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. 

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