Delaney v. Fidelity Lease Limited

517 S.W.2d 420, 1974 Tex. App. LEXIS 2940

Opinions

OPINION

WARD, Justice.

This is a suit by a landlord for damages for breach of a lease contract with the defendants being the lessee, Fidelity Lease Limited, a limited partnership, Interlease Corporation, which is a corporation and the only general partner of Fidelity Lease Limited, and the twenty-two limited partners of Fidelity Lease Limited. The suit also seeks to hold certain of the limited partners personally liable as general partners. The trial Court granted summary judgment in favor of the limited partners in a severed cause in which all limited partners appear only as to their personal liability. The appeal concerns the question whether a limited partner in a limited partnership becomes liable as a general partner when he also participates as an active officer, director and shareholder of a corporation which is the sole general partner of the limited partnership. We affirm the judgment of the trial Court which held that the limited partner did not become liable as a general partner solely because of his participating in the affairs of the corporation as an officer, director or stockholder.

Fidelity Lease Limited is a limited partnership organized under the Statutes of the State of Texas. The general partner within Fidelity Lease Limited is Interlease Corporation, a Texas corporation. Among the limited partners of Fidelity Lease Lim ited were W. S. Crombie, Jr., William Sanders and Alan Kahn, who were also respectively the active President, Vice-President and Treasurer, as well as directors and stockholders of Interlease Corporation, the general partner of the limited partnership. In February of 1969, the plaintiffs, as lessor, entered' into the lease with “FIDELITY LEASE, LTD., a limited partnership acting by and through INTERLEASE CORPORATION, General Partner, * * * hereinafter called ‘LESSEE,’ * * The lease was executed by the lessee, Fidelity Lease, Ltd., by the General Partner, Interlease Corporation, by W. S. Crombie, Jr., President. The acknowledgment to the lease is by W. S. Crombie, Jr., as President of Interlease Corporation, who acknowledged to the notary that the same was the act of said Interlease Corporation and that he executed the same as the act of the corporation and in the capacity therein stated.

The lessors proceeded to erect on the premises a fast food service restaurant as called for by the lease and it is the plaintiffs’ contention that thereafter Fidelity Lease Limited failed to take possession of the premises as required and has paid none of the rental thereon. The suit for the breach of the lease joins as defendants the limited partnership of Fidelity Lease Limited, its general partner Interlease Corporation, and all of its limited partners among whom appear W. S. Crombie, Jr., Alan Kahn and William Sanders. Personal liability at least to these three individuals is asserted under Art. 6132a, Sec. 8, Tex.Rev.Civ.Stat.Ann., and it is alleged that these three limited partners have become liable as general partners because they had participated in the management and control of the business of the limited partnership.

Both plaintiffs and the defendants filed motions for summary judgment. Summary judgment proof consisted of certified copies of the Articles of Incorporation of Interlease Corporation and of the Certificate of Formation of the limited partnership, Fidelity Lease, Ltd., the depositions of W. S. Crombie, Jr., Wm. D. Sanders and Alan R. Kahn, and affidavits of many of the limited partners. It was upon the plaintiffs’ own motion that the cause of action was severed insofar as the limited partners appeared individually as defendants in their personal capacities and in their personal liabilities. The defendants’ motion for partial summary judgment was then granted in favor of the limited partners of Fidelity Lease Limited, so far as the limited partners appear in their personal capacities and liabilities and they were ordered dismissed. The plaintiffs’ motion for partial summary judgment was also overruled. It is from this order of the trial Court that the plaintiffs now appeal. Regardless of how novel the granting of the severance was in this case, it was within the judicial power of the Court to determine that the cause was severable and to sever the same. The judgment which fully adjudicated this one severed cause was final, became appealable, and is properly before us. Pierce v. Reynolds, 160 Tex. 198, 329 S.W.2d 76 (1959), at 78.

By moving for the severance and by narrowing the point in their brief, the Appellants have sought an immediate answer to the inquiry which may well determine the entire controversy, i. e., individual liability of the .three named limited partners. This one point presented to us on this appeal is to the effect that the trial Court erred in granting the motion for summary judgment “because there exists a genuine material issue of mixed fact and law as to whether the limited partners W. S. Crombie, Jr., William Sanders and Alan Kahn participated in the management and control of the business of Fidelity Lease Limited to the extent necessary to impose personal liability upon them, and the ruling of the trial court constituted an incorrect conclusion of law to the effect that such participation in the management and control of the business of the limited partnership by Appellees in their respective capacities within the corporate general partner does not subject them individually to liabil ity as general partners pursuant to Article 6132a, Sec. 8 [Vernon’s Ann.Civ.St.] * * An examination of the entire record reveals that the trial Court granted the summary judgment only upon the matter contained in the Appellants’ one point. As to the nineteen other limited partners who were also dismissed in the severed cause of action no complaint is now made. Judgment in that severed cause of action as to those nineteen individuals is now affirmed.

It is permissible in this State to form a limited partnership where a corporation is the only general partner, provided that the purpose to be carried out by the limited partnership is lawful. Port Arthur Trust Company v. Muldrow, 155 Tex. 612, 291 S.W.2d 312 (1956); 19 Hamilton, Texas Business Organizations § 212, p. 196. While the Port Arthur Trust Company case had before it only the question of the corporation entering the limited partnership as a limited partner, the Court in no uncertain language decided that a corporation was a “person” within the meaning of Art. 6132a and placed no restriction as to a corporation entering the limited partnership as a general partner. There is no logical reason why it can not, and since that opinion the Secretary of State has accepted the corporate general partner in the limited partnership. 24 Sw.L.J. 285. The Texas Uniform Limited Partnership Act, Art. 6132a, Tex.Rev.Civ.Stat.Ann., provides for the formation and operation of limited partnerships. Generally, the limited partnership is a business form intermediate between a partnership and a corporation. It consists of general partners who have all the rights, duties and obligations of partners in an ordinary partnership and limited partners whose positions are somewhat akin to shareholders in a corporation. The general partners conduct the business and are personally liable to creditors. The liability of limited partners on the partnership obligations is limited to the amount of their contributions. They do not participate in management of the limited partnership on pain of losing their limited liability. 19 Hamilton, Texas Business Organizations § 211. It is the extent of the reach of the prohibition contained in the Statute that determines this appeal. Art. 6132a, Sec. 8, states “A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.” If the language of this Statute is all controlling in importance then the Appellants are correct and the three questioned limited partners have become personally liable to the creditors of the limited partnership.

On the other hand, if this dispute is approached from our basic notions of corporations, then no liability exists. In corporate law, it is fundamental that the shareholder, officer or director is ordinarily protected from personal liability arising from the activities of the corporation. “This insulation from personal liability is said to be the natural consequence of the incorporation process, and is supported by the theory or ‘fiction’ that incorporation results in the creation of an ‘entity’ separate and distinct from the individual shareholders.” Sutton v. Reagan & Gee, 405 S.W.2d 828 (Tex.Civ.App.—San Antonio 1966, writ ref’d n. r. e.). From this corporate viewpoint, limited liability is the rule rather than the exception. It is only in the exceptional situation where a court will “pierce the corporate veil” or where some of the other well-known adjectives are used to describe the process calling for the creation of personal liability. Some six exceptions are described in Pacific American Gasoline Co. of Texas v. Miller, 76 S.W.2d 833 (Tex.Civ.App.—Amarillo 1934, writ ref’d), and one of the exceptions might be urged here, i. e., the corporate structure is being used as a vehicle for circumventing the terms of Art. 6132a, Sec. 8.

Professor Hamilton, in his work at § 234, makes an analysis of the problem and he argues strongly against the creation of any personal liability where the facts are similar to those that are now before us. Where there has been a voluntary dealing between businessmen which has resulted in the execution of a contract, the plaintiff has dealt in some way with the corporation and should be aware that the corporation lacks substance. In the absence of some sort of deception, the creditor more or less assumes the risk of loss when he deals with the corporate “shell.” If he were concerned, he should have insisted that some solvent third person guarantee the performance by the corporation.

“In contract cases the separate existence of a minimally capitalized corporation should usually be recognized. * * * if a person knowingly deals with an under-capitalized corporation he is, in effect, assuming the risk of loss if the transaction does not work out. If the person does not wish to take this risk, he should insist that the shareholders themselves enter into the contract or personally guarantee performance by the corporation. Indeed, transactions are often entered into in the name of a shell corporatioñ precisely because the shareholders do not wish to assume personal liability. * * * When the parties themselves are apportioning the risk of loss through their relative bargaining power, there is no reason for a court to disturb this allocation of risk.” Hamilton, supra, pp. 228-229. The leading Texas Supreme Court case that reflects this attitude is Bell Oil & Gas Company v. Allied Chemical Corporation, 431 S.W.2d 336 (Tex.1968).

As far as we or the parties have determined the point before us is of first impression. Certain cases in other jurisdictions have passed on statutes identical to our § 8 of our Limited Partnership Act. The case of Holzman v. DeEscamilla, 86 Cal.App.2d 858, 195 P.2d 833 (4th Dist, 1948), is the leading case where a court imposed general liability on limited partners because of their participation in the control of the business of truck farming. The limited partners directed which crops were to be planted, signed the partnership checks without the consent of the general partner, required the general partner to resign as manager, and secured his successor. The Court held that the activities clearly showed that they took part in the control of the business and became liable as general partners.

In certain other cases, the courts have refused to impose general liability on the limited partners merely because they had an interest and did participate to a limited extent in the affairs of the partnership. In Silvola v. Rowlett, 129 Colo. 522, 272 P.2d 287 (1954), the limited partner, as foreman in the repair shop of an automobile sales company, merely by making suggestions and expressing opinions as to the advisability of transactions, did not become liable as a general partner. In Rathke v. Griffith, 36 Wash.2d 394, 218 P.2d 757 (1950), the limited partner was named to the board of directors of the limited partnership. He never functioned as a director and because of his lack of actual participation and control was held not liable as a general partner. Two other cases have held that the lack of actual participation in the management and control did not create any general liability regardless of certain limited activities in the partnership. Plasteel Products Corporation v. Helman, 271 F.2d 354 (1st Cir.1950); Grainger v. Antoyan, 48 Cal.2d 805, 313 P.2d 848 (1957). One case does touch somewhat upon the problem. That is, Bergeson v. Life Insurance Corporation of America, 170 F.Supp. 150 (D.Utah 1958), modified 265 F.2d 227 (10th Cir.1959), cert. denied, 360 U.S. 932, 79 S.Ct. 1452, 3 L.Ed.2d 1545. There the limited partnership was formed for the sole purpose of organizing and owning a corporation and the limited partners became directors of the corporation and therefore participated in the management. One alternative reason advanced by the trial Court for holding general liability was the terms of the statute on control. That case can well be limited to its facts as there was considerable evidence of fraudulent conduct on the part of the participants in the business. Regardless, the point was not passed on by the Circuit Court of Appeals.

These cases do not attempt to state a general standard for determining when the control test is met and are limited to their specific facts. One writer points out that no satisfactory standard of “control” has ever been enunciated though the Uniform Limited Partnership Act is over fifty years old. He suggests that the Act itself is due for an overhaul which would clarify the meaning of the control test. Alan Feldt, 82 Harvard L.Rev. 1471.

Admittedly, the decision in the case before us is not free from doubt. The logical reason to hold a limited partner to general liability under the control prohibition of the Statute is to prevent third parties from mistakenly assuming that the limited partner is a general partner and to rely on his general liability. However, it is hard to believe that a creditor would be deceived where he knowingly deals with a general partner which is a corporation. That in itself is a creature specifically devised to limit liability. The fact that certain limited partners are stockholders, directors or officers of the corporation is beside the point where the creditor is not deceived. The evidence is that the three limited partners did not control Fidelity Lease Limited. It was controlled by its sole general partner, the corporate entity of Inter-lease Corporation.

While we affirm this case upon the affidavits and depositions of interested parties, we feel their evidence is clear, direct and positive and that there are no circumstances in evidence tending to discredit or impeach them. The Appellants have not attempted in any way to controvert them. Great American Reserve Insurance Company v. San Antonio Plumbing Supply Company, 391 S.W.2d 41 (Tex.1965).

The affidavits of the limited partners do contain conclusions, but no complaint is made in the Appellants’ point or anywhere in their brief as to any such defect in the summary judgment proof. That must be done either by raising the complaint in a separate point or as a ground of argument under a general point. Malooly Brothers, Inc. v. Napier, 461 S.W.2d 119 (Tex.1970). The dissent urges the use of conclusions as one base for reversal. Since the Appellants fail to complain, we should not advance the principle of fundamental error to protect them for their unassigned error, which is in no way fundamental error. McCauley v. Consolidated Underwriters, 157 Tex. 475, 304 S.W.2d 265 (1957).

The trial Court is affirmed.