In our previous post, Does Texas Hold a Partner Liable for a Partnership Debt, we discussed the Texas Supreme Court’s holding in American Star Energy and Minerals Corporation v. Stowers, [1] that a creditor cannot sue individual partners to satisfy a partnership debt until a judgment is passed against the partnership and goes unsatisfied for 90 days.
There is a continuation of this story. The partners argued that the court’s holding imposed “automatic” liability– essentially claiming that the court undermined their due process rights on grounds that they should have been named and served in the lawsuit against the partnership so that they would be on notice of their potential liability and have an opportunity to contest it.
The court rejected this argument and emphasized that the partners’ liability is not automatic because they have the same opportunity to contest their liability in the following action naming them personally, as they would have had been were they sued within the original limitations period. In addition, the court stated, the partners were generally on notice of their potential liability when they agreed to form and do business as a partnership. Essentially, they should have known when they formed the partnership that they could be held liable because the partnership form has the following built-in mechanisms to furnish further notice of any impending liability:
(1) when a partnership is sued, the litigation presumably becomes part of that business;
(2) each partner owes to the others a duty of care, so when a partnership is served with a lawsuit, that duty may require the partner served to tell the other partners; and
(3) partners may agree to provide notice of pending litigation to one another in their partnership agreement.
After all, the court said, individuals who choose the partnership form for their business do so knowing that their personal assets are on the line.
So, does Texas hold a partner liable for a partnership debt? Yes, provided that a judgment is rendered against the partnership and goes unsatisfied for 90 days. Is it fair? According to the court, yes because partners should have known that when they formed a general partnership, they could be liable. Although we mentioned in our previous blog series on general partnership, that is not always the case, which is one reason for business owners to educate themselves about a general partnership.
This post was part of a multi-part series on enforcing a partner’s liability for a partnership debt. You can find the other posts by searching our blogs. If you have any questions about the content of this blog or other business law issues not discussed here, please contact us.
If you have any suggestions for blog topics, please send them to [email protected].
[1] Am. Star Energy & Minerals Corp. v. Stowers, No. 13-0484 (Tex. Oct. 14, 2014). Unless otherwise specified, all references to the case are from this citation.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer zandikrat.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call 407-517-0064.
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