Last week the Texas Supreme Court confirmed that a cause of action does not accrue against business partners for partnership debt unless and until the partnership fails to satisfy a judgment against it. In other words, the partnership itself really is a separate legal entity and individual partners cannot immediately be called upon to pay or perform in lieu of the partnership.
The case before the court involved an oil and gas investment dispute in which the plaintiff had litigated for about 15 years and won a breach of contract judgment against the partnership. The partnership, however, was undercapitalized and lacked the assets to satisfy the judgment. Two years later, the plaintiff sued the individual partners to pay the judgment. The trial court ruled that the suit against the partners was barred by the four-year statute of limitations for the partnership’s underlying breach of contract and a split appellate court affirmed.
The Texas Supreme Court disagreed. The starting point for the Court’s analysis was the simple proposition that in Texas a partnership is a legal entity distinct from its partners that can enter contracts in its own name, sue and be sued in its own name, and own property. Importantly, the partners’ derivative liability only arises once the partnership’s liability is established. “Considering the derivative and contingent nature of that liability, the only obligation for which a partner is really responsible is to make good on the judgment against the partnership, and generally only after the partnership fails to do so.” Therefore, because it was the partnership that was a party to and breached the contract and the partners are separate legal entities, they committed no wrongful act and caused no legal injury until the partnership failed to satisfy the judgment against it.
If a partnership obligates itself to pay money or perform services, the individual partners cannot be immediately sued to satisfy those commitments. Instead, the aggrieved party must first obtain a judgment as against the partnership and give the partnership 90 days to satisfy the judgment. If it fails to do so, then the aggrieved party may seek satisfaction from the individual partners.
What this also means is that the limitations period for the underlying claim against the partnership does not apply to the claims that may arise as to the partners if the partnership cannot ultimately satisfy a judgment against it. According to the Texas Supreme Court, “the limitations period against a partner generally does not commence until after final judgment against the partnership is entered.” So individual partners need not be included in the lawsuit against the partnership and face exposure to liability beyond the otherwise applicable statute of limitations relating to the claims against the partnership.
American Star Energy & Minerals Corp. v. Stowers, Case No. 13-0484 (Feb. 27, 2015) (Tex.)