Sunday, April 26, 2015

Claims against a general partner for partnership debts do not accrue until after the judgment against the partnership

The Texas Supreme Court recently held that Texas partnership law does not require a plaintiff, seeking to enforce a partner’s liability for partnership debt, to bring a claim against the partner within the limitations period on the underlying claim against the partnership. Am. Star Energy and Minerals Corp., v. Stowers, --- S.W. 3d ----, 2015 Tex. LEXIS 151 (Tex. Feb. 27, 2015)

The four respondents (collectively the “Partners”) formed a general partnership (the “Partnership”) in Texas. In 1980, American Star Energy and Minerals Corporation (the “Creditor”) entered into an agreement with the Partnership to manage certain oil and gas properties. In the early 1990’s, the Creditor sued the Partnership for breach of that agreement and eventually prevailed on its claims. After various appeals, the Creditor’s judgment against the Partnership became final in 2009. 

In June 2010, the Creditor brought an action against the individual Partners to satisfy the debts the Partnership owed to the Creditor. In response, the Partners asserted that the action was barred by the four-year statute of limitations that applies to the underlying breach-of-contract claim. The trial court agreed and granted summary judgment in favor of the Partners.

The Texas Supreme Court analyzed whether the statute of limitations barred the Creditor’s cause of action against the Partners, which depended on when the action against the individual Partners accrued. General partnerships are entities distinct from the partners, but partners are jointly and severally liable for the partnership’s obligations. TEX. BUS. ORGS. CODE §§ 152.056, 152.101. A creditor seeking to hold a partner liable may either join the partner in the suit against the partnership or file a separate lawsuit against the partner. However, the creditor cannot obtain a judgment against the partner assets until at least 90 days after the judgment has been rendered against the partnership. Id. at §152.305.

The Supreme Court was left to establish a rule of accrual for partner liability suits. Generally, a cause of action accrues “when facts come into existence [that] authorize a claimant to seek a judicial remedy.” Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W. 3d 194,202 (Tex. 2011). When the Legislature employs the term “accrues” without an accompanying definition, the courts must determine what cause of action accrues and thus when the statutes of limitations commences to run. Moreno v. Sterling Drug, Inc., 787 S.W.2d 348, 351-52, 354 (Tex. 1990). Here, a creditor cannot obtain a judgment against a partner until 90 days after the judgment is issued against the partnership. Thus, the Court found that the Creditor’s claims did not accrue until the 90-day period after the judgment against the Partnership had expired. Summary judgment in favor of the Partners was reversed and remanded.

This case has benefits and drawbacks for partners in general partnerships. On the one hand, it extends the period in which creditors of the partnership may seek to enforce the judgment against the partners. Given that civil lawsuits can take years to reach judgment, this de facto extension of the limitations period could be significant. On the other hand, this ruling removes some incentive for the creditor to join the partners to the original lawsuit with the general partnership. The creditor may obtain its judgment against the partnership before deciding whether to incur the additional time and expense of seeking judgments against individual partners. 

Friday, April 10, 2015

Texas Supreme Court Allows General Contractor to Compel Arbitration Against Developer Despite Asserting Counterclaims and Participating in Discovery

In a recent decision involving a dispute over a construction project, the Texas Supreme Court held that the developer had to arbitrate its claims against the general contractor, even though the general contractor filed counterclaims and responded to discovery requests. G.T. Leach, LLC v. Sapphire V.P., LP, 2015 Tex. LEXIS 273 (Tex. 2015).

Sapphire V.P., LP (“Developer”) contracted with G.T. Leach, LLC (“General Contractor”) for the development of luxury condominiums (the “Project”) on South Padre Island. In July 2008, Hurricane Dolly tore through the island causing significant damage to the Project. Developer filed suit against its insurance brokers, alleging claims for negligence and breach of contract. Developer alleged that, eight days before the hurricane hit, the brokers allowed a builder’s risk insurance policy to expire and be replaced by a permanent insurance policy, even though construction of the Project had not yet been completed. More than two years later, the brokers designated several other responsible third parties. These parties included the project general contractor, General Contractor, two subcontractors, and an engineering contractor. Developer amended its petition to name these parties and defendants, also alleging their negligence and contractual breaches resulted in construction defects that caused the Project to sustain water damage that resulting in uncovered losses.

After pursuing pretrial motions and participating in discovery, General Contractor moved to compel arbitration and stay the litigation. General Contractor relied on an arbitration agreement in its general contract with Developer. The brokers, subcontractors, and engineer (collectively, the “Other Defendants”) also moved to compel arbitration, relying on the general contract (even though they never signed that contract) and their own subcontracts with General Contractor.

The trial court denied all of the motions. The defendants pursued an interlocutory appeal, the court of appeals affirmed, and defendants subsequently petitioned the Supreme Court for review.

The Texas Supreme Court took up several issues. First, the Court analyzed whether General Contractor could compel arbitration. Specifically, the Court examined whether General Contractor had waived its right to compel arbitration by participating in pretrial proceedings and discovery. In Texas, a party may waive its right to enforce an arbitration agreement implicitly, though conduct inconsistent with an intent to enforce the right. See Perry Homes v. Cull, 258 S.W.3d 580, 590-91, 594 (Tex. 2008); Moayedi v. Interstate 35/Chisam Rd., LP, 438 S.W. 3d 1, 6 (Tex. 2014). A party asserting implied waiver as a defense to arbitration has the burden to prove that the other party “substantially invoke the judicial process,” which is conduct inconsistent with a claimed right to compel arbitration, and the inconsistent conduct caused the non movant detriment or prejudice. Perry Homes, 258 S.W. 3d at 593-94. Whether a party has “substantially invoked the judicial process depends on the totality of the circumstances.” Id. at 589-90. Relevant factors include: (1) how long the party waited to move to compel arbitration; (2) how much discovery it conducted before moving to compel arbitration; and (3) whether the party asserted affirmative claims for relief in court. Id. at 590-91. “Merely taking part in litigation” was not enough to rise to the level of substantially invoking the judicial process.

Here, General Contractor’s counterclaims were compulsory and purely defensive in nature–that is, “use it or lose it” type claims. Moreover, General Contractor never sought judgments on the merits of the case. General Contractor sought to transfer venue, but venue challenges do not relate to the merits of the case. See Richmont Holdings v. Superior Recharge Sys., LLC, 2014 Tex. LEXIS 1211 (Tex. 2014). In addition, General Contractor filed motions for continuance, to quash depositions, and to designate responsible third parties (a procedure available to tort defendants in Texas that does not involve adding any parties). The Court found these actions were defensive rather than offensive in nature. A party’s litigation conduct aimed at defending itself and minimizing its litigation expenses, rather than taking advantage of the judicial form, does not amount to substantial invocation of the judicial process. Finally, Developer complained of an excessive delay in seeking arbitration. However, General Contractor moved to compel arbitration three months after it had been joined. The Court found that three months, while lengthy, was not an unreasonable delay amounting to waiver.

The Court then examined whether Developer proved it suffered unfair prejudice as a result of General Contractor’s litigation conduct. In this context, detriment or prejudice referred to an “inherent unfairness caused by a party’s attempt to have it both ways by switching between litigation and arbitration to its own advantage.” In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 635 (Tex. 2008). Here, General Contractor did not serve a single request for production, interrogatory, or deposition notice, therefore not giving it any more of an advantage that it otherwise would have obtained by switching back and forth. In summary, the Court held that General Contractor did not implicitly waive its right to compel arbitration.

The Court analyzed several other interesting issues in the case, including whether the issue of whether the General Contractor’s claims were timely under the language of the arbitration provision had to be resolved by arbitration (it did), and whether subcontractors and other parties who had not signed the arbitration agreement could compel arbitration (a complex issue, but they could not in this case).

Thanks to Ian Fullington at Griffith Davison & Shurtleff, P.C. for his assistance with preparing this post.

Tuesday, April 7, 2015

Join Us for a Breakfast Presentation on Updates to the Model Jury Instructions for Construction Litigation at the Forum's Annual Meeting

Please join Divisions 10 and 12 and the Construction Litigation Committee of the ABA Section of Litigation for a breakfast presentation on "Updates to the Model Jury Instructions for Construction Litigation: Charging to a Successful Verdict" at the Forum on Construction Law's Annual Meeting on Saturday, April 18, 2015, at 8:00 a.m. 

Join us to hear from Melissa Beutler, Vice President and General Counsel of Big-D Construction, Forum Division 10 Steering Committee Green Building Chair and ABA Section of Litigation Construction Litigation Committee Member. She is the lead editor of the soon-to-be-published Second Edition of the ABA Section of Litigation Construction Litigation Committee's book on model jury instructions for construction litigation. The First Edition quickly became a go-to resource for many construction litigators when it was originally released. Melissa will discuss key updates to the model instructions, and explain the book's use as a resource on jury instructions as well as a way to gain quick insight on the elements of key legal issues faced in the construction industry.