989 F.2d 779 (5th Cir. 1993), 91-1059, Matter of Bennett

Docket Nº:91-1059.
Citation:989 F.2d 779
Party Name:In the Matter of Archie BENNETT, Jr., Debtor, LSP INVESTMENT PARTNERSHIP, a Texas Partnership, Charles Sapp, Howard Boyd, R. Bruce LaBoon, Thomas Reidy, H. Michael Tyson, John C. Nabors, George Carameros, Willis Witt, Walter P. Zivley, Croshaw Investment Partnership (by its Agent, Fred E. Croshaw), W. Robert Brown, Obie & Co. (by its Agent, Frank A
Case Date:April 19, 1993
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 779

989 F.2d 779 (5th Cir. 1993)

In the Matter of Archie BENNETT, Jr., Debtor,

LSP INVESTMENT PARTNERSHIP, a Texas Partnership, Charles

Sapp, Howard Boyd, R. Bruce LaBoon, Thomas Reidy, H. Michael

Tyson, John C. Nabors, George Carameros, Willis Witt, Walter

P. Zivley, Croshaw Investment Partnership (by its Agent,

Fred E. Croshaw), W. Robert Brown, Obie & Co. (by its Agent,

Frank A. Liddell, Jr.), Carl Galloway, Don C. Quast, and Joe

E. McLemore, Appellants,

v.

Archie BENNETT, Jr., Appellee.

No. 91-1059.

United States Court of Appeals, Fifth Circuit

April 19, 1993

Rehearing and Rehearing En Banc Denied May 21, 1993.

Page 780

D. Mitchell McFarland, Cynthia L. Osborn, Paul L. Alpern, Liddell, Sapp, Zivley, Hill & LaBoon, Houston, TX, for appellants.

Lenard M. Parkins, Patrick L. Hughes, Sheinfeld, Maley & Kay, Houston, TX, for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Page 781

ON PETITION FOR REHEARING

(Opinion September 2, 5th Cir., 1992 970 F.2d 138.)

Before POLITZ, Chief Judge and HIGGINBOTHAM, Circuit Judges, and PRADO 1, District Judge.

PRADO, District Judge:

On the petition for rehearing filed by LSP Investment Partnership, we hereby withdraw our prior opinion, published as LSP Inv. Partnership v. Bennett (Matter of Bennett), 970 F.2d 138 (5th Cir.1992), and substitute the following opinion in its place.

This appeal arises out of an adversary proceeding in a bankruptcy case 2, in which the bankruptcy court entered an order granting a discharge to the Appellee, Archie Bennett, Jr., over the objection of the Appellants that certain of Mr. Bennett's debts were not dischargeable. In support of their argument, the Appellants rely solely on 11 U.S.C. § 523(a)(4), which provides that debts resulting from a defalcation by the debtor while acting in a fiduciary capacity are not dischargeable in bankruptcy. This Court must decide whether Bennett, as the managing partner of the managing partner of the limited partnership, owed a sufficient fiduciary duty to the limited partners to satisfy the strict requirements of 11 U.S.C. § 523(a)(4). This is a case of first impression in this Circuit.

Standard of Review

Although this case has already been reviewed on appeal by the district court, this Court reviews the bankruptcy court's findings as if this were an appeal from a trial in the district court. Killebrew v. Brewer, 888 F.2d 1516, 1519 (5th Cir.1989). Thus, the bankruptcy court's findings of fact are reviewed under the clearly erroneous standard, and its conclusions of law are reviewed de novo. Id.

Background

  1. Bankruptcy Court's Findings of Fact.

    The facts in this case are essentially undisputed. 3 In approximately March of 1980, Bennett and the Appellants formed a Texas limited partnership known as Mariner/Greenspoint, Ltd. ("MG"). The Appellants in this case are and were at all relevant times, limited partners of MG. The sole general partner of MG was another limited partnership, known as Mariner Interest No. 20, Ltd. ("No. 20"). The sole general partner of No. 20 was the Appellee, Archie Bennett, Jr.

    Under the terms of the MG partnership agreement, the general partner, No. 20, was charged with management of the partnership and had full, exclusive and complete authority and discretion to manage, control and make all decisions affecting the purposes of the partnership and to take any action required to effectuate the purpose of the partnership. Bennett, as the sole general partner of No. 20, was the only individual with the power or authority to direct the affairs of No. 20 and MG, and was prohibited by the MG partnership agreement from voluntarily withdrawing as the general partner of No. 20.

    The purpose of the MG partnership was to construct and operate a Marriott hotel near the Greenspoint Mall in Houston, Texas. The partnership obtained $22 million, in capital contributions and loans, to cover the cost of constructing the hotel. The MG partnership agreement required the general partner to contribute cash, as necessary, for the costs of constructing, equipping and furnishing the hotel, to the extent such

    Page 782

    costs exceeded the $22 million previously raised. As an incentive, the agreement also provided that the general partner was eligible to receive a cash distribution of up to $4 million if the project was completed for less than the projected $22 million. However, prior to taking any distribution for savings in the construction of the hotel, the general partner was required both to construct the hotel and to provide all equipment necessary so that it could operate as a "first-class hotel".

    At some point early on in the business venture, Bennett retained a corporation, known as Mariner Corporation, to perform his duties as the general partner of No. 20 and, in turn, its duties as general partner of MG. Mariner Corporation was 100% owned by Bennett. The officers and employees of Mariner Corporation acted on Bennett's behalf in performing their duties and were aware that, if the project was completed under budget, the savings would be paid directly to Bennett.

    Mariner Corporation obtained bids for the construction of the hotel from a number of general contractors. All of the bids initially submitted were at least $1 million over the budgeted amount of $22 million. After these bids were received, Mariner Corporation entered into negotiations with one of the contractors, Eaves Construction. Subsequently, Eaves dropped its bid price by $1 million and was awarded the contract. Eaves was not able to obtain a bond on the project, however, due to its lack of financial strength and lack of a sufficient track record on large projects. Bennett told Eaves that it could have the job without a bond, if it reduced its general contractor's fee by one-half. Eaves agreed and reduced its fee by an additional $250,000.

    The hotel was completed on time, and opened in January of 1981. At that time Bennett made a $1 million distribution to himself, for completing the project for less than the budgeted $22 million.

    Subsequently, several problems with the hotel came to light. First, in approximately April of 1981, mildew began to occur in the guest rooms of the hotel. This mildew was evidently caused by a "negative pressure" problem, which in turn was caused by the design of the heating, ventilation, and air conditioning (HVAC) system in the hotel. 4 As a result of the mildew problem, virtually all of the guest rooms in the hotel had to be revinyled and resheetrocked twice, during 1981 and 1982. 5

    The bankruptcy court found that the mildew problem at the hotel was a continuous construction problem that the general partner had an obligation to fix and pay for under the terms of the MG partnership agreement. The court found that the first round of repairs was performed at the expense of the general contractor. The second round, however, was charged, by the general partner, to the partnership earnings. The limited partners' share of this cost was $72,000.

    The bankruptcy court also reviewed numerous equipment leases that were entered into by the general partner for the purpose of providing various types of equipment to the hotel. The court found that, under the partnership agreement, the general partner had an obligation to equip and furnish the hotel with the $22 million budgeted amount. The court found, with respect to some but not all of these leases, that the general partner had charged them to the partnership, instead of paying for them out of the construction budget. The court also found that Bennett had failed to properly disclose these leases to the limited partners, or to obtain their approval for them. The court determined that the amount wrongfully charged to the limited partners for these equipment leases was $832,204.40.

    Page 783

  2. Bankruptcy Court's Conclusions of Law.

    The bankruptcy court concluded that the misapplication of partnership funds to pay for the mildew repairs and the equipment leases described above were the result of defalcations by the general partner of MG in the total amount of $904,204.40. The court also found that No. 20, as the sole general partner of MG, was a fiduciary to the limited partners of MG, for purposes of section 523(a)(4). The bankruptcy court noted that while Texas courts have not extended the partnership relationship generally to encompass the type of fiduciary duty envisioned by section 523(a)(4), an exception exists for the managing partner of a partnership, who owes to his co-partners, "one of the highest fiduciary duties recognized in law." (Citing Huffington v. Upchurch, 532 S.W.2d 576 (Tex.1976); Crenshaw v. Swenson, 611 S.W.2d 886 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.)).

    The bankruptcy court also found, however, that Bennett, as the general partner of the general partner, did not owe a fiduciary duty to the limited partners of MG. The bankruptcy court stated:

    No. 20 was the fiduciary of MG and only it had an express, technical, preexisting trust relationship with MG, even though Bennett was the managing partner of No. 20.

    The bankruptcy court found that Bennett's individual liability to the limited partners of MG came into effect only by reason of the breach by No. 20, and pursuant to the Uniform Partnership Act (UPA) which provides, "[a]ll partners are liable jointly and severally for all debts, and obligations of the partnership...." Tex.Rev.Civ.Stat.Ann. art. 6132b, § 15 (Vernon 1979). The court reasoned that while the UPA made Bennett liable for No. 20's partnership "obligations", it did not create a fiduciary relationship between Bennett and the limited partners of MG. Accordingly, the bankruptcy court granted a discharge to Bennett of all debts, including those which it...

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