Partner Liability: Out of the Woods?

Originally published by Drew York.

Debbett Runnup Partnership, a Texas general partnership, was sued by Widgets R Us in 2010 for failing to pay Widgets R Us invoices. Judgment was granted to Widgets in 2012 against Debbett Runnup for $300,000. After chasing Debbett for over three years, Widgets’ lawyer Plinn T. Agreshun realizes that Debbett is penniless. Knowing that partners are also responsible for partnership debts, Agreshun sues Cash Kau, a multimillionaire Debbett partner. Cash’s army of lawyers argue that the Widgets R Us lawsuit is too late and barred by the statute of limitations. Can Widgets R Us collect from Cash Kau almost five years after the invoices were sent?

Partners Are Liable for the Partnership’s Obligations

Yes. Texas law generally makes a partner jointly and severally liable for all of the obligations of the general partnership. However, Widgets R Us must sue and get a judgment against Cash Kau because a judgment against a partnership is not, by itself, a judgment against its partner. To do so, Widgets R Us could have named Cash Kau as a defendant in the lawsuit against the partnership, or in a separate lawsuit. Widgets R Us must get a judgment against the partnership, and the judgment must go unsatisfied for 90 days before Widgets R Us may seek to satisfy from Cash Kau.

A Creditor’s Claim Against a Partner Accrues After Judgment Against the Partnership

But what about the Texas statute of limitations of four years? Widgets R Us slides under the wire. The Texas Supreme Court recently considered whether a creditor’s claim against the partner accrues (i.e., starts the limitations clock) at the time the partnership breached, or on the date the creditor obtained the judgment against the partnership. The court held that the limitations clock does not start running against the partner until the creditor can actually proceed against the partner’s assets, which is 90 days after the judgment, or 2012. The court concluded that Texas partnership law does not require a creditor to sue a partner in the same suit as the partnership, and the creditor could not proceed against the partner until after the 90 day period.

Tilting the Scales in Your Favor

Luckily for Widgets R Us the Texas Supreme Court sided with its interpretation of the statute of limitations. Claimants against general partnerships are better served by naming all of the partnership’s partners as defendants in the collection lawsuit. Doing so also leverages settlement negotiations because the partners probably want to avoid having a judgment rendered against them personally. Additionally, the partners must be careful not to transfer or dissipate assets because those could be considered fraudulent conveyances.

Finally, if you are a partner in a general partnership, strongly consider converting to a limited liability partnership, a limited liability company or a corporation. A valuable aspect of any entity is the shield it offers owners of these entities from personal liability for the entity’s obligations and liabilities.

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