Liability of Partners
Generally speaking, partners are jointly and severally liable, and each partner is personally and individually liable for the entire amount of all partnership obligations. For example, in the farming partnership case we discussed above, each partner would be liable to any person with a claim against the partnership, e.g., if the supplier sues the partnership – each individual partner would be liable if the partnership fails to pay the supplier, because they are each a partner in a general partnership (as opposed to a farming contract), whether they intended to be a partner or not or whether they knew they were exposed to such liability. It bears repeating that this is why it is important for business owners to know about a general partnership and understand what it means to be a general partner– unlike a corporation or LLC, a general partnership does not provide liability protection and indeed increases the scope of risk since Partner A in a general partnership can be liable for the acts of Partner B, if Partner B is acting for the general partnership.
On a related note, an act of a partner usually binds the partnership if the act is apparently in the ordinary course of the partnership business or the like, or authorized by other partners, unless the outside third party dealing with the partner knows that the partner lacks authority. This encompasses situations where a partner commits a wrongful act, including fraud, within the scope of the partnership business. For example, if a partner in a brokerage firm accepts securities from a customer, converts them to cash, and deposits it in his personal bank account, the partnership would be liable for conversion.
Varosa Energy, Ltd. v. Tripplehorn is a recent case that shows when a joint venture or co-venturer may or may not be liable for an obligation incurred by another co-venturer. While the case involved a joint venture, the same analysis would apply to a general partnership as well. In this case, the plaintiff argued that Rollings and Tripplehorn, on behalf of an LLC, formed a joint venture and, thus, both the joint venture and the co-venturers were liable on a contract executed by Rollings, a co-venturer. The court agreed that the parties formed a joint venture and acknowledged that a joint venturer, like a partner in a partnership, is jointly and severally liable for joint venture debts and obligations. The court noted, however, that a co-venturer may only be liable on obligations made on behalf of the joint venture. In this case, there was no evidence that anyone other than Rollings was obligated under the contract or that the plaintiff knew of the existence of the joint venture or other co-venturer(s) when the contract was executed. Accordingly, the court concluded that the contract was not an obligation of the joint venture and, thus, it was not an obligation for which the co-venturer was liable.
This is all the more reason to understand what it means to enter into a general partnership with another person and be aware when you might be doing so inadvertently. Our next post will look at the relationship between partners.
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.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; email@example.com, or www.mcbrideattorneys.com.
 Varosa Energy, Ltd. v. Tripplehorn, No. 01-12-00287-CV, 2014 WL 1004250 (Tex. App.—Houston [1st Dist.] Mar. 13, 2014, no pet. h.) (mem. op.).About the AuthorR. Shawn McBride — is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride Law Firm or call (214) 418-0258.