In our previous post, Can a Partner Be Held Liable for a Partnership Debt in Texas?, 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 another part of the story. The partners argued that the court’s holding imposed “automatic” liability– basically 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, however, rejected this argument, emphasizing that the partners’ liability is not automatic because they have the same opportunity to contest their liability in the subsequent action naming them personally, as they would have had were they sued within the underlying limitations period. Moreover, the court said, the partners were generally on notice of their potential liability when they agreed to form and do business as a partnership–basically, they should have known when they formed the partnership that they could be held liable–and that the partnership form has the following built-in mechanisms to provide 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 apprise the other partners; and
(3) partners can 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 as the vehicle for their business do so knowing that their personal assets are on the line.
So, can an individual partner be held liable for a partnership debt under Texas law? Yes, provided that a judgment is rendered against the partnership and goes unsatisfied for 90 days. Is it unfair? According to the court, no, partners should have known that when they formed a general partnership—although, as we mentioned in our previous blog series on general partnership, that is not always the case, which is all the more reason for business owners to inform themselves about 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 at www.mcbrideattorneys.com. If you have any questions about the content of this blog or other business law issues not discussed here, please contact us.
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This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
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[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.