Delaney v. Fidelity Lease Limited

• Decision Date: 23 July 1975
• Docket Number: No. B--5118,B--5118
• Citation: 526 S.W.2d 543
• Parties: Neil G. DELANEY, Jr., et al., Petitioners, v. FIDELITY LEASE LIMITED et al., Respondents.
• Court: Texas Supreme Court

Page 543

526 S.W.2d 543

Neil G. DELANEY, Jr., et al., Petitioners, v. FIDELITY LEASE LIMITED et al., Respondents.

No. B--5118.

Supreme Court of Texas.

July 23, 1975.

Rehearing Denied Sept. 24, 1975.

Kronzer, Abraham & Watkins, W. James Kronzer, Houston, Webb & Stokes, Tom Webb, Cain, Dorsey & Johnson, Donald P. Dorsey, Melvin N. Gray, San Angelo, for petitioners.

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

DANIEL, Justice.

The question here is whether limited partners in a limited partnership become liable as general partners if they 'take part in the control of the business' while acting as officers of a corporation which is the sole general partner of the limited partnership. The trial court, by summary judgment, held that under such circumstances the limited partners did not become liable as general partners. The court of civil appeals affirmed with a dissent and a concurring opinion. 517 S.W.2d 420. We reverse and remand the case for trial on the merits.

Fidelity Lease Limited is a limited partnership organized under the Texas Uniform Limited Partnership Act, Article 6132a, ¹ to lease restaurant locations. It is composed of 22 individual partners, and a corporate general partner, Interlease Corporation. Interlease's officers, directors and shareholders were W. S. Crombie, Jr., Alan Kahn, and William D. Sanders, who were also limited partners of Fidelity. In February of 1969, plaintiffs Delaney, et al. entered into an agreement with the limited partnership, Fidelity, acting by and through its corporate general partner, Interlease, to lease a fast-food restaurant to the partnership. In accordance therewith, plaintiffs built the restaurant, but Fidelity failed to take possession or pay rent.

Plaintiffs brought suit for damages for breach of the lease agreement, naming as defendants the limited partnership of Fidelity Lease Limited, its corporate general partner Interlease Corporation, and all of its limited partners. On plaintiffs' motion the cause against the limited partners individually, insofar as it relates to their personal capacities and liabilities, was severed from the cause against Fidelity and Interlease. In this severed cause, the trial court granted a take nothing summary judgment for the limited partners. Plaintiffs appealed only as to limited partners Crombie, Kahn, and Sanders. Plaintiffs sought to hold these three individuals personally liable under Section 8 of Article 6132a, alleging that they had become general partners by participating in the management and control of the limited partnership.

Pertinent portions of the Texas Uniform Limited Partnership Act, Article 6132a, provide:

'Sec. 8. 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.

'Sec. 13. (a) A person may be a general partner and a limited partner in the same partnership at the same time.

'(b) A person who is a general, and also at the same time a limited partner, shall have all the rights and powers and be subject to all the restrictions of a general partner; except that, in respect to his contribution, he shall have the rights against the other members which he would have had if he were not also a general partner.' (Emphasis added.)

It was alleged by plaintiffs, and there is summary judgment evidence, that the three limited partners controlled the business of the limited partnership, albeit through the corporate entity. The defendant limited partners argue that they acted only through the corporation and that the corporation actually controlled the business of the limited partnership. In response to this contention, we adopt the following statements in the dissenting opinion of Chief Justice Preslar in the court of civil appeals:

'I find it difficult to separate their acts for they were at all times in the dual capacity of limited partners and officers of the corporation. Apparently the corporation had no function except to operate the limited partnership and Appellees were obligated to their other partners to so operate the corporation as to benefit the partnership. Each act was done then, not for the corporation, but for the partnership. Indirectly, if not directly, they were exercising control over the partnership. Truly 'the corporation fiction' was in this instance a fiction.' 517 S.W.2d at 426--27.

Thus, we hold that the personal liability, which attaches to a limited partner when 'he takes part in the control and management of the business,' cannot be evaded merely by acting through a corporation. See Bergeson v. Life Ins. Corp. of America, 170 F.Supp. 150, 159 (D.Utah 1958), Modified on other grounds, 265 F.2d 227 (10th Cir.) Cert. den., 360 U.S. 932, 79 S.Ct. 1452, 3 L.Ed.2d 1545 (1959); Strang v. Thomas, 114 Wis. 599, 91 N.W. 237 (1902); 68 C.J.S. Partnership § 478, p. 1029 (1950); 60 Am.Jur.2d Partnership, § 381, pp. 262--63 (1972).

The defendant limited partners also contend that the 'control' test enumerated in Section 8 of Article 6132a for the purpose of inflicting personal liability should be coupled with a determination of whether the plaintiffs relied upon the limited partners as holding themselves out as general partners. Thus, they argue that, before personal liability attaches to limited partners, two elements must coincide: (1) the limited partner must take part in the control of the business; and (2) the limited partner must have held himself out as being a general partner having personal liability to an extent that the third party, or plaintiff, relied upon the limited partners' personal liability. See Vulcan Furniture Mfg. Corp. v. Vaughn, 168 So.2d 760 (Fla.Dist.Ct.App.1964); Silvola v. Rowlett, 129 Colo. 522, 272 P.2d 287 (1954); Rathke v. Griffith, 36 Wash.2d 394, 218 P.2d 757 (1950). They observe...