In re Leal

• Decision Date: 09 January 2007
• Docket Number: Bankruptcy No. 05-11154.,Adversary No. 06-7009.
• Citation: 360 B.R. 231
• Parties: In re Omar R. LEAL; aka Omar Ricardo Leal; dba All American Auto Glass, Debtor. Omar R. Leal, Plaintiff, v. Kevin Mokhabery; dba All American Auto Glass, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Texas

360 B.R. 231

In re Omar R. LEAL; aka Omar Ricardo Leal; dba All American Auto Glass, Debtor Omar R. Leal, Plaintiff, v. Kevin Mokhabery; dba All American Auto Glass, Defendant.

Bankruptcy No. 05-11154.

Adversary No. 06-7009.

United States Bankruptcy Court, S.D. Texas, McAllen Division.

January 9, 2007.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Eduardo V. Rodriguez, Brownsville, TX, for Debtor.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

For the reasons set forth below, the Court finds that Plaintiff and Defendant have each engaged in wrongful conduct with respect to the business partnership formed by them. A separate judgment has been issued.

Background

On or around March 15, 2000, Omar Leal and Kevin Mokhabery entered into a general partnership doing business under the assumed name All American Auto Glass. The purpose of the business was the installation of automotive glass. Each party owned a 50% interest in the partnership. Mokhabery provided the capital for the business while Leal provided sweat equity and received a salary. The primary place of business was in McAllen, Texas.

On April 1, 2005, Leal filed suit against Mokhabery in the 206th Judicial District Court, Hidalgo County, Texas. Leal sought a temporary restraining order and damages due to Mokhabery's alleged waste of business assets, among other claims. On June 23, 2005, Mokhabery filed a counterclaim, alleging breach of fiduciary duty, conversion and unfair competition among other allegations.

On or around May 19, 2005, the state court entered an agreed order appointing a receiver.

On October 19, 2005, Leal filed a petition for relief under chapter 13 of the Bankruptcy Code. The Plaintiff filed a notice of removal on February 21, 2006. A two-day trial was held on October 23, 2006, and October 24, 2006. Upon conclusion of the trial, the Court took the matter under advisement.

Applicable Law

The Texas Revised Partnership Act ("TRPA")¹ governs the relations between partners unless a partnership agreement provides otherwise. TEX.REV.CIV. STAT. art. 6132b-1.03(a). A partnership has the same powers as an individual or corporation to do all things necessary or convenient to carry out its business and affairs. Id. at § 3.01. Unless agreed otherwise, each partner has equal rights in the management and conduct of the partnership's business and a right to access the partnership books and records. Id. at §§ 4.01(d), 4.03(b). Every partner is an agent of the partnership for the purpose of its business. Id. at § 3.02(a). Unless a partner does not have authority to act for the partnership, the act of each partner binds the partnership if the act is for apparently carrying on the partnership business or affairs. Id.

Absent an express agreement that a partnership is for a particular term or specific undertaking, a partnership is at the will of each person who enters into the partnership. Bohatch v. Butler & Binion, 977 S.W.2d 543, 545 (Tex.1998); Hughes v. Cole, 585 S.W.2d 865, 869 (Tex.Civ.App.-Tyler 1979, writ ref'd n.r.e.). A partnership at will continues until the partnership is terminated. TEX.REV.CIV. STAT. art. 6132b-2.06 & 8.02.

Section 6.01(a) of the TRPA provides that a partner ceases to be a partner on the occurrence of an event of withdrawal. Id. at § 6.01(a). Section 6.01(b) identifies events of withdrawal that do not require a partnership to wind up. One such event includes the partnership's receipt of notice of a partner's express will to withdraw as a partner. Id. at § 6.01(b)(1). In addition, § 8.01 sets forth additional events that require the winding up of a partnership. Such events include the express will of a majority-in-interest of the partners, the entry of certain judicial decrees, and a request for winding up the partnership from a partner, among other events. Id. at § 8.01.

Partners owe to the partnership and to each other fiduciary duties as a matter of law, including a duty of loyalty and care. Id. at § 4.04; Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998). Such duties include a duty to: (1) account to the partnership and hold for it all partnership profits and property; (2) refrain from dealing with the partnership on behalf of a party adverse to the partnership; and (3) refrain from competing with the partnership. TEX.REV.CIV. STAT. art. 6132b-4.04(a)-(b). As a fiduciary, a partner is under an obligation not to usurp opportunities for personal gain, and equity will hold a partner accountable to the partnership for his profits if he does so. Lifshutz v. Lifshutz, 199 S.W.3d 9, 18-19 (Tex.App.-San Antonio 2006, pet. filed). A partner's duties also include a strict duty of good faith and candor. TEX. REV. CIV. STAT. art. 6132b-404(d); Zinda v. McCann St., Ltd., 178 S.W.3d 883, 891 (Tex.App.-Texarkana 2005, pet. denied). Thus, the partnership relation imposes upon all partners an obligation of the utmost good faith, fairness and honesty in their dealings with each other with respect to matters pertaining to the partnership business. Bohatch, 977 S.W.2d at 545.

When an event of withdrawal occurs, the remaining partners have the right to continue the business. Id. at § 2.06(a). If no event requiring a winding up occurs within 60 days after an event of withdrawal, the withdrawn partner is automatically entitled to redeem his interest as of the date of withdrawal. Id. at § 7.01(a). Where the withdrawal is not wrongful as defined by § 6.02, the redemption price is the fair value of the partner's interest as of the date of withdrawal. TEX.REV.CIV. STAT. art. 6132b-§ 7.01(b). If an event requiring a winding up occurs, the partnership continues until the winding up of its business is completed, at which time the partnership is terminated. Id. at § 8.02. The rules governing distribution upon a winding up dictate that assets first be applied to pay debts held by creditors of the partnership. Id. at § 8.06(a). Any surplus will be paid in cash as distributions to a partner with a positive balance in the partner's capital account. Id. at § 8.06(a)-(b). A partner's capital account is determined by crediting the partner's account with the partner's contributions to the partnership (consisting of cash and the value of any other contributions) and the partner's share of profits subtracting any distributions to the partner and the partner's share of the partnership losses. Id. at 1.01(2) & 4.01(a). Absent an agreement to the contrary, each partner is responsible for a share of the losses in proportion to the partner's share of the profits. Id. at 4.01(b).

Analysis

It is undisputed that although Leal and Mokhabery entered into a partnership, they did not have a written partnership agreement. The parties' oral agreement addressed only a few matters. The parties agreed that each partner owned a 50% interest in the partnership, and that Mokhabery would provide some start-up capital and Leal would provide the day-to-day labor for the business. The parties did not provide that the partnership was for a particular term or discuss whether any events would result in a winding up of the partnership. Thus, the partnership was at the will of each partner. Upon creation of the partnership in 2000, each partner owed the partnership and each other fiduciary duties including the duty of loyalty and care with respect to the All American's affairs.

The evidence shows that Mokhabery provided the partnership with limited assets upon creation of the partnership, including a truck from Mokhabery's business in Dallas, Texas, Advantage DFW Auto Glass, Inc. Leal worked on site at All American's business premises during all relevant periods while Mokhabery lived in Dallas and oversaw the business from there. In 2002, Mokhabery handled the partnership's payroll tax bills using a certified public accountant in Dallas. However, in 2003, the parties changed their business arrangement and Leal began handling All American's bills and payroll taxes, in addition to the day-to-day operations that he already oversaw. Leal admits that prior to joining All American he had never operated an auto glass business and that his office management and organization skills were poor and needed much improvement.

On April 1, 2005, Leal filed this lawsuit seeking a temporary restraining order and damages. Leal alleged that Mokhabery wasted business assets, failed to pay business debts, used the partnership name to obtain personal loans, and improperly withdrew business assets. Mokhabery filed a counterclaim, alleging breach of fiduciary duty, conversion and unfair competition among other allegations. After reviewing all the evidence, it is clear that this dispute arose because neither Leal nor Mokhabery took his fiduciary duty seriously.

Leal's claim for damages

Leal asserts that in 2002 Mokhabery improperly used partnership assets for personal use. Partners do not have any interest in partnership property. TEX. REV. CIV. STAT. art. 6132b-2.04. Partnership property includes property acquired in the name of the partnership or in the name of one or more partners if the instrument transferring title indicates the grantee's capacity as a partner or the existence of the partnership. Id. at § 2.05. All American received capital and assets from Mokhabery when the business was started. All American purchased glass from sellers under its partnership name and held bank accounts under the partnership name.

Leal alleges that Mokhabery improperly withdrew business assets and failed to account for the withdrawals. Specifically, Leal contends that Mokhabery withdrew $34,000 from a partnership account for use in Mokhabery's Dallas business. Mokhabery admits that he took 834,000 from All American's account in 2003 without approval from Leal but argues he is owed at least this much in profits that should have been dispensed to him pursuant to his 50% interest in the partnership if Leal had properly managed the business. Mokhabery is an experienced businessman,...