misdeeds in the depositions?
The buyer argued the statute of limitations should not run until the date it learned of Marcus & Millichap's alleged misdeeds (No. 3). The broker argued for the approximate date of the lease default (No. 2). Neither party argued for the period during the sale (No. 1), reflecting the court's prior guidance that, as a fiduciary, the broker's acts were unknowable at that time.
That's three warm-up paragraphs to set up the following lift: everyone agreed that the buyer was damaged on the default. The buyer argues it didn't know that it was Marcus & Millichap who damaged it until the depositions, and thus the Discovery Rule should protect it until that time. So did the buyer exercise reasonable diligence? Was being damaged, filing suit within the statute of limitations, conducting discovery, and then adding a party a good enough workout?
The court said no. In the process, it clarified that the Discovery Rule does not linger until a party learns of actual causes and possible cures, nor does it defer accrual until a party learns the specific nature of the wrongful act or the identity of the wrongdoer—here, Marcus & Millichap. Further, it reiterated that the fiduciary duty does not absolve a party from acting to discover the cause of the injury. Instead, it leaned on the reasonable part of the exercise of diligence; though the buyer didn't know Marcus & Millichap was at fault at the time of the default, it knew enough to continue investigating. Its failure to follow-through led to the delay and the waiver of the Discovery Rule as a defense.
Indeed, the buyer's own statements at that time indicated it was already warming up to the idea that Marcus & Millichap was at fault; for whatever reason, it just wasn't ready to sue. That, the court determined, was the moment the statute of limitations began to run.
This decision should be a warning to all lawyers: if your client is damaged, be thorough in your investigation. The Discovery Rule will protect you, but don't rely on it too heavily. Don't wait for the statute of limitations to almost run before filing suit. Yes, it can be hard to trace back through the fog, but there is no replacement for hard work. The Discovery Rule should be a supplement, not a miracle cure. "No days off" indeed.
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