Last Friday, the Texas Supreme Court held in American Star Energy and Minerals Corp. v. Stowers that the statute of limitations on a claim against a partner to enforce his or her liability for a claim against the partnership does not begin to run until the creditor can proceed directly against partner’s assets, which is normally only after a judgment is taken against the partnership itself. This means that a partner could potentially be sued many years after the creditor’s claim against the partnership arises.
Partner liability is one of the defining characteristics of a partnership as a type of business organization. When a corporation defaults on a debt or is sued for wrongfully injuring someone, the corporation’s creditor normally can collect only against the corporation’s own assets, while the law shields shareholders from liability. With a general partnership, on the other hand, a partner may be held personally liable for the debts and other liabilities of the partnership.
Historically, this was because, at common law, a partnership had no separate legal existence from the partners. The partnership could not take action, incur debts, or hold property-instead, its actions, debts, and property were the actions, debts, and property of the partners themselves. This is called the “aggregate theory,” because the partnership was nothing but an aggregate of its members.
More recently, many states-whether through the legislature or the courts-have moved toward an “entity theory” of partnerships where the partnership has its own legal existence as an entity separate from the partners. Its actions are no longer the actions of the partnership, and the partnership can own its own property separate from the partners. Certain types of partnerships, such as limited partnerships (LPs) or limited liability partnerships (LLPs) can even shield the partners for liability for the partnership’s debts, though the state usually exacts a cost for this protection in the form of fees and taxes, reporting requirements, and other regulations.
Texas adopted the “entity theory” of partnerships when it adopted the Texas Revised Partnership Act (TRPA), which codified the powers and obligations of Texas partnerships. However, as with every other state, one fundamental aspect of the aggregate theory remains in place with respect to general partnerships-partners still have essentially unlimited personal liability for the partnership’s debts.
TRPA modified this principal in one important way, however-a creditor of a partnership must attempt to collect the debt out of the partnership’s assets before he or she can proceed against the partners personally. While a creditor can sue the partners at the same time that he or she sues the partnership, the creditor normally cannot proceed directly against the partners until and unless the creditor gets a judgment against the partnership and the judgment is not satisfied for 90 days. However, if the partner was not a defendant in the original lawsuit, the partner still has the right to contest the validity of the original debt. There are only a few exceptions to this rule, such as when the partnership has filed for bankruptcy or a court has found that the partnership is clearly insolvent.
This begged the question: Given that the statute of limitations for the underlying debt or claim would often run before a lawsuit against the partnership ends in a final judgment (especially if there is an appeal), is it necessary for a creditor to sue preemptively sue the partners directly before the statute of limitations expires to preserve the creditor’s ability to collect against the partners’ assets?
The Supreme Court held in American Star Energy and Minerals Corp. v. Stowersthat it is not. The statute of limitations does not begin to run until a cause of action “accrues,” meaning that facts come into existence that “authorize a claimant to seek a judicial remedy.” The Supreme Court held that because a creditor does not have the right to collect from partner’s assets until after a judgment against the partnership goes unsatisfied, the creditor’s cause of action against the partner does not “accrue” until that right matures.
The effect of this holding on members of a general partnership could be profound. Before, a partner might feel safe if he was not sued along with the partnership and the statute of limitations on the underlying claim expired. Now, even if the partner is not initially sued directly, the partner may still be sued up to two or four years (depending on the type of claim) after the lawsuit against the partnership is over. However, this also means that creditors do not need to sue partners directly at the outset just to protect their ability to collect against the partners later if it turns out that the partnership cannot satisfy the debt out of its own assets.
In essence, this means that a partner’s liability will not go away any time soon just because the partnership was not sued directly, and it would behoove a partner, or a partnership’s creditor, to have competent legal counsel at the outset of any business dispute. If you or someone you know is involved in abusiness dispute, contact an attorney at Abraham, Watkins, Nichols, Agosto, Aziz & Stogner by calling 713-396-3964 or toll free at 800-594-4884.