McBride Law Blog

Can a Partner Be Held Liable for a Partnership Debt in Texas? (Part II)

McBride Law Blog

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In American Star Energy and Minerals Corporation v. Stowers,[1] four partners formed a general partnership called S&J Investments (“S&J”) to invest in oil and gas properties.  S&J contracted with  American Star Energy and Minerals Corporation (“American”) to operate these properties.  Subsequently, American sued S&J for breach of contract, which resulted in a final judgment in the amount of $227,884.46 against S&J in 2008.  It turned out that S&J was undercapitalized and unable to satisfy the judgment debt, so in 2010, American brought another action seeking a judgment against the partners individually.  In response, the partners argued that the action was barred by the four-year statutes of limitations that applied to the underlying breach-of-contract claim.  Essentially, statutes of limitations are the time frames in which lawsuits can be filed–in this case, four years (although when the clock starts ticking depends on the facts and types of claims).

The Supreme Court of Texas explained Texas partnership law requirements for a business creditor seeking to enforce individual partners’ liability for a partnership debt.  A Texas partnership, the court noted, is “an entity distinct from its partners.”  At the same time, the court said, a partner remains “jointly and severally liable for all obligations of the partnership,” which is a defining characteristic of the partnership form and distinguishes it from other entity types such as LLC.  Still, a judgment against a partnership is not by itself a judgment against a partner, and a creditor must obtain a judgment against the partner individually, whether in the same suit or in a separate suit.  A creditor may not, however, go after a partner until a judgment is rendered against the partnership and goes unsatisfied for 90 days.

Indeed, this was the basis of American’s argument that the partners owed no obligation until the judgment against S&J became final in 2009 and the limitations period began then.  The court agreed.  In light of a partnership’s status as a separate entity and the statutory prerequisites to proceeding against individual partners, the court held that the limitations period does not start running until a creditor can proceed against a partner’s assets, that is, generally at the expiration of the 90-day satisfaction period.

This post was part of a multi-part series on enforcing a partner’s liability for a partnership debt.  You can find the other posts by searching our blogs at www.mcbrideattorneys.com.  In our next post, we will discuss what it means to be a partner in a general partnership from a general liability standpoint.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions. 

[1] Am. Star Energy & Minerals Corp. v. Stowers, No. 13-0484 (Tex. Oct. 14, 2014).  Unless otherwise specified, all references to the case are from this citation.

 

Posted In: Business Management, Partnerships, Personal Liability, Texas Law Update, Uncategorized

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