A SURVEY OF RECENT TEXAS PARTNERSHIP AND LLC CASES

CASE LAW UPDATE:

A SURVEY OF RECENT TEXAS

PARTNERSHIP AND LLC CASES

Elizabeth S. Miller

M. Stephen and Alyce A. Beard Professor

of Business and Transactional Law

Baylor Law School

Waco, Texas

Douglas K. Moll

Beirne, Maynard & Parsons, L.L.P. Professor of Law

University of Houston Law Center

Houston, Texas

The University of Texas School of Law

2020 LLCs, LPs and PARTNERSHIPS

July 23 & 24, 2020

TABLE OF CONTENTS

Page

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Recent Texas Cases Involving Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

A. Creation/Existence of General Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

B. Partner’s Personal Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

C. Authority and Power of Partner or Other Agent to Bind Partnership . . . . . . . . . . . . . . . . . . . . 16

D. Fiduciary Duties of Partners and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

E. Partnership Property and Partnership Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

F. Interpretation and Enforcement of Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

1. Financial Rights and Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

2. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

3. Contractual Modification of Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

4. Transfer or Assignment of Partnership Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

5. Removal of Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

6. Admission of Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

7. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

8. Venue Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

G. Assignment of Partnership Interest; Admission of Assignee as Partner . . . . . . . . . . . . . . . . . . 52

H. Withdrawal or Expulsion of Partner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

I. Dissolution/Winding Up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

J. Merger, Conversion, Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

K. Creditor’s Remedies: Turnover Order.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

L. Attorney’s Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

M. Standing or Capacity to Sue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

N. Direct and Derivative Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

O. Divorce of Partner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

P. Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Q. Diversity Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

R. Personal Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

S. Statute of Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

T. Service of Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

U. Pro Se Representation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

V. Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

III. Recent Texas Cases Involving Limited Liability Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

A. Nature of Limited Liability Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

B. Limited Liability of Member or Manager; Personal Liability of Member or Manager

Under Agency or Other Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

C. Authority of Member, Manager, Officer or Other Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

D. Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

E. LLC Property and LLC Membership Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

F. Interpretation and Enforcement of Company Agreement or Certificate of Formation . . . . . . . 99

1. Fiduciary Duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

2. Indemnification and Advancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

3. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

G. Assignment or Transfer of Membership Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

H. Access to Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

I. Dissolution/Winding Up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

J. Merger, Conversion, Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

K. Forfeiture and Involuntary Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

L. Veil Piercing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

M. Creditor’s Remedies: Foreclosure of Security Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

N. Attorney’s Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

O. Standing or Capacity to Sue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

P. Direct and Derivative Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

Q. Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

R. Diversity Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

S. Personal Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

T. Service of Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

U. Pro Se Representation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

V. Attorney Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

W. Appeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

X. Section 1981 Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Y. RICO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

Case Law Update: A Survey of Recent

Texas Partnership and LLC Cases

Elizabeth S. Miller

Douglas K. Moll

I. Introduction

This paper summarizes recent Texas cases involving issues of partnership and limited liability company

law. This paper only includes cases that have appeared since the paper for last year’s program was prepared. Case

law surveys that include cases from prior years are available on Professor Miller’s profile page at the Baylor Law

School web site.

II. Recent Texas Cases Involving Partnerships

A. Creation/Existence of General Partnership

Energy Transfer Partners, L.P. v. Enterprise Products Partners, L.P., 593 S.W.3d 732 (Tex. 2020).

The court held that Texas law permits parties to conclusively agree that, as between themselves, no

partnership will exist unless certain conditions are satisfied. Because the parties made such an agreement, the court

upheld the court of appeals’ reversal of the trial court’s judgment, which was based on the jury’s finding that the

parties created a partnership applying the five-factor test set forth in the partnership statute.

In March 2011, Enterprise Products Partners, L.P. and Enterprise Products Operating LLC (collectively,

“Enterprise”) approached Energy Transfer Partners, L.P. and Energy Transfer Fuel, L.P. (collectively, “ETP”)

about converting a pipeline known as Old Ocean into one that could move oil south from Cushing, Oklahoma. ETP

owned Old Ocean, but Enterprise held a long-term lease on it. Converting the pipeline to a pipeline for transporting

oil and extending it the rest of the way to Cushing would require a large investment from the parties and

commitments from customers. The parties agreed to explore the viability of the project, which they referred to as

“Double E.” In three written agreements, they stated that neither party would be bound to proceed until each

company’s board of directors had approved the execution of a formal contract.

A confidentiality agreement entered into in March 2011 included a provision that the parties would not be

under any legal obligation other than the matters specifically agreed to in the confidentiality agreement “unless and

until a definitive agreement between the Parties with respect to the Potential Transaction has been executed and

delivered.”

In April 2011, the parties signed a Letter Agreement with an attached “Non-Binding Term Sheet.” The

Letter Agreement stated:

Neither this letter nor the JV Term Sheet create any binding or enforceable obligations between

the Parties and, except for the Confidentiality Agreement ..., no binding or enforceable obligations

shall exist between the Parties with respect to the Transaction unless and until the Parties have

received their respective board approvals and definitive agreements memorializing the terms and

conditions of the Transaction have been negotiated, executed and delivered by both of the Parties.

Unless and until such definitive agreements are executed and delivered by both of the Parties,

either [Enterprise] or ETP, for any reason, may depart from or terminate the negotiations with

respect to the Transaction at any time without any liability or obligation to the other, whether

arising in contract, tort, strict liability or otherwise.

The third agreement entered into by the parties was a Reimbursement Agreement signed in April 2011. That

agreement provided the terms under which ETP would reimburse Enterprise for half the cost of the project’s

engineering work, and it recognized that the parties were “in the process of negotiating mutually agreeable

definitive agreements” for the project and stated that nothing in it would “be deemed to create or constitute a joint

venture, a partnership, a corporation, or any entity taxable as a corporation, partnership or otherwise.” ETP’s

pleadings acknowledged that “the parties had not yet formed a partnership” when the parties entered into these

agreements.

As of May 2011, the parties had formed an integrated team to pursue Double E. During the spring and

summer, they marketed Double E to potential customers as a “50/50 JV” and prepared engineering plans for the

project. Because a federal rule governing new interstate pipelines requires an “open season” of 30 to 45 days in

which shippers are asked to commit to daily barrel volumes and tariffs, the parties needed shipping commitments

of at least 250,000 barrels a day for ten years at a tariff of $3.00 per barrel if Double E was going to be viable. The

first open season was unsuccessful, and the parties extended the open season twice. On August 12, the last day of

the second extended open season, Chesapeake Energy Corp. committed to ship 100,000 barrels daily. ETP hoped

that Chesapeake’s commitment would attract other shippers who had been holding out, but Enterprise had begun

preparing its exit by resuming negotiations with Enbridge, a Canadian company with whom Enterprise had

previously had discussions that did not materialize. Enterprise ended its relationship with ETP orally on August

15 and in writing a few days later.

The next month, ConocoPhillips announced that it would sell its interest in the Seaway pipeline, and

Enbridge bought the interest, making Enbridge co-owner of the pipeline with Enterprise. Enterprise and Enbridge

obtained an anchor shipper commitment from Chesapeake, which resulted in their securing many additional

commitments during the open season. Enterprise and Enbridge invested billions to reverse the direction of the

pipeline and make other modifications needed to move oil from Cushing to the Gulf. The new pipeline, known as

Wrangler, opened in June 2012, and was a financial success.

ETP sued, alleging that it had formed a partnership with Enterprise to “market and pursue” a pipeline

through their conduct, and Enterprise breached its statutory duty of loyalty by pursuing the Wrangler project with

Enbridge. The jury found that “ETP and Enterprise [had] create[d] a partnership to market and pursue a pipeline

project to transport crude oil from Cushing, Oklahoma to the Gulf Coast” and further found that Enterprise had not

complied with its duty of loyalty. The jury found that ETP suffered $319,375,000 in compensatory damages and

that the value to Enterprise of the benefit gained as a result of its misconduct was $595,257,433. The trial court

reduced the disgorgement award to $150 million and otherwise rendered judgment on the verdict for ETP for a total

of $535,794,777 plus post-judgment interest.

The Dallas Court of Appeals reversed and rendered judgment for Enterprise on the basis that the Texas

Business Organizations Code (TBOC) allows parties to contract for conditions precedent to partnership formation

and that the Letter Agreement created two conditions that were not met: (1) execution of “definitive agreements

memorializing the terms and conditions of the Transaction”, and (2) approval of the definitive agreements by the

boards of each of the parties. The court of appeals concluded that ETP had the burden either to obtain a jury finding

that the conditions were waived or to prove waiver conclusively, which it failed to do. ETP appealed to the Texas

Supreme Court, which granted review.

The Texas Supreme Court began its analysis by reviewing provisions of Chapter 152 of the TBOC that

address creation of a partnership. Under § 152.051(b), “an association of two or more persons to carry on a business

for profit as owners creates a partnership, regardless of whether: (1) the persons intend to create a partnership; or

(2) the association is called a ‘partnership,’ ‘joint venture,’ or other name.” Under § 152.052(a):

Factors indicating that persons have created a partnership include the persons’:

(1) receipt or right to receive a share of profits of the business;

(2) expression of an intent to be partners in the business;

(3) participation or right to participate in control of the business;

(4) agreement to share or sharing:

(A) losses of the business; or

(B) liability for claims by third parties against the business; and

(5) agreement to contribute or contributing money or property to the business.

The court further pointed out that § 152.003 provides that “[t]he principles of law and equity and the other

partnership provisions supplement this chapter unless otherwise provided by this chapter or the other partnership

provisions.”

The court reviewed its previous analysis of the five-factor statutory test in Ingram v. Deere, in which the

court traced the evolution of Texas partnership law from the early common law to the current statutory provision,

which sets out a nonexclusive list of factors to be considered in a totality-of-the-circumstances test. The court

pointed out that “expression of an intent to be partners in the business” is just one factor of the

totality-of-the-circumstances test, and this factor is not given any greater weight than the other factors. The court

acknowledged that, under § 152.051(b), persons can create a partnership regardless of whether they intend to do

so, and a comment to the analogous provision of the Revised Uniform Partnership Act warns that parties “may

inadvertently create a partnership despite their expressed subjective intention not to do so.” The court pointed out,

however, that it expressed skepticism in Ingram that the Legislature “intended to spring surprise or accidental

partnerships on independent business persons.” The court then turned to the question of whether persons can

override the default test for partnership formation in Chapter 152 by agreeing not to be partners until conditions

precedent are satisfied, a question that was not presented or addressed in Ingram.

The court emphasized the importance of the principle of freedom to contract against the backdrop of the

pronouncement in § 152.003 importing “principles of law and equity” into the partnership-formation analysis, and

use of the word “include” in § 152.052(a) such that the enumerated factors are nonexclusive. The court quoted pre-

TBOC case law relying on a 19th century British jurist regarding the “sacred” nature of freedom to contract, and

the court stated that “Texas courts regularly enforce conditions precedent to contract formation and reject legal

claims that are artfully pleaded to skirt unambiguous contract language, especially when that language is the result

of arm’s-length negotiations between sophisticated business entities.”

The court then turned to the question of “whether parties’ freedom to contract for conditions precedent to

partnership formation can override the statutory default test, in which intent is a mere factor.” The court discussed

cases relied on by each party and concluded that neither of the cases were directly on point.

ETP argued that the TBOC’s totality-of-the-circumstances test controls partnership formation to the

exclusion of the common law and that the parties’ intent with respect to the creation of a partnership is just one

factor to be weighed with the other statutory factors set forth in § 152.052(a). ETP argued that contract language

cannot preclude the creation of a partnership until a specific condition has occurred or been performed, and the key

to avoiding an accidental partnership is to “avoid the conduct that establishes a partnership under the statute.”

Enterprise relied upon the primacy of freedom of contract and argued that detrimental economic consequences to

the State and constant litigation would ensue if parties cannot protect themselves from the creation of an unwanted

partnership. The court noted that it had received numerous amicus briefs weighing in on both sides. Reaffirming

its statement in Ingram that the Legislature did not “intend[ ] to spring surprise or accidental partnerships” on

parties, the court relied on the supplementation of the partnership-formation rules of Chapter 152 with “principles

of law and equity” (as authorized by § 152.003) and the deeply ingrained common-law principle of freedom of

contract to “hold that parties can contract for conditions precedent to preclude the unintentional formation of a

partnership under Chapter 152 and that, as a matter of law, they did so here.”

The court stated that “[a]n agreement not to be partners unless certain conditions are met will ordinarily

be conclusive on the issue of partnership formation as between the parties,” adding the caveat in a footnote that

“[s]uch an agreement would not, of course, bind third parties, and we do not consider its effect on them.”

Notwithstanding the conclusive effect that a failure to satisfy a condition to partnership formation will ordinarily

have, the court acknowledged that performance of a condition precedent “can be waived or modified by the party

to whom the obligation was due by word or deed.” The court held, however, that ETP was required either to obtain

a jury finding on waiver or to prove waiver conclusively, and the court concluded that ETP had done neither.

Addressing the relationship between a waiver and evidence of the statutory factors indicating creation of

a partnership, the court pointed out that it had explained in Ingram that courts should only consider evidence not

specifically probative of the other factors when determining whether there is evidence of “expression of an intent

to be partners.” That is, evidence of profit or loss sharing, control, or contribution of money or property should not

be considered evidence of an expression of intent to be partners. The court explained that, if evidence of these other

factors constituted evidence of intent to be partners, “all evidence could be an ‘expression’ of the parties’ intent,

making the intent factor a catch-all for evidence of any of the factors, and the separate ‘expression of intent’ inquiry

would be eviscerated.” Based upon this principle, the court reasoned as follows regarding evidence of waiver of

a condition precedent to partnership formation:

Similarly, where waiver of a condition precedent to partnership formation is at issue, only evidence

directly tied to the condition precedent is relevant. Evidence that would be probative of expression

of intent under § 152.051(a)—such as “the parties’ statements that they are partners, one party

holding the other party out as a partner on the business’s letterhead or name plate, or in a signed

partnership agreement”[footnote omitted]—is not relevant. Nor is evidence that would be probative

of any of the other § 152.052(a) factors. Otherwise, a party in ETP’s position could claim waiver

in virtually every case.

The court stated that ETP pointed to no evidence that Enterprise specifically disavowed the Letter

Agreement’s requirement of definitive, board-approved agreements or that Enterprise intentionally acted

inconsistently with that requirement. Because the only record evidence ETP pointed to—that the parties held

themselves out as partners and worked closely together on the Double E project—was determined by the court not

to be relevant to the issue of waiver of definitive, board-approved agreements, there was no evidence that ETP

waived the conditions to partnership formation.

GR Fabrication, LLC v. Swan, No. 02-19-00242-CV, 2020 WL 2202325 (Tex. App.—Fort Worth May 7,

2020, no pet. h.) (mem. op.).

The court held that the evidence was sufficient to support the existence of a partnership between two

individuals, breach of the partnership agreement, and damages.

Swan and Swartzwelder were involved in various aspects of oil and gas production. Swartzwelder formed

GR Fabrication, LLC, to sell equipment that the men acquired and refurbished, but the two men disagreed as to the

terms of their business arrangement, with Swan claiming that they had a partnership and Swartzwelder claiming

that there was no partnership and that Swan was paid salary and bonuses through another company of

Swartzwelder’s that employed Swan. The jury found that Swartzwelder breached his partnership agreement with

Swan and awarded $110,000 in damages. The jury found that Swan did not have a partnership with GR Fabrication.

On appeal, the court examined the evidence with respect to the five-factor statutory test for creation of a partnership

and concluded that four of the factors favored a partnership between the two individuals, thus supporting the jury’s

finding of a partnership.

The court of appeals began its discussion of the sufficiency of the evidence by setting forth the applicable

law. “[A]n association of two or more persons to carry on a business for profit as owners creates a partnership,

regardless of whether: (1) the persons intend to create a partnership; or (2) the association is called a ‘partnership,’

‘joint venture,’ or other name.” Tex. Bus. Orgs. Code § 152.051(b). Tex. Bus. Orgs. Code § 152.052(a) lists five

factors that a court should review in determining whether a partnership exists:

(1) receipt or right to receive a share of profits of the business;

(2) expression of an intent to be partners in the business;

(3) participation or right to participate in control of the business;

(4) agreement to share or sharing:

(A) losses of the business; or

(B) liability for claims by third parties against the business; and

(5) agreement to contribute or contributing money or property to the business.

The determination of whether a partnership exists requires an examination of the totality of the

circumstances. Evidence of none of the factors precludes the recognition of a partnership, and conclusive evidence

of only one factor is ordinarily insufficient to establish the existence of a partnership. Conclusive evidence of all

five factors establishes a partnership as a matter of law. Cases that fall on the “continuum” between these two

extremes will often present a question of fact.

The court characterized the sharing of profits as one of the two most important factors, and the court stated

that Swan’s evidence demonstrated an agreement to share profits. Swan testified that he and Swartzwelder had

agreed to split profits in the two equipment transactions at issue (50/50 for one and 75/25 for the other) and that

the arrangement was consistent with many similar equipment transactions in the past. Although Swartzwelder

disputed that there was any agreement to share profits and testified that Swan was fairly compensated through salary

and bonuses as an employee of another entity of Swartzwelder’s, the jury was free to disbelieve Swartzwelder. The

court also pointed out that the fact that Swan was a salaried employee of Swartzwelder did not preclude him from

also being Swartzwelder’s partner in another venture. Swartzwelder argued that an email exchange and certain

testimony of Swan showed that there was not an agreement to share profits, but the court explained how the jury

could have interpreted the email and testimony differently. Given the jury’s apparent determinations on credibility,

the court stated that this “highly important factor” favored the existence of a partnership.

Turning to the second factor, the court explained that a court’s examination of expression of intent to be

partners may involve examination of the putative partners’ speech, writings, and conduct, such as the parties’

statements that they are partners, one party holding the other party out as a partner on the business’s letterhead or

name plate, or a signed partnership agreement. Referring to a friend, employee, spouse, teammate, or fishing

companion as a “partner” in a colloquial sense does not tend to show an expression of intent to form a business

partnership. Courts should look to the terminology used by the putative partners, the context in which the statements

were made, and the identity of the speaker and listener. Swan testified that for both of the equipment deals at issue,

he and Swartzwelder agreed that the arrangement “would be a partnership.” The court stated that the context of this

testimony indicated that Swan was not describing a colloquial usage of the term “partnership,” but rather a usage

with legal significance. Swartzwelder emphasized that there was no written agreement regarding these equipment

deals even though the parties had executed written agreements setting out their ownership rights for some of their

other companies. The court stated, however, that the lack of a written contract is not dispositive as to the parties’

intent because the law recognizes oral partnership agreements. The jury could have believed and placed greater

weight on Swan’s testimony that both men expressed their intent to be partners. Swartzwelder also emphasized

evidence that certain documents for the equipment transactions at issue were not made out to Swartzwelder and

Swan jointly. A purchase order for the first transaction was made out to a business solely owned by Swan, while

a proposal for the other transaction was made out to a business majority-owned by Swartzwelder, but the court

stated that these documents, when viewed together, could be interpreted as a loose manifestation of intent to be

partners. The court explained that the jury could have believed that just as the duo evenly split which company’s

name would be held out to the public—half Swan’s company and half Swartzwelder’s company—the equity for

these side transactions was split as well. In light of the jury’s likely credibility determinations, the court said that

this factor slightly favored the existence of a partnership.

The court explained that the third factor, the right to control a business, is the right to make executive

decisions. Examples of the type of executive decisions that might indicate the right of control include exercising

authority over the business’s operations, the right to write checks on the business’s checking account, control over

and access to the business’s books, and receiving and managing the business’s assets. Swartzwelder argued that

there were no signs of joint control and that the transactions were routed through GR Fabrication, an LLC for which

Swartzwelder was the sole member and which he alone funded. But the court pointed out that Swan did not argue

on appeal that GR Fabrication itself was a partnership; Swan argued, and the jury found, that he had a partnership

with Swartzwelder outside of GR Fabrication. The court said that Swartzwelder’s formal right to make decisions

for GR Fabrication was not dispositive and the court could also look to the partners’ de facto authority within the

separate partnership. The court gave examples of evidence that showed Swartzwelder and Swan jointly made some

executive decisions and decided to divide responsibility for others in their separate partnership. The court said that

the partial division of control did not necessarily indicate that there was no joint control, pointing to cases in which

the courts found that there was sufficient evidence of joint control where the parties made major decisions together

but one partner was responsible for finance and the other was responsible for operations. In sum, “would-be partners

may exercise different spheres of authority, so long as their mutual and separate spheres indicate that they are

jointly wielding control,” as was the case here, and “[t]his highly important factor speaks strongly in favor of a

partnership.”

As to the fourth factor, there was no evidence of an agreement to share losses. The statute provides that

“[a]n agreement by the owners of a business to share losses is not necessary to create a partnership.” Tex. Bus.

Orgs. Code § 152.052(c). In any event, this factor weighed against the jury’s finding of a partnership.

Finally, the court evaluated whether Swan agreed to contribute or did contribute money or property (which

includes tangible and intangible property) to the business. Swan testified that for the second transaction, he

contributed equipment for which he paid $110,000 and thousands more to store and transport. The court also noted

that the partnership derived substantial value from Swan’s management and unpaid labor in buying, refurbishing,

and marketing the equipment. The court said that while there is some authority for the proposition that unpaid work

or “sweat equity” can establish the element of contribution, this seems to cut against the plain language of the

statute. The court said that it need not decide whether Swan’s labors could qualify as a contribution to the alleged

partnership because his contribution of over $100,000 in equipment and expenses tilted this factor in his favor.

In sum, the court concluded that four of the five factors favored the existence of a partnership, including

the two most important factors; therefore, the evidence was legally and factually sufficient to support the jury’s

finding of a partnership.

Swartzwelder next contended that the evidence was legally and factually insufficient to show that he

breached the partnership agreement, causing damages to Swan. Swan testified that, under the partnership agreement,

he was entitled to 50% of the profit for the first transaction and 75% of the profit for the second transaction, as well

as the value of his capital contributions for the second transaction. He also testified concerning the distributions

that he received from the partnership. The court summarized Swan’s testimony and concluded that his testimony

concerning profits, expenses, and distributions was legally and factually sufficient to establish the amount owed

and that Swartzwelder breached the partnership agreement by not paying any of that amount. The court further held

that the evidence was legally and factually sufficient to support the measure of damages.

Swan pleaded a breach of partnership claim, for which attorney’s fees are recoverable; however, he also

pursued theories for which attorney’s fees are not recoverable, including breach of fiduciary duty, shareholder

oppression, and fraud. These other claims were resolved against Swan through dispositive motions and an appeal,

and Swan thus bore the burden to demonstrate that his counsel’s efforts in support of his unrecoverable claims were

intertwined with and served the ends of his recoverable claim. Because Swan offered no evidence to show that these

efforts were intertwined, he did not carry his burden to show that segregation was impossible. However, a failure

to segregate attorney’s fees does not necessarily preclude recovery of attorney’s fees. A court may remand the issue

for a new trial on attorney’s fees, which the court in this case did.

Houle v. Casillas, No. 08-17-00189-CV, 2019 WL 4640082 (Tex. App.—El Paso Sept. 24, 2019, no pet.).

The court of appeals reversed the trial court’s granting of summary judgment to Jose Casillas on Robert

Houle’s causes of action for breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing,

constructive fraud, and other claims. The court determined that Houle provided at least a scintilla of evidence to

raise a question of fact regarding whether Casillas breached a fiduciary duty owed to Houle based on a partnership

theory.

Houle and Casillas purchased an older home that had already been divided into apartment units. They

initially intended to renovate the home for resale, but they soon decided that they would keep it and lease out the

apartment units after they were renovated. The parties agreed that Casillas would provide the financing and Houle

would oversee the renovations. They also agreed that once Casillas had been reimbursed for his initial investment,

the parties would split profits equally. Upon Houle’s suggestion, Pershing LLC was formed to purchase the property

(Houle and Casco Investments, Inc., an entity wholly owned by Casillas, were the members of Pershing.) Pershing

purchased the property for $100,000 (an amount loaned by Casillas to Pershing), and Casillas received a promissory

note from Pershing that was secured by a deed of trust on the property. Unbeknownst to Houle, Casillas later

obtained a second promissory note and deed of trust on the property to secure additional monies that he had

advanced during the renovations.

The renovations did not go as planned. They took longer and cost more money than Houle had estimated.

Eventually, Casillas foreclosed on the property and the parties sued each other. Part of Houle’s lawsuit alleged that

Casillas and Houle were partners and that Casillas had breached a fiduciary duty (as well as the duty of good faith

and fair dealing) owed to Houle by ceasing to advance funds for the project and by failing to provide notice to

Houle of the second deed of trust. The trial court dismissed Houle’s fiduciary duty and good faith claims on

summary judgment, and Houle appealed.

The court of appeals observed that, under Texas law, not all contracts contain an implied covenant of good

faith and fair dealing. Nevertheless, the duty of good faith and fair dealing is one of many duties that fiduciaries

owe to one another. As a consequence, the court decided to combine its discussion of the fiduciary duty and good

faith claims as they both turned on whether Casillas owed a fiduciary duty to Houle.

Houle argued that he and Casillas were in a partnership, despite the fact that they had formed an LLC. The

court noted that, in partnerships, fiduciary duty arises as a matter of law. In LLCs, however, it is less clear whether

members owe each other a fiduciary duty. The court cited the Dallas Court of Appeals Suntech decision which

determined that a member-to-member duty did not exist as a matter of law, but might arise as a question of fact

based, at least in part, on whether the members were in unequal positions of power. Regardless, the court of appeals

noted that Houle was not arguing that he was owed a fiduciary duty as a member of an LLC; instead, he was arguing

that he and Casillas had formed a partnership and that the LLC was simply a means of effectuating the partnership.

To that extent, the court agreed with Houle’s argument, stating that “[t]he fact that the parties agreed to form an

LLC to effectuate their agreement does not preclude the possibility that the parties already had a pre-existing—and

continuing—partnership.” Thus, the court focused on whether the parties’ relationship could be considered a

partnership.

In the trial court, Casillas argued that a partnership was not formed, primarily because the parties did not

sign a written agreement to that effect. The court observed that the absence of a signed, written agreement is not

dispositive of whether a partnership was actually formed, as the law has long recognized the existence of oral

partnership agreements. Citing the Texas Supreme Court’s Ingram decision, the court stated that a partnership

agreement may be either express or implied from the parties’ conduct. The court continued by citing the five

partnership factors from TBOC § 152.051 (“(1) receipt or right to receive a share of profits of the business; (2)

expression of an intent to be partners in the business; (3) participation or right to participate in control of the

business; (4) agreement to share or sharing: (A) losses of the business; or (B) liability for claims by third parties

against the business; and (5) agreement to contribute or contributing money or property to the business”) and

considering whether Houle presented more than a scintilla of evidence to establish the factors indicative of a

partnership.

With respect to profit sharing, Houle presented evidence of the parties’ agreement to share equally in profits

after renovations were completed and Casillas was reimbursed for his investment. Although the partnership ended

before any profits were shared, the court found that the undisputed summary judgment evidence demonstrated that

the parties had agreed they would share profits when profits were earned. This factor supported a finding of

partnership.

As to the expression of intent to be partners, the court noted that direct proof of the parties’ intent to form

a partnership is not needed. Nevertheless, whether the parties made a direct expression of their intent through

speech, writings, or conduct is a factor that can be examined, although there must be evidence that both parties

expressed their intent to be partners. The court found only one mention of the term “partner” in the communications

between the parties and stated that “[a]lthough this indicates that Houle—at some point in their

relationship—expressed to Casillas that he considered him to be a partner, there is no evidence that Casillas

similarly expressed any such intent to Houle or to anyone else.” The court concluded that the record did not contain

evidence that both parties made a direct expression of their intent to form a partnership.

With respect to control, the court stated that it is one of the most important factors in determining whether

a partnership exists. The right to control a business is the right to make executive decisions, and several sub-factors

are relevant to concluding that a party has the right to make executive decisions, including: (1) the exercise of

authority over the operation of the business; (2) the right to write checks on the business checking account; (3)

control over and access to the books of the business; and (4) the receipt of and management of all of the assets and

monies of the business. The court found clear evidence that both parties controlled various aspects of the operation

of the business and exercised control over the assets and monies of the business. The court also noted that “[t]he

fact that the parties may have effectively controlled different aspects of the business operations does not foreclose

a finding that they both had the right to make, and did in fact make, executive decisions about those operations.”

This factor supported a finding that a partnership existed.

As to loss sharing, the court observed that an agreement to share losses is not necessary to create a

partnership. While the parties did agree to share profits equally after Casillas was reimbursed, there was nothing

in the record to suggest that they also agreed to share equally in the losses or liabilities of the partnership. Although

acknowledging again that loss sharing is not necessary to the creation of a partnership, the court concluded that this

factor weighed against finding a partnership.

With respect to the contribution of money or property, the parties agreed that Casillas would contribute

money to fund the project by extending a loan to the LLC to purchase and renovate the property, while Houle would

contribute by offering his skills and services. The court found that Casillas’ agreement to lend money to fund the

project was the equivalent of contributing money to the partnership. The court also concluded that Houle’s

agreement to provide his labor and time to supervise the renovations of the property was the equivalent of

contributing money or property to the partnership. In reaching that conclusion, the court recognized that if Houle

had simply been an employee of the company, and only contributed his services in that capacity, it would not result

in a finding that he contributed anything of value to the partnership itself. “However, the undisputed summary

judgment evidence established that Houle was not serving in an employee capacity during the renovations, and that

he instead contributed his time and skills, or in other words his ‘sweat equity’ in furtherance of the partnership

itself. We find this to be sufficient to constitute a contribution to the partnership under the Code.”

In concluding its analysis, the court determined that the record contained more than a scintilla of evidence

in support of three of the five factors: (1) an agreement to share profits, (2) control over the enterprise, and (3) a

contribution of money and property to the enterprise by both parties. The court further noted that these factors were

generally recognized as being the most dispositive and important factors in the analysis, and that there was

sufficient evidence to raise a factual question regarding the existence of a partnership between the parties.

Because partners owe each other fiduciary duties, the court then turned to whether the evidence also raised

a question of fact on breach of fiduciary duty. Houle argued that his affidavit, which chronicled Casillas’ conduct,

starting with Casillas’ decision to stop funding the renovations, his subsequent decisions to sign a promissory note

to himself and to take out a second deed of trust on the property without notice to Houle, and his steps taken to

foreclose on the property without considering any interest that Houle may have had, all raised a question of fact

as to whether Casillas breached his fiduciary duties. The court agreed:

In general, partners owe each other a strict duty of good faith and candor, as well as a duty

to one another to make full disclosure of all matters affecting the partnership and to account for

all partnership profits and property. The evidence that Casillas engaged in a course of conduct with

regard to clearly significant matters affecting the partnership, such as signing the promissory note

and deed of trust without notice to Houle, and subsequently foreclosing on the subject property,

without considering any of Houle’s interests, was sufficient to raise a question of fact with respect

to whether Casillas breached his fiduciary duties to Houle including his duty of good faith and fair

dealing.

In reaching this conclusion, we note that Casillas, at some point, could have taken steps

to foreclose on the original deed of trust and/or to end the partnership if he believed that Houle was

not fulfilling his obligations. However, in exiting the partnership, Casillas was required to do so

in a manner that was consistent with fiduciary duties owed to Houle and consistent with the terms

of the parties’ partnership agreement. We believe that a question of fact exists on the issue of

whether Casillas acted in accordance with his obligations by essentially terminating the partnership

agreement in the manner in which he did.

The court then determined that Houle’s affidavit provided at least a scintilla of evidence to raise a question

of fact on the issue of whether he suffered an injury as a result of Casillas’ conduct. In reaching that conclusion,

the court found it significant that Casillas, in his motion for summary judgment, only argued in very general terms

that Houle had no evidence to establish that Houle had suffered any injury as a result of Casillas’ alleged breach,

or that Casillas had benefitted from such a breach. Moreover, in his motion, Casillas did not challenge Houle to

provide evidence pertaining to the economic value of his alleged injury and/or the economic value of the benefit

that Casillas received. Casillas only challenged Houle to come forward with evidence of an alleged “injury,” and

the court did not believe that this would have put Houle on notice that he needed to provide an accounting of the

monetary amount of the injury that he suffered. The court noted that Houle had provided evidence, albeit in general

terms, that he was injured when Casillas took control over the property through his allegedly fraudulent course of

conduct, thereby depriving Houle of his “interest” in the property, and without compensating Houle for the work

that he performed over the course of the year-long renovations. Finally, the court observed that Houle did not simply

seek monetary damages for Casillas’ alleged breach of fiduciary duty. Instead, he also requested equitable relief,

such as a “Declaratory Judgment declaring the rights of the parties and imposing a constructive trust.” The court

observed that in analogous situations, the Texas Supreme Court had determined that when a plaintiff seeks equitable

relief for a breach of fiduciary duty, the plaintiff does not necessarily need to present evidence of actual damages

stemming from the breach.

In summary, the court concluded that Houle provided at least a scintilla of evidence to raise a question of

fact regarding whether Casillas owed him a fiduciary duty, whether that duty was breached, and whether Houle was

injured by the breach and/or whether he was entitled to the equitable relief requested in his pleadings. The court

therefore concluded that the trial court erred by granting Casillas’ motion for summary judgment on Houle’s causes

of action for breach of fiduciary duty and the implied covenant of good faith and fair dealing. (The court also found

that the trial court erred in granting summary judgment on Houle’s claim for constructive fraud, as “constructive

fraud occurs when a party violates a fiduciary duty or breaches a confidential relationship.”)

Chi Hua Lee v. Linh Hoang Lee, No. 02-18-00006-CV, 2019 WL 3024478 (Tex. App.—Fort Worth

July 11, 2019, no pet.) (mem. op.) (“We turn now to the trial court’s finding that Jessey’s ownership interest in

JoAnderson Capital [an LLC] was 50%. The trial court expressly based that finding on Jessey’s declaration in the

California proceeding that Huang was his business partner. JoAnderson Capital, Jim, and Jenny contend that

Jessey’s reference to Huang as his business partner is no evidence that they [Jessey and Huang] each owned a 50%

interest in JoAnderson Capital. By relying on Jessey’s reference to Huang as his business partner as its sole basis

for finding that Jessey held a 50% interest in JoAnderson Capital, the trial court necessarily assumed Jessey’s use

of the term ‘business partner’ meant partner in the traditional, formal legal sense. See Johnston v. Ballard, 18 S.W.

686, 686 (Tex. 1892) (noting the rule at common law that in the absence of evidence to the contrary, partners in

a partnership share equally in the partnership’s profits, losses, and capital stock). There are at least two problems

with that assumption. First, it is undisputed that JoAnderson Capital is a California limited liability company, not

a partnership. Second, one’s statement that another is his business partner in a limited liability company says

nothing about their respective ownership interests, if any, in that company. Thus, in this context, Jessey’s use of

the term ‘business partner’ to describe his relationship with Huang, standing by itself, does nothing more than create

a mere surmise or suspicion that he and Huang each owned 50% of the ownership interest in JoAnderson Capital.

See Ingram v. Deere, 288 S.W.3d 886, 900 (Tex. 2009) (holding ‘‘partner’ is regularly used in common vernacular

and may be used in a variety of ways’ but using the term in ‘a colloquial sense is not legally sufficient evidence of

expression of intent to form a business partnership’). We therefore conclude that no evidence supports the trial

court’s finding that Jessey owned 50% of JoAnderson Capital.”).

Stephens v. Three Finger Black Shale Partnership, 580 S.W.3d 687 (Tex. App.—Eastland 2019, pet.

filed).

The court of appeals reversed the portions of the trial court’s judgment that awarded relief based upon

findings that partnerships existed and that the fiduciary duties of partners were breached.

Richard Raughton, Lowry Hunt, Chester Carroll, and Kerwin Stephens each pledged to acquire oil and gas

leases and options for such leases in Fisher County (the “Project”). They had no written agreement; instead, they

operated on a “handshake.” When they needed additional money to continue the Project, they recruited Tom Taylor,

an oil and gas investor. The parties eventually entered into a letter agreement known as the “Alpine Letter

Agreement.” Those named in the Alpine Letter Agreement as members of the “Alpine Group” were (1) Alpine

Petroleum (by Carroll); (2) Thunderbird Oil & Gas, LLC (by its sole member, Stephens); (3) Arapaho Energy, LLC

(by its manager, Raughton); and (4) L.W. Hunt Resources, LLC (by its manager, Hunt). Paradigm Petroleum

Corporation, acting through its president, Taylor, was also a party to the Alpine Letter Agreement, but was not a

member of the Alpine Group.

The Alpine Letter Agreement contained a provision that Paradigm was to contribute $4,500,000 to the

project and that the Alpine Group was to contribute, collectively, $500,000. The Alpine Group agreed to transfer

to Paradigm all of the oil and gas leases and options “that it holds,” and future leases and options were to be taken

in Paradigm’s name. Decisions as to future leases and options, the scope of the Project, and the terms of any future

leases and options were at Paradigm’s sole discretion and direction. The agreement also contained provisions for

the division of the proceeds from sales. After payout, proceeds from sales of oil and gas leases were to be paid 82%

to Paradigm and 18% to the Alpine Group. Although Thunderbird Land was not a named party to the Alpine Letter

Agreement, the named parties specified that Thunderbird Land, Stephens’s wholly owned landman entity, was to

provide landman services for the project and that it would “charge its normal customary rates” for those services.

Taylor found investors who agreed to provide a portion of Paradigm’s $4,500,000 contribution. The

investors signed a “Participation Agreement” that referred to the investors in some places as “Parties” and in other

places as “Partners.” Paradigm was not a partner, but Trek Resources, Inc. and Tiburon Land and Cattle were two

of the eight named partners in the agreement. Ultimately, Trek and Tiburon pleaded that the Participation

Agreement resulted in the creation of a partnership known as Three Finger Black Shale Partnership. By the terms

of the agreement, Paradigm was to contribute $1,000,000; each of the additional parties agreed to contribute

$500,000 each. The agreement contained other terms by which the signatories defined their relationship. Paradigm

was to receive a 20% interest before payout and a 36% interest after payout; each of the other parties was entitled

to a 10% interest before payout and an 8% interest after payout. Each of the parties was also entitled to its

percentage interest in any overriding royalties that were reserved in sales of the leases. The Participation Agreement

was later amended to (a) substitute Lazy T Royalty Management, Ltd. for Paradigm, (b) reduce Paradigm’s status

to “agent for the Parties,” and (c) add the Alpine Group as a party.

In January 2012, Devon Energy Production Company, L.P. agreed to buy 25,000 net mineral acres of oil

and gas leases for $900 per acre. The Devon agreement included an “option” provision whereby Devon agreed that

it would not take oil and gas leases from Fisher County mineral owners directly. In return, Devon was given the

right to purchase additional Fisher County acreage that Paradigm and its associates might acquire in the future.

Although the Participation Agreement proposed that 25,000 net mineral acres were involved in the Project,

Devon’s initial purchase comprised leases on 30,000 net mineral acres. As a part of the Devon transaction, Devon

was to make a down payment of $2,500,000 and was to pay the balance of the $22,500,000 purchase price upon

delivery of an assignment of the leases from Paradigm and Carroll to Devon.

The evidence showed that Taylor, Stephens, and Carroll, knowing that Devon was interested in acquiring

leases of more mineral acreage, continued to buy Fisher County oil and gas leases, but they did so on their own to

the exclusion of the “Partners” in the amended Participation Agreement and, to some extent, Raughton and Hunt

Resources. The record contains evidence that Taylor, Stephens, and Carroll used money from the initial sale to

Devon—money that belonged to Plaintiffs—to fund the acquisition of the additional acreage. At some point in time,

it came to light that Taylor, Stephens, and Carroll had sold leases on more than the initial 30,000 acres but that the

proceeds of those sales were not shared with those involved in the Participation Agreement. When it did not receive

satisfactory responses to its inquiries about the additional acreage, Tiburon filed a lawsuit. Trek and Three Finger

were eventually added as plaintiffs, and Raughton and Hunt Resources later intervened in the suit.

Three Finger basically claimed that Taylor, through Paradigm and Lazy T, breached fiduciary duties owed

to Three Finger in connection with the calculation and distribution of the proceeds from the sale of leases on the

initial 30,000 acres. Three Finger claimed that through creative (albeit dishonest) accounting, Taylor made it appear

that he, through his entities, had funded his required contribution when he had not fully funded it. Three Finger also

claimed that Stephens and his Thunderbird-related entities had knowingly participated in those breaches. As the

court summarized: “There are other claims, but, at this point, suffice it to say that Three Finger basically takes the

position that one or more of the appellants [Stephens, Stephens & Myers, LLP, the Thunderbird-related entities,

and Carroll], individually or collectively, had lied, cheated, and stolen from them and overtly, covertly, silently,

and via creative accounting procedures had attempted to execute a cover-up of their ill-intentioned activities. The

result of those activities, as well as overcharges by Thunderbird Land, was that Three Finger did not receive its

rightful share of the profits from the sale of either the initial deal for 30,000 acres or in connection with the sales

of additional acreage.”

At trial, Three Finger was awarded actual damages of $4,560,433 against Stephens, Thunderbird Oil,

Thunderbird Land, and Thunderbird Resources, jointly and severally, specifically for, as stated by the trial court

in its judgment, “injuries sustained because of [A] the contribution failures of entities affiliated with ... Taylor and

[B] Thunderbird Land’s role in determining and charging expenses to the Project for the Initial 30,000 Acres.”

(Taylor had died before trial and the plaintiffs settled their claims against Taylor’s estate and his entities before trial

began.) Alternatively, the trial court awarded that identical sum of money in favor of Three Finger against Stephens,

Thunderbird Oil, Thunderbird Land, and Thunderbird Resources under its equitable powers to award “disgorgement

and restitution.” The trial court also awarded Three Finger a judgment against Stephens, Thunderbird Land, and

Carroll, jointly and severally, in the amount of $6,584,440 for damages that related to Three Finger’s exclusion

from transactions over and above the initial 30,000 acres. Alternatively, the trial court awarded that identical sum

of money in favor of Three Finger against Stephens, Thunderbird Land, and Carroll under its equitable powers to

award “disgorgement and restitution.”

The court of appeals examined the jury’s determination that Three Finger was a partnership. Appellants

argued that, if Three Finger was not a partnership, it cannot recover as such and the court of appeals should render

a take-nothing judgment against Three Finger. Alternatively, Appellants claimed that the evidence was factually

insufficient to prove that Three Finger was a partnership. The court cited the five partnership factors in § 152.052

of the Business Organizations Code—(1) “receipt or right to receive a share of profits of the business”; (2)

“expression of an intent to be partners in the business”; (3) “participation or right to participate in control of the

business”; (4) “agreement to share or sharing: (A) losses of the business; or (B) liability for claims by third parties

against the business”; and (5) “agreement to contribute or contributing money or property to the business.” The

court noted that when it reviews these factors, it applies a totality-of-the-circumstances test.

With respect to profit sharing, Appellants argued that Three Finger, as an entity, never received any profits

to share. They contended that all distributions came directly from Paradigm to the individuals listed as “Parties,”

not to the partnership first and then distributed to the partners. The court of appeals noted that “[a] partnership is

an entity distinct from its partners.” It then pointed out that, under the Participation Agreement, if an individual

party paid the amount shown in the agreement, that individual would own its percentage interest in the leases rather

than in the alleged partnership. Additionally, that individual party would also own its interest in any overriding

royalty interests and carried working interests that might be reserved when the leases were sold. The court also

observed that the Participation Agreement named Paradigm as an agent for the “Parties” and not for a partnership.

Thus, the court concluded that “[i]n accordance with the agreement that the parties made, distributions were not

made to a partnership, but to the individual parties, and the overriding royalty interests were also made directly to

individuals—not to a partnership as partnership property.” The court noted that “[a]lthough the evidence to which

we have referred shows that the parties were investors in the project, it does not show that the parties participated

in the profits as owners or principals of a business.”

As to the expression of intent to be partners, the court stated that “the question is separate and apart from

a review of the other factors; we are to consider only that evidence that is not specifically probative of other factors;

and the terms used by the parties do not control—except that we consider the terminology used by ‘the putative

partners,’ and the context in which any statements were made, as well as who made the statements and to whom

the statements were made.” Although the court stated that the Participation Agreement used the word “Partner,”

that fact alone did not signal the expression of an intent to form a partnership. The court also observed that there

was evidence contradicting an intent to form a partnership:

The context and circumstances surrounding the conduct of the project contradicts a claim

that the parties expressed an intent to form a partnership. Here, as pointed out by Carroll and by

Stephens and his related entities, there is no evidence that the alleged partnership ever had a bank

account, that any of the putative partners ever wrote checks on behalf of a partnership—or for that

matter had a right to write checks, that any formal filings were made to the State of Texas in

connection with the formation of a partnership, that any partnership tax returns were filed, that any

K-1s were ever provided by the alleged partnership, or that the alleged partnership ever executed

any operating agreements. ... In Hoss v. Alardin, the Dallas Court of Appeals noted that the absence

of partnership tax returns, a separate federal tax identification number for the alleged partnership,

or K-1 tax forms for the alleged partners were evidentiary items contradicting the existence of a

partnership that a jury could not reasonably disregard.

As to control, the court cited Ingram for some of the factors that may be considered on the issue of control:

“the exercise of authority over business operations; the right to write checks on the business checking account;

access to the books of the business; and the receipt of assets and monies of the business.” According to the court,

evidence of such factors was not present:

Lett, one of the Parties to the Participation Agreement, testified that he did not know

whether he had any rights to determine the acreage that would be bought, that he had no right to

direct the amount of acreage that Taylor could buy, that he could not tell Taylor what to pay for

acreage that he acquired, that he could not tell Taylor who to sell the acreage to, and that he had

no right to write checks for the group (as far as he knew). Michael Montgomery, another Party to

the Participation Agreement, testified that he “[d]idn’t want to” control the leases that Taylor

acquired. He also testified that those matters were within Taylor’s control.

There is no evidence in the record that any of the signatories to the participation

agreements could write checks in connection with the project, that they received any of the assets

or monies related to the project from Three Finger, or that they had access to the books related to

the project except for sporadic reports furnished them—in fact they had accounting questions that

went unanswered. The receipt of sporadic information is not an indication of control.

As a matter of control, in accordance with the agreement, neither Lazy T nor Paradigm

could sell any leases to third parties for less than the acquisition costs without the approval of the

“Partners.” We believe that this one provision does not show that the “Partners” had the right to

make executive decisions in the operation of the project; the signatories to the agreement lodged

control of the project solely in Taylor through his entities. We hold that the Appellees have not

established that the parties either participated in or had the right to participate in the control of the

project contemplated in the participation agreements.

With regard to sharing losses and liabilities, the court pointed out that the Business Organizations Code

specifically provides that an agreement to share losses is not necessary to the creation of a partnership. In addition,

Lett and Montgomery testified that they were only at risk of losing the amount of their investment. The court

concluded that there was no evidence of an agreement to share losses and no evidence that the parties had ever

discussed liability to third parties.

As to contributions, some of those named as “Parties” in the Participation Agreement did make

contributions to the Project by sending funds directly to Paradigm. The agreement also provided that the failure to

contribute monies resulted in a person not being a party to the agreement. Nevertheless, the court was unpersuaded:

“The possibility of exclusion upon failure to contribute is evidence more akin to contributions as investors, not

partners. Also, as noted by Carroll, no additional contributions were made by the Alpine Group or Carroll under

the participation agreements; any contributions that they made were made pursuant to the Alpine Letter Agreement.

If we are wrong, and if Appellants have established the contribution element ... even conclusive proof of one

element is generally not enough to prove the existence of a partnership.” As the court concluded:

The court in Ingram noted the difficulty encountered in the application of the

totality-of-the-circumstances test and set forth a continuum along which the cases might fall.

Normally, proof of more than one factor is necessary to establish a partnership. As we have said,

in general, even conclusive evidence of only one factor will be insufficient to establish the

existence of a partnership. At the other end of the spectrum, a partnership is established as a matter

of law if there is conclusive evidence of all five factors. But when there is no evidence of any of

the factors, recognition of a partnership is precluded. Of the five factors, the first and third factors

(the receipt or right to receive a share in the profits and the participation or right to participate in

the control of the business) are the most important. Consequently, depending on the facts

developed in it, each case falls somewhere along the continuum.

Regardless of the version of the document that underlies Three Finger’s lawsuit, they all

bear the title “Participation Agreement” as opposed to “Partnership Agreement.” We believe that

the agreement is just what its title purports it to be: an agreement whereby the parties agree to

participate in a project as investors, not partners. Headings and titles can supply context and can

also inform meaning. The title of an instrument “like every other portion of a contract, may be

looked to in determining its meaning.”

Although there may be some evidence of one or more of the factors that we are to consider,

that evidence in and of itself, when we consider the totality of the circumstances, is no more than

a scintilla to support a finding that a partnership exists. Accordingly, we sustain Appellants’ issues

on appeal wherein they challenge the claim that Three Finger was a partnership because we

determine that there is no evidence of a partnership.

The trial court’s judgment, at the election of Appellees, was in favor of Three Finger, not

the individual parties. Because the trial court’s judgment was in favor of a partnership to which

Appellants could owe no fiduciary duties because, as a matter of law, it did not exist, we reverse

the judgment of the trial court insofar as Three Finger is concerned and render judgment that Three

Finger take nothing in its suit against Stephens, Thunderbird Land, Thunderbird Oil and Gas,

Thunderbird Resources, and Carroll.

The conclusion that there was no evidence to support a partnership also doomed the disgorgement award.

The court stated that “[t]he purpose of the equitable remedy of disgorgement is to protect relationships of trust,”

and “[h]ere, in the absence of proof of such a relationship, and a breach of the duties arising from it, we hold that

the trial court erred when it awarded Three Finger damages in the form of disgorgement.” Moreover, the court noted

that “[a] trial court is without authority to award disgorgement contingent upon a reversal of the award of actual

damages.” The court reformed the judgment to delete all awards of disgorgement to Three Finger.

The court of appeals then turned to the claims of Raughton and Hunt Resources as intervenors, who had

prevailed on a breach of fiduciary duty claim in the trial court. That claim was premised in part on the jury’s finding

that the Alpine Group was a partnership. The court noted that even if it assumed that the Alpine Letter Agreement

created a partnership known as the Alpine Group, the parties had expressly disclaimed any partner-related fiduciary

duties that existed under that agreement. The court quoted the following language from the agreement: “It is not

intended and it is agreed that the parties have not entered into and do not enter into any partnership, joint venture

or agency relationship. None of the parties owe a fiduciary duty or obligation to the other and the relationship shall

be considered as a normal customary commercial relationship with the ownership interest of the parties in and to

the properties the subject of this letter agreement as provided herein.” According to the court, the disclaimer was

dispositive:

The record in this case reflects that those named in the Alpine Letter Agreement were

sophisticated businessmen. We must honor the terms that they used when they made their contract,

including those that define the scope of their obligations and agreements, even those that limit

fiduciary duties that might otherwise exist. Accordingly, we hold that any fiduciary duty that might

have existed as a result of an alleged partnership growing out of the Alpine Letter Agreement was

expressly disclaimed in that agreement and that no recovery may be had by Hunt Resources in

relation to those alleged fiduciary duties. We have already dealt with Raughton’s inability to

recover Arapaho’s damages that are connected to the Alpine Letter Agreement. We sustain

Appellants’ issues on appeal wherein they assert that the disclaimer contained in the Alpine Letter

Agreement insulates them from liability for any breach of disclaimed fiduciary duties.

To escape the effects of the fiduciary duty disclaimer, the intervenors also argued that the original

parties—those in the deal before the Alpine Letter Agreement was signed—formed a partnership that was not

evidenced by a writing but, rather, was sealed with a handshake. The court rejected that claim as well: “If

Intervenors, to establish a breach of fiduciary duty, rely upon a position that the Alpine Group was a partnership

that existed by handshake prior to the Alpine Letter Agreement, then they have failed to present any evidence to

prove that, and we have found none. Thus, under the well-recognized standard of review for a no-evidence

challenge, we hold that there is no evidence beyond a scintilla that the Alpine Group was a partnership that existed

before the date of the Alpine Letter Agreement.”

In summary, the court of appeals reversed the portions of the trial court’s judgment in favor of Three Finger

and rendered judgment that Three Finger take nothing in the lawsuit. The court also reversed those portions of the

trial court’s judgment by which relief was awarded to Raughton or Hunt Resources based upon the existence of a

partnership.

Axford Consulting, L.P. v. Foster Jordan, LLC, Civ. A. No. H-09-1899, 2009 WL 10711347 (S.D. Tex.

Sept. 24, 2009). (Although the court issued this opinion in 2009, it is included in this year’s update because it did

not appear in the Westlaw database until recently.)

The court granted Safwan’s motion to dismiss for lack of personal jurisdiction after determining that

Safwan was not in a partnership with Foster Jordan, LLC. Because there was no partnership, Foster Jordan’s

contacts with Texas were not relevant to Safwan’s personal jurisdiction analysis.

Axford was a Texas limited partnership based in Harris County, Texas that provided consulting and

procurement services to the power generation industry. Defendant Foster Jordan, LLC was organized in the United

Arab Emirates with its base of operations in Amman, Jordan. Foster Jordan’s primary business was project

management of power generation contracts. Defendant Safwan was an oil and gas services company headquartered

in Kuwait.

Axford and Foster Jordan entered into a contract where Axford agreed to source two electrical generation

units in exchange for a commission of $500,000 per unit. When Foster Jordan did not pay the full commission,

Axford sued Foster Jordan and Safwan.

Safwan contended that Axford’s claims against it should be dismissed for lack of personal jurisdiction.

Based on the theory that Foster Jordan and Safwan operated as a partnership, Axford argued that the contacts of

both Foster Jordan and Safwan with Texas should be considered on the question of whether Safwan was subject

to personal jurisdiction. The court declined to consider Forster Jordan’s contacts, as it found that a partnership

between the defendants did not exist:

As a preliminary matter, the court must determine which of the contacts attributed by

Axford to Safwan are relevant for personal jurisdiction analysis. Many of the contacts mentioned

by Axford occurred between Foster Jordan and Axford directly, and may be attributed to Safwan

only through Axford’s theory that Safwan and Foster Jordan operated as a partnership. Axford

argues that the nature of Safwan and Foster Jordan’s business relationship makes the two

companies a partnership under Texas law, and that therefore their cumulative contacts should be

counted together as for a single entity. Axford does not, however, explain why Texas partnership

law should apply to companies based in Jordan and Kuwait that are not incorporated in Texas and

have no offices in Texas. The Texas statute cited by Axford states, “An association or entity

created under a law other than [the Texas Revised Partnership Act, the Texas Uniform Partnership

Act, the Texas Revised Limited Partnership Act, or a comparable statute in another jurisdiction]

is not a partnership.” Tex. Rev. Civ. Stat. art. 6132b-2.02(a)-(b). Axford has given the court no

reason to believe that this association was created under the Texas Revised Partnership Act or one

of the other listed statutes. In the absence of such evidence, the court concludes that under the

terms of the Texas Revised Partnership Act the alleged association is not a partnership under Texas

law.

Even assuming that Texas partnership law did apply to Safwan’s and Foster Jordan’s

activities in Texas, the court is not persuaded that a partnership existed. The Texas Supreme Court

has stated that “a partnership consists of an express or implied agreement containing four required

elements: (1) a community of interest in the venture, (2) an agreement to share profits, (3) an

agreement to share losses, and (4) a mutual right of control or management of the enterprise.”

Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 176. In Schlumberger the Court found that

there was no partnership between the parties because even though there was an entitlement to

royalties and the payment of a consultation fee, there was no evidence of an agreement to share

profits. Likewise, in this action Axford has presented no evidence of an agreement between Safwan

and Foster Jordan to share profits or losses. The fact that Safwan made a partial payment to Axford

for the electrical generators that Foster Jordan ordered does not establish an agreement to share

profits. Such a payment is equally consistent with the relationship of a subcontractor to a general

contractor that has ordered materials for the subcontractor’s use. Nor does the mention of a

“Consortium of Partners” in one of Foster Jordan’s letters indicate that the individual parties had

agreed to operate as a single legal entity. The letter also describes the group as a “consortium of

subcontractors,” and there is nothing in the letter that would lead a reasonable reader to conclude

that the multinational companies described had all agreed to share profits and losses henceforth.

Since there is no evidence that Safwan and Foster Jordan agreed to share profits and losses, the

court concludes that under the standard articulated in Schlumberger, Axford has not shown that

the two parties operated as a partnership.

Since Axford has not established that Safwan and Foster Jordan operated as a partnership,

the court declines to consider Foster Jordan’s independent contacts with Texas as part of the

minimum contacts analysis for [Safwan].

The court went on to conclude that Axford failed to present a prima facie case of minimum contacts between

Safwan and Texas. As a result, the court granted Safwan’s motion to dismiss for lack of personal jurisdiction.

B. Partner’s Personal Liability

Southern California Sunbelt Developers, Inc. v. Grammar, No. 03-19-00192-CV, 2019 WL 7342249

(Tex. App.—Austin Dec. 31, 2019, no pet. h.) (mem. op.).

In the course of reversing a Rule 91a motion in favor of the defendants, the court recited and discussed

Nevada limited partnership law regarding personal liability of the general partners of two Nevada limited

partnerships, enforcement of such liability, exceptions to such liability, and contribution obligations of general

partners of limited partnerships. The court also discussed the impact of bankruptcy law on the assertion of claims

against non-debtor parties in the case given that the limited partnerships had filed bankruptcy.

Judgment creditors brought this suit in Texas to enforce cost awards that were entered against Donald

Grammar and two limited partnerships formed by Donald Grammar in out-of-state litigation. The plaintiffs alleged

that Donald Grammar and other family members evaded payment of the cost awards through a conspiracy to

fraudulently transfer and hide assets in multiple alter-ego entities. The plaintiffs also sought a declaration that two

general partners, Donald Grammar and an LLC owned by Grammar, were liable for the debts of the two limited

partnerships. The trial court granted a Rule 91a motion dismissing the suit, and the plaintiffs appealed.

In the course of the appellate court’s discussion, the court recited provisions of the Nevada Limited

Partnership Act governing personal liability of a general partner of a Nevada limited partnership, enforcement of

such liability, exceptions to such liability, and contribution obligations of a general partner of a limited partnership.

The court also discussed arguments raised under bankruptcy law. In concluding that the trial court erred in granting

the Rule 91a dismissal motion, the appellate court held, inter alia, that the plaintiffs’ cost awards and fraudulent

transfer claims were not property of the bankruptcy estates of the limited partnerships, the trial court failed to

address various fact-dependent determinations relating to the general partners’ liability under non-bankruptcy law,

and the automatic stay in the bankruptcy of the limited partnerships did not apply to the non-debtor defendants.

Austin Tapas, LP v. Performance Food Group, Inc., No. 03-18-00680-CV, 2019 WL 3486574 (Tex.

App.—Austin Aug. 1, 2019, no writ) (mem. op.).

The court of appeals affirmed a judgment against a limited partnership and its general partner after

concluding that they were jointly and severally liable for a partnership debt.

Austin Tapas, LP operated Malaga Tapas & Bar. PFG supplied food products to Malaga. After Austin

Tapas failed to pay invoices totaling $6,795.75, PFG filed suit on a sworn account against Austin Tapas and Greg

Schnurr, Austin Tapas’ alleged general partner. The trial court rendered judgment that Austin Tapas and Schnurr

were jointly and severally liable to PFG.

On appeal, Austin Tapas and Schnurr first argued that they were not liable to PFG because the “Customer

Account Application” that PFG had them sign named Austin Tapas, LLC as the purchaser. The court of appeals

agreed that the wrong name was simply a misnomer, which occurs when a party misnames itself or another party,

but the correct parties are involved in the transaction. The court concluded that “there is legally sufficient evidence

to support the trial court’s implied findings that ‘Austin Tapas, LLC’ was a misnomer subject to correction and that

Austin Tapas, LP was the purchaser under the agreement, and the trial court’s finding that, as a result, Austin Tapas,

LP was a party to the Customer Account Application.”

Austin Tapas and Schnurr then challenged the trial court’s finding that Schnurr was personally liable as

the general partner of Austin Tapas. The court quoted § 153.152(b) of the Business Organizations Code (“Except

as provided by this chapter or the other limited partnership provisions, a general partner of a limited partnership

has the liabilities of a partner in a partnership without limited partners to a person other than the partnership and

the other partners”) and cited case law for the proposition that general partners are jointly and severally liable for

limited partnership debts. The record included a copy of the Customer Account Application, which was signed by

Schnurr and named him as a “general partner.” Further, “Schnurr admitted in testimony that he signed the

application and he also acknowledged that his personal information in the document—his date of birth and his

driver-license number—was correct and must have been provided to whomever filled out the document.” The court

concluded that this evidence constituted more than a scintilla to support the trial court’s finding that Schnurr was

the general partner of Austin Tapas, LP. As such, it was legally sufficient.

The court also concluded that the evidence was factually sufficient to support the trial court’s finding. Even

though Schnurr testified that he was not the general partner, the trial judge was entitled to resolve conflicts in the

evidence. “Notably, neither Schnurr nor Austin Tapas, LP offered any additional evidence regarding Austin Tapas,

LP’s formation or organizational structure. Accordingly, on the record before us we cannot conclude that the

evidence supporting the trial court’s finding regarding Schnurr’s status as general partner is so weak as to make the

judgment clearly wrong and manifestly unjust. Accordingly, the evidence is factually sufficient.”

Impact Floors of Texas, L.P. v. At Your Disposal, Inc., No. 03-18-00294-CV, 2019 WL 2939261 (Tex.

App.—Austin July 9, 2019, no pet.) (mem. op.) (“In its motion for summary judgment, Impact Floors [a limited

partnership] asked the trial court to dismiss all claims against IFT, Inc. because IFT was not a party to the alleged

contract between Impact Floors and AYD. The trial court denied that request. On appeal, Impact Floors argues that

the trial court erred in not dismissing all claims against IFT. However, it is undisputed that IFT, Inc. is the general

partner of Impact Floors of Texas, L.P. Therefore, IFT is always liable for Impact Floors debts and obligations.”).

C. Authority and Power of Partner or Other Agent to Bind Partnership

Impact Floors of Texas, L.P. v. At Your Disposal, Inc., No. 03-18-00294-CV, 2019 WL 2939261 (Tex.

App.—Austin July 9, 2019, no pet.) (mem. op.).

The court of appeals determined that a fact issue existed as to whether the “Operations Manager” of a

limited partnership had the authority to enter into a contract on behalf of the limited partnership. The court of

appeals also concluded that the general partner was liable for the limited partnership’s obligations.

At Your Disposal, Inc. (“AYD”) collected the trash of Impact Floors (a limited partnership) pursuant to a

written contract. When Impact Floors informed AYD that it would no longer use AYD’s services, AYD sued for

breach of contract. In response, Impact Floors argued that the contract was not valid because the Impact Floors

employee who signed the contract lacked the authority to do so. AYD filed a motion for summary judgment on its

breach of contract claim, which the trial court granted. (Impact Floors also filed a summary judgment motion

requesting the dismissal of AYD’s breach of contract claim, which the trial court denied.) The court further found

that IFT, Inc. was the general partner of Impact Floors and was therefore liable for Impact Floors’ debts and

obligations.

On appeal, the court first discussed the law related to actual and apparent authority. Actual authority, or

express authority, “denotes that authority that a principal intentionally confers upon an agent, intentionally allows

the agent to believe he possesses, or allows the agent to believe he possesses by want of due care.” Actual authority

“depends on some communication by the principal ... to the agent.” In contrast, apparent authority “depends on

some communication by the principal ... to the third party” and “is based on estoppel, arising either from a principal

knowingly permitting an agent to hold [himself] out as having authority or by a principal’s actions which lack such

ordinary care as to clothe an agent with the indicia of authority, thus leading a reasonably prudent person to believe

that the agent has the authority [he] purports to exercise.” According to the court, “the principal’s full knowledge

of all material facts is essential to establish a claim of apparent authority based on estoppel.” Moreover, “when

making that determination, only the conduct of the principal is relevant.” The court noted that “the standard is that

of a reasonably prudent person, using diligence and discretion to ascertain the agent’s authority,” so “to determine

an agent’s apparent authority we examine the conduct of the principal and the reasonableness of the third party’s

assumptions about authority.” Declarations of the alleged agent, without more, are incompetent to establish either

the existence of the alleged agency or the scope of the alleged agent’s authority.

Lee Pachicano was the “Operations Manager” for Impact Floors who signed the contract. The court

observed that several of the declarations submitted by the parties stated that only certain persons at Impact Floors’

Dallas office had the authority to enter into contracts and that employees at the Austin office, such as Pachicano,

would have been aware of this policy. The court concluded, therefore, that a genuine issue of material fact existed

as to whether Impact Floors intentionally conferred upon Pachicano authority to sign the contract with AYD.

Moreover, although uncontroverted evidence showed that Impact Floors bestowed the title of “Operations

Manager” on Pachicano, the court determined that such title, standing alone, did not establish as a matter of law

that Pachicano had apparent authority to sign a contract with AYD. As the court concluded: “Because we have

determined that a fact question exists as to whether Pachicano had the authority to sign the contract with AYD, a

fact question also exists as to whether Impact Floors is bound by the agreement that Pachicano signed. Accordingly,

the trial court erred in granting summary judgment to the extent that it ruled in favor of AYD on its breach of

contract claim. ... On the other hand, AYD has presented declarations that, taken as true, would establish that

Pachicano had the authority to sign the contract. Therefore, Impact Floors was not entitled to summary judgment

dismissing AYD’s breach of contract claim. Accordingly, the trial court did not err in denying that request.”

Impact Floors also asked the trial court to dismiss all claims against IFT, Inc. because IFT was not a party

to the alleged contract between Impact Floors and AYD. The trial court denied that request. On appeal, the court

agreed with the trial court’s decision because it was undisputed that IFT, Inc. was the general partner of Impact

Floors. As a consequence, “IFT is always liable for Impact Floors’ debts and obligations.”

D. Fiduciary Duties of Partners and Affiliates

Berry v. Berry, No. 13-18-00169-CV, 2020 WL 1060576 (Tex. App.—Corpus Christi Mar. 5, 2020, no pet.

h.) (mem. op.).

The court held that a co-trustee of a trust that was a limited partner did not have the right to sue derivatively

on behalf of the limited partnership where a majority of the co-trustees and the other limited partner opposed the

derivative suit and determined that it was not in the best interest of the partnership. The court held that the filing

of a memorandum of lease in the real estate records did not constitute constructive notice to the co-trustee for

purposes of his claim for breach of fiduciary duty because deed records do not furnish constructive knowledge to

a property owner of subsequent impairments to title.

Marvin and Laura Berry acquired a ranch in 1960 and created the Flying Bull Limited Partnership in 1996.

They assigned a 2% general partner interest to FB Ranch, LLC (FB Ranch) and split between themselves the

interests as limited partners. Marvin died in 1997. At some point, the Berry Dynasty Trust (“the Trust”) received

a limited partner interest for which the Berrys’ four sons served as co-trustees. There were several other Berry-

related entities, including an entity known as Berry Contracting that leased the ranch and made regular lease

payments to the limited partnership from 2000 to 2005. In 2000, after a family dispute, Kenneth Berry (Marvin and

Laura’s son) resigned from nearly all of his functions within the family enterprises, and the family entered into a

global release in 2005 under which Kenneth released certain Berry companies and individual family members in

all capacities and they similarly released him from all causes of action related to facts that existed at that time.

In 2005, Kenneth sought lease and partnership records in his capacity as co-trustee of the Trust. In 2007,

the limited partnership and Berry Contracting signed and recorded a lease agreement through 2024, back-dated to

2000. Several years thereafter, Kenneth continued to pursue partnership records and tax filings related to the Trust,

including a 2014 demand for an accounting pursuant to the Texas Trust Code. These requests continued until 2016

when Kenneth and his trust-beneficiary daughter filed suit derivatively and individually against Kenneth’s

co-trustees and all of the Berry-related entities. The suit alleged, inter alia, breaches of fiduciary duty, breach of

the partnership agreement, and breach of the 2005 release agreement between Kenneth and other family members

and Berry entities. He also sought an accounting and a declaratory judgment declaring that contracts and agreements

in violation of the partnership agreement and fiduciary duties were void.

In response, the defendants filed a plea to the jurisdiction and a motion for summary judgment on statute-of-

limitations grounds. The defendants entered into a consent and release agreement among themselves pursuant to

which they rectified Laura’s inadvertent mishandling of lease payments owed to the ranch and released Laura from

any liability related to the payments, modified the lease agreement, and declared that none of them believed that

the suit was in the best interest of the Trust or the limited partnership. The trial court granted the plea to the

jurisdiction as to Kenneth’s standing in a derivative capacity on behalf of the partnership and granted defendants’

motion for summary judgment as to limitations. Certain disputes were severed, and after a bench trial on the issue

of attorney’s fees, the court awarded attorney’s fees in various amounts to Kenneth and the various defendants.

On appeal, Kenneth challenged the trial court’s ruling that he did not have standing to sue derivatively on

behalf of the partnership in his capacity as co-trustee of the limited partner and the trial court’s summary-judgment

ruling as to limitations.

With respect to Kenneth’s standing to sue derivatively on behalf of the limited partnership, the appellate

court examined the Texas Trust Code, the Texas Property Code, and the Texas Business Organizations Code. The

court pointed out that under Tex. Bus. Orgs. Code §§ 153.402 and 153.403, a limited partner has no right to sue on

behalf of the limited partnership if the limited partner does not fairly and adequately represent the interests of the

partnership. Further, the court took note that under Tex. Prop. Code § 113.85(a) trustees act on behalf of a trust by

majority decision. Additionally, Texas case law limits a beneficiary’s ability to bring suit on behalf of a trust absent

a trustee’s wrongful refusal to bring suit. Accordingly, in light of Chapter 153 of the Texas Business Organizations

Code, the release agreement entered into among the defendants demonstrating a majority decision pursuant to Tex.

Prop. Code § 113.85(a), and Texas case law, neither the Trust, as a limited partner, nor a trust beneficiary could

sue third parties on behalf of the limited partnership. Consequently, the court affirmed the trial court’s judgment

with respect to the issue of standing.

Next, the court addressed Kenneth’s challenge to the trial court’s summary judgment in favor of the

defendants as to the statute of limitations. A claim for breach of fiduciary duty is subject to a four-year statute of

limitations. The court recited the elements of a claim for breach of fiduciary duty (a fiduciary relationship, breach,

causation, and damages) and recited the following principles regarding the duties of a fiduciary:

“The fiduciary owes a duty of full disclosure of matters concerning the parties’ interests and a strict

duty of candor and good faith. The fiduciary may be punished for breaching these duties.”

Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, 572 S.W.3d 213, 231 (Tex. 2019)

(internal citations omitted). “A fiduciary relationship gives rise to a duty of full disclosure of all

material facts.” Valdez v. Hollenbeck, 465 S.W.3d 217, 230 (Tex. 2015); see also Montgomery v.

Kennedy, 669 S.W.2d 309, 313 (Tex. 1984) (failing to disclose existence of an oil and gas lease

on estate property was a breach of fiduciary duty by trustee). Furthermore, full disclosure of

information concerning a partnership is required upon demand by a partner or the partner’s

representative. See TEX. BUS. ORG. CODE ANN. § 152.213. Additionally, a trustee is required

to respond to a request for an accounting. See TEX. PROP. CODE ANN. § 113.151.

In his capacity as a co-trustee and beneficiary of the Trust, Kenneth sought copies of any lease agreements

affecting the ranch from Laura, who operated the ranch as general partner beginning in 2006, and continuing

intermittently through 2015. The court reviewed the history of various agreements and documents, including real

estate records that were filed in the deed records. The defendants argued, and the trial court agreed, that the filing

of a memorandum of lease in the deed records was sufficient to begin the statute of limitations on Kenneth’s claim

for breach of fiduciary duty regarding the lease. Kenneth argued that the general partner’s and his co-trustees’

failure to provide him with copies of the lease or to inform him of its terms was a breach of fiduciary duty and that

he had no responsibility to search the deed records when all of the parties to the lease remained silent. In Archer

v. Tregallas, 566 S.W.3d 281, 288 (Tex. 2018) , the Texas Supreme Court upheld the use of the discovery rule in

a case involving a right of first refusal even though the deed was recorded. The trial court and the parties did not

have the benefit of the Archer case at the time of the summary-judgment hearing. According to the court, under

Archer and the authorities it relied upon, a trustee would have no duty to search the deed records for impairments

to its title by subsequent events. The defendants moved for summary judgment based only on constructive

knowledge of the lease resulting from the filing of the memorandum of lease. Because Archer holds that deed

records do not furnish constructive knowledge to a property owner of subsequent impairments to title, the court

reversed the grant of summary judgment on statute-of-limitations grounds.

Ortiz v. Las Blancas Minerals, L.P., No. 04-18-00769-CV, 2020 WL 806652 (Tex. App.—San Antonio

Feb. 19, 2020, pet. filed) (mem. op.).

The court affirmed summary judgment in favor of the defendants on the plaintiffs’ claims for breach of a

limited partnership agreement, fraud, breach of fiduciary duties, and conversion.

An individual and a trust that was purportedly the successor limited partner to the individual sued the

limited partnership and the other partners for breach of the limited partnership agreement, breach of fiduciary

duties, and conversion. The claims for breach of the partnership agreement, fraud, and breach of fiduciary duties

were based on allegations that the other partners and the partnership diverted partnership profits to another entity.

In this regard, the plaintiffs relied on monthly distribution tables that listed each partner’s name, ownership

percentage, distribution amount, and the net amount paid to the partner. The tables also displayed a column that

showed capital contributions paid to another limited partnership. The column that showed this information

contained the words “not partner” in parentheses next to the name of the other limited partnership. The distribution

tables showed that several partners other than the plaintiffs elected to make a capital contribution to the other

limited partnership each month, and that amount was then deducted from those partners’ respective shares for the

month. Because the court concluded that the distribution tables reflected that the amounts paid as capital

contributions to the other limited partnership were paid after the partners were allocated their respective profit

distributions and that the capital contributions did not affect the plaintiff’s share of the profits and distributions,

the records were no evidence of breach of the partnership agreement, fraud, or breach of fiduciary duties. In the

course of its discussion, the court recited the elements of a breach-of-fiduciary-duty claim and stated that “[p]artners

owe certain fiduciary duties to other partners within the partnership, such as the duty of loyalty and the duty of

care.”

Shannon Medical Center v. Triad Holdings, III, L.L.C., 2019 WL 6606406, __S.W.3d __ (Tex.

App.—Houston [14th Dist.] 2019, no pet. h.).

In this suit for judicial dissolution brought by the managing general partner of a limited partnership, the

court held that judicial dissolution on the ground that it was not reasonably practicable to carry on the partnership’s

business in conformity with its governing documents was unwarranted because there was no deadlock. The court

also stated that the partnership agreement could not and did not disclaim the managing general partner’s duty of

care to the partnership, and the court held that there was evidence that the managing general partner breached its

statutory duty of care and caused actual damages. There was no evidence to support a disgorgement award,

however, because there was no evidence of the extent to which the managing general partner profited from excess

rent paid by the limited partnership to the subsidiary of the managing general partner.

Shannon Medical Center (“Shannon”) and Triad Holdings III, L.L.C. (“Triad”) were general partners in

a limited partnership that operated a regional cancer-treatment center (“RCTC”) on premises leased from Shannon’s

subsidiary, Shannon Real Estate Services, Inc. (“SRES”). Except for the limited partnership, Shannon and Triad

were competitors. Under the terms of the partnership agreement, the general partners managed and controlled the

limited partnership through a partnership committee (consisting of one representative of each of the two general

partners) and a managing general partner. Shannon served as the managing general partner, for which the limited

partnership paid Shannon management fees under a separate agreement.

For some time before the lawsuit, Shannon had been attempting to dissolve the limited partnership and take

over RCTC. The partnership agreement provided that the limited partnership would dissolve upon the earliest of

(a) December 31, 2038; (b) approval of 75% of the partnership units; (c) the partnership’s ceasing to operate a

radiotherapy facility; or (d) the occurrence of any other circumstance that, under the Texas Revised Limited

Partnership Act, would require dissolution. Shannon attempted to obtain the right to vote 75% of the partnership

units in favor of dissolution. There originally were three general partners and a varying number of limited partners,

but the third general partner left the limited partnership and sold its partnership units to Shannon and Triad. With

the addition of those units, Shannon owned 72.32% of the partnership units, Triad owned 24.35%, and three doctors

who were limited partners owned, respectively, 1.72%, 0.86%, and 0.75%. To reach the 75% threshold needed for

it to dissolve the limited partnership, Shannon proposed voting agreements with the limited partners, but Triad

blocked this move by entering into a voting agreement with one of the limited partners, thus giving Triad votes of

more than 26% of the partnership and preventing Shannon from forcing the partnership to dissolve without Triad’s

consent. By the time of trial, Shannon and Triad had purchased all of the limited partners’ partnership units so that

Shannon and Triad were the only partners of the partnership. Due to the voting agreements, Shannon had the right

to vote slightly less than 74% of the partnership units, and Triad had the right to vote slightly more than 26%.

Prior to expiration of the partnership’s lease, SRES, the partnership’s landlord, informed the partnership

that it would not renew the five-year lease upon its expiration in 2012. Three days before the lease expired, Bryan

Horner, Shannon’s chief executive officer and SRES’s president, sent the partnership and Triad a lease amendment

that he had executed on behalf of Shannon, as the Partnership’s managing partner, and SRES, as its president. The

amended lease almost doubled the partnership’s annual rent. A significant portion of the increase was purportedly

to reimburse SRES for vaults in the building that SRES represented were specialized tenant improvements it made

to the building for the partnership’s use. Contrary to these representations, however, Shannon knew that SRES had

not modified the building and that the original owner had included the vaults as part of the building’s original

construction in 1988.

Shannon sued for judicial dissolution of the limited partnership so that Shannon could take over RCTC’s

operations. Triad, individually and derivatively on behalf of the limited partnership, sued Shannon for breach of

common-law and statutory fiduciary duties in connection with the lease. Based on the jury verdict, the trial court

denied Shannon’s request for judicial dissolution and awarded the limited partnership actual damages in the amount

of excess rent that Shannon obligated the limited partnership to pay to SRES. The trial court also ordered Shannon

to pay the same amount to Triad as equitable disgorgement of profits. Shannon appealed.

Shannon first argued that the trial court erroneously charged the jury on breach of the statutory duty of care.

The jury charge read as follows:

Did Shannon comply with its duty of care to [Triad] and the Partnership?

As a partner in the Partnership, Shannon owes [Triad] and the Partnership a duty of care. Shannon

must discharge this duty and conduct the Partnership business (1) in good faith and (2) in a manner

that Shannon reasonably believes to be in the best interest of the Partnership.

To prove it complied with its duty of care, Shannon must show that, in conducting the

Partnership’s business, it acted with the care of an ordinarily prudent person in similar

circumstances. An error in judgment does not by itself constitute a breach of the duty of care.

A partner is presumed to have satisfied the duty of care if the partner acted on an informed basis,

in good faith, and in a manner that the partner reasonably believed to be in the best interest of the

Partnership.

A partner does not violate a duty or obligation merely because the partner’s conduct furthers the

partner’s own interests.

The jury answered “no” as to both Triad and the partnership. A “no” answer to this question was one of

several alternative predicates to a question asking the jury to determine the amount that would compensate the

partnership for its damages caused by the non-compliant conduct. The jury was instructed to consider only “[t]he

amount of any improperly charged rents, determined at the time and place of the payment.”

In the trial court and on appeal, Shannon argued that the duty-of-care question did “not adequately address

the partnership agreement and the alterations of the statutory duty of care.” In response to Shannon’s argument that

the duty of care was contractually disclaimed and that Shannon’s conduct was authorized, the court of appeals

stated as follows:

As a matter of law, however, the duty of care cannot be disclaimed. See id. § 152.002(b)(3). A

partner must conduct the partnership’s business “with the care an ordinarily prudent person would

exercise in similar circumstances.” Id. § 152.206(a). A partner additionally must discharge the

partner’s duties “in good faith” and “in a manner the partner reasonably believes to be in the best

interest of the partnership.” Id. § 152.204(b). Although the Partnership Agreement authorizes

contracts between the Partnership and a partner or a partner’s affiliate, a partner entering into such

a contract still must comply with the duty of care by acting in good faith and in a manner the

partner reasonably believes to be in the partnership’s best interest. The Partnership Agreement

could not change this and did not purport to do so.

The court said that the instructions accompanying the jury question on the statutory duty of care tracked

the statute and “additionally clarified that ‘[a] partner does not violate a duty or obligation merely because the

partner’s conduct furthers the partner’s own interest’ and that ‘a[n] error in judgment does not by itself constitute

a breach of the duty of care.’” The court stated that the jury could have found under these instructions that Shannon

complied with its duty of care by entering into a contract with the partnership that furthered Shannon’s interest so

long as Shannon acted in good faith and reasonably believed that the contract also was in the partnership’s best

interest. The court concluded that the charge correctly reflected both the governing law and the terms of the

partnership agreement.

The court next addressed Shannon’s argument that there was no evidence to support the jury’s finding that

Shannon failed to comply with its statutory duty of care. Because Shannon bore the burden of proof on this issue

and the jury returned a finding against Shannon, Shannon was required to demonstrate on appeal that the evidence

conclusively established that it complied with its statutory duty of care. The court stated in a footnote that Shannon

failed to preserve its objection that the breach-of-duty questions improperly shifted the burden to Shannon, but the

court went on to note that “under the common law, when a fiduciary enters into a transaction in which its

self-interest might conflict with the beneficiary’s interests, the fiduciary bears the burden to show compliance with

the duty of care.” The court expressed the view that the Texas Business Organizations Code makes this

burden-shifting rule applicable to alleged violations of statutory duties as well, citing Tex. Bus. Orgs. Code §

153.003 (providing that “the provisions of Chapter 152 governing partnerships that are not limited partnerships and

the rules of law and equity govern” limited partnerships in matters not addressed in Chapters 153, 151, and 154);

Tex. Bus. Orgs. Code § 152.003 (stating that “[t]he principles of law and equity and the other partnership

provisions supplement [Chapter 152] unless otherwise provided by [Chapter 152] or [Chapters 151 and 154].”);

Tex. Bus. Orgs. Code §§ 152.004, 153.002(b) (providing that “[t]he rule that a statute in derogation of the common

law is to be strictly construed does not apply” to Chapters 151-154). The court held that the evidence did not

conclusively show that Shannon complied with its duty of care concerning the lease amendment because the

evidence showed that Shannon knew that (1) the vaults at issue were not a modification to the building, and thus,

they were not a “tenant improvement”; (2) the original owner of the building, not SRES, paid to construct the

building, including the vaults; and (3) the vaults’ construction-costs were not part of the building’s fair-market

rental value. There thus was no basis for Shannon, as the partnership’s managing general partner, to obligate the

partnership to “reimburse” SRES for construction costs that Shannon knew had been paid by the building’s original

owner pursuant to the original owner’s agreement with the partnership.

Shannon relied on the fact that the partnership agreement permitted the partnership to contract with a

partner’s affiliate such as SRES, but the court pointed out that the agreement specified that contracts with affiliates

“must be competitive with the terms that the Partnership could obtain from third parties in an arm’s length

transaction.” There was evidence that the highest annual fair-market rental value for the property was $19.25/sq.

ft., and the record supported the finding that Shannon did not act “on an informed basis, in good faith, and in a

manner [it] reasonably believed to be in the [Partnership’s] best interest” when Shannon obligated the partnership

to pay SRES an additional $11.79/sq. ft. The court thus affirmed the portion of the judgment awarding the

partnership actual damages as found by the jury.

The court sustained Shannon’s challenge to the disgorgement award to Triad, however, because there was

no evidence that Shannon profited from the improperly charged rent as opposed to SRES. Texas law limits profit

disgorgement to the amount of a fiduciary’s profits obtained as a result of the fiduciary’s breach of duty. The

partnership paid the rent to its landlord SRES, and SRES was a separate entity distinct from Shannon, SRES’s sole

shareholder. According to the court, “[t]he excess rent was SRES’s profit, not Shannon’s, and Triad did not plead

or litigate any basis for ignoring the distinction between the two entities. The extent to which Shannon profited from

the excess rent paid to SRES was a question of fact on which there is no finding and no evidence.”

Triad complained that the actual damages Shannon was required to pay to the partnership would primarily

benefit Shannon as the majority owner of the partnership, but the court responded that “[t]he extent of Shannon’s

partnership interest is irrelevant, because a partnership is ‘an entity distinct from its partners’ and ‘[p]artnership

property is not property of the partners,’” citing Tex. Bus. Orgs. Code §§ 152.056, 152.101.

The court began its discussion of Shannon’s claim for judicial dissolution by stating that a district court

may order the winding up and termination of a domestic partnership on application by a partner “if the court

determines that it is not reasonably practicable to carry on the entity’s business in conformity with its governing

documents.” Shannon relied on a voting deadlock as grounds for judicial dissolution, but Shannon admitted that

it could “break the deadlock on its own because it holds the majority” of the partnership units. Additionally, the

court said that a partnership can carry on its business in accordance with its governing documents despite litigation

between partners, as had been done here. Thus, Shannon failed to establish that it was not “reasonably practicable

to carry on the Partnership’s business in conformity with its governing documents.”

Finally, the court remanded for further proceedings on attorney’s fees in view of the reversal of Triad’s

disgorgement award. The court first pointed out that, under the statute in effect at the time of trial, a trial court had

discretion to award the plaintiff reasonable attorneys’ fees and expenses if the plaintiff is wholly or partly

successful in prosecuting a derivative action. Tex. Bus. Orgs. Code § 153.405. In addition, the partnership

agreement provided that the prevailing partner in litigation between partners relating to the partnership “shall be

entitled to recover, in addition to all damages allowed by law and other relief, all court costs and reasonable

attorney’s fees incurred in connection therewith from the Partner or Partners not prevailing.” Based on these

provisions, the trial court ordered Shannon to pay Triad’s fees, expenses, and court costs incurred in pursuing the

individual and derivative claims. The trial court also conditionally awarded additional attorney’s fees in the event

of appeal. The court of appeals agreed with Shannon that reversal of the judgment required remand for a new trial

solely on the issues of attorneys’ fees, reasonable expenses, and costs, and the court instructed the trial court to

condition any award of appellate attorneys’ fees on a successful appeal.

Red Honor Ventures, Ltd. v. Edmonds (In re Edmonds), Case No. 14-40375-MXM-7, Adv. No. 14-4027,

2019 WL 4780921 (Bankr. N.D. Tex. Sept. 30, 2019).

The bankruptcy court concluded that Red Honor Ventures, Ltd. (the “Plaintiff”) proved that its liquidated

state-law claims against Robert Edmonds (the “Debtor”) were nondischargeable on several bases, including

§ 523(a)(4) for fraud or defalcation while acting in a fiduciary capacity.

Plaintiff was a Texas limited partnership formed to produce a museum guide for the National Scouting

Museum, to produce other original-content publications, and to publish and distribute books of third parties. Red

Honor Management, Inc. (“Management”) was the general partner of Plaintiff. The Debtor, Greg White, and David

Scott were the limited partners.

The Plaintiff asserted a number of claims against Debtor, including breach of fiduciary duty and conversion,

based on allegations that Debtor (a) never made his $10,000 capital contribution to Plaintiff, (b) misappropriated

Plaintiff’s funds for personal expenses, and (c) misappropriated a business opportunity of the Plaintiff. Debtor filed

for bankruptcy, and the bankruptcy court first determined that Plaintiff had established liquidated state-law claims

against Debtor in the amount of $101,378.75. The court then addressed whether the claims were dischargeable.

Section 523(a)(4) of the Bankruptcy Code does not allow the “discharge [of] an individual from any debt

... for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]” To bar discharge, the

debtor must have been acting in a fiduciary capacity at the time of the alleged defalcation. With respect to fiduciary

capacity, the court made the following observations:

While the scope of fiduciary duties is determined by federal law, federal courts, including

the Fifth Circuit, often look to state law to determine whether an obligation exists. For example,

in In re Harwood, [637 F.3d 615 (5th Cir. 2011),] the Fifth Circuit relied on Crenshaw v. Swenson

[611 S.W.2d 886 (Tex. Civ. App.—Austin 1980)] to hold that a managing partner of a

partnership’s general partner owed the underlying partners “the highest fiduciary duty recognized

in the law.” In accordance with state law, the court observed that the amount of control the director

had over the company, and the confidence and trust placed into the director’s hands in managing

the company’s operations, determined the scope of the director’s fiduciary duties. Where the

business relationship shows that the director has a requisite degree of control over the business,

and the director holds a considerable degree of trust from other partners, that director “act[s] in a

fiduciary capacity ... within the meaning of Section 523(a)(4).”

In this case, the Partnership Agreement provides that each partner (including limited

partners) agrees to act as a fiduciary of the Plaintiff with respect to matters of noncompetition,

confidentiality, and other business opportunities. The Partnership Agreement also provides that

“[e]ach Partner shall conduct the affairs of the Partnership in good faith toward the best interests

of the Partnership.”

In addition, the Debtor was President of Management, which was the Plaintiff’s general

partner. The Debtor was sole signatory for the Plaintiff’s bank accounts. Scott and White trusted

the Debtor to conduct the Plaintiff’s financial affairs. There can be no dispute that the Debtor owed

fiduciary duties to the Plaintiff and that the Debtor was acting in a fiduciary capacity.