Delaney v. Fidelity Lease Ltd.

• Decision Date: 27 November 1974
• Docket Number: No. 6370,6370
• Citation: 517 S.W.2d 420
• Parties: Neil G. DELANEY, Jr., et al., Appellants, v. FIDELITY LEASE LIMITED et al., Appellees.
• Court: Texas Court of Appeals

Page 420

517 S.W.2d 420

Neil G. DELANEY, Jr., et al., Appellants, v. FIDELITY LEASE LIMITED et al., Appellees.

No. 6370.

Court of Civil Appeals of Texas,

El Paso.

Nov. 27, 1974.

Rehearing Denied Jan. 8, 1975.

Webb & Stokes, Tom Webb, Gray, Aaron & Dorsey, Donald P. Dorsey, San Angelo, Kronzer, Abraham & Watkins, W. James Kronzer, Houston, for appellants.

Edwards, Belk, Hunter & Kerr, Frank H. Hunter, Kemp, Smith, White, Duncan & Hammond, Joe Lea, Jr., Jim Curtis, El Paso, for appellees.

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 Limited 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 liability 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...