Park Cities Corp. v. Byrd

• Decision Date: 18 February 1976
• Docket Number: No. B--5369,B--5369
• Citation: 534 S.W.2d 668
• Parties: PARK CITIES CORPORATION, Petitioner, v. D. Harold BYRD et al., Respondents.
• Court: Texas Supreme Court

Page 668

534 S.W.2d 668

PARK CITIES CORPORATION, Petitioner, v. D. Harold BYRD et al., Respondents.

No. B--5369.

Supreme Court of Texas.

Feb. 18, 1976.

Rehearing Denied March 24, 1976.

Jackson, Walker, Winstead, Cantwell & Miller, Vester T. Hughes, Jr., and Sam J. Dealey, Dallas, for petitioner.

Turner, Rodgers, Sailers, Jordan & Calloway, John H. McElhaney, Dallas, John L. Hill, Atty. Gen., Martha E. Smiley, Asst. Atty. Gen., Austin, for respondents.

McGEE, Justice.

This suit was brought by the executors of the estate of Mattie Caruth Byrd against Park Cities Corporation. On September 30, 1961 Mrs. Byrd and Park Cities Corporation entered into a limited partnership agreement for the purpose of building, owning and operating a large apartment complex in Dallas, Texas. The limited partnership, called Mattie Caruth Byrd Limited, was to exist until September 30, 2011 unless otherwise terminated under the provisions of the agreement. It was agreed that Mrs. Byrd was to be the managing general partner and Park Cities was to be a limited partner. No additional partners ever existed. On February 12, 1972 Mrs. Byrd died, which effectively dissolved the limited partnership as of that date pursuant to their agreement. Thereafter, a dispute arose between the executors of Mrs. Byrd's estate and Park Cities Corporation. The executors of Mrs. Byrd's estate brought this suit as an action for declaratory judgment to determine the correct method of winding up the limited partnership previously existent between Mrs. Byrd and Park Cities. In a non-jury trial, the trial court held on all points favorably to the position taken by the executors of Mrs. Byrd's estate and denied all relief sought by Park Cities. The court of civil appeals affirmed the judgment of the trial court. 522 S.W.2d 572. The only problem to be resolved is whether or not the $1,987,344 deficit in Mrs. Byrd's capital account, created mainly by annual allocation of depreciation losses, is to be treated as an asset of the partnership, and as a liability of Mrs. Byrd. The court of civil appeals held that the deficit was not an asset of the partnership. We disagree.

The articles of agreement naming Mrs. Byrd as general partner and Park Cities as limited partner was carefully tailored to comply with the provisions of Tex.Rev.Civ.Stat.Ann. art. 6132a (1970). Park Cities was required to make a capital contribution of $100 and Mrs. Byrd was required to contribute her financial resources, skill, efforts and abilities to the mutual benefit of the partnership.

Park Cities Corporation was wholly owned by the Mattie Caruth Byrd Trust and the W. W. Caruth, Jr. Trust. The Mattie Caruth Byrd Trust benefited the general partner during her lifetime while the W. W. Caruth, Jr. Trust benefited her brother during his lifetime. Each trust provided a remainder interest to the children of the lifetime beneficiary.

The books of the partnership were audited each year by a national accounting firm and pursuant to Article VI of the partnership agreement, the books of the partnership were to be kept in accordance with generally accepted partnership accounting principles and the net income, profit or loss, and all items of income or expense were to be determined in accordance therewith. Other governing articles of agreement signed by the parties which are crucial and controlling of our ultimate decision, reveal the following:

'V. The parties hereby agree to divide the net income of the partnership at least annually and to share same in the percentages set forth opposite their names below:

Mattie Caruth Byrd, General partner 50%

Park Cities Corporation, Limited Partner 50%

'And in the event the Limited Partner's interest in the partnership is transferred, its successor in interest shall be entitled to the share set forth opposite the Limited Partner's name.

'The parties further agree that fox tax purposes they will share all net losses of the partnership according to the actual losses suffered by each party, and it is further expressly agreed that Park Cities Corporation shall not be financially responsible for any of the losses of the partnership in excess of its capital contribution as herein elsewhere set forth.

'X. The Limited Partner shall not be responsible for the debts of the partnership in excess of a capital contribution as herein provided And any losses shall be borne entirely by the General Partner, Mattie Caruth Byrd.

'VIII. In the event it is desired and the parties enter into an agreement to sell the property, or on the retirement, death or insanity of the General Partner, the partnership shall terminate And a final accounting and distribution be made as provided by law; . . .' (Emphasis added)

As per article VIII, upon the death of Mrs. Byrd on February 12, 1972 the partnership was dissolved and under article IX the assets of the partnership were to be distributed in the following manner and in the priority set forth:

'1. All charges, debts and obligations of the partnership shall be paid.

'2. The contribution of the Limited Partner shall be returned to it.

'3. The parties hereto shall each own and hold and be entitled to Receive the percentages of the remaining partnership assets set out opposite their names below:

Mattie Caruth Byrd, General Partner 50%

Park Cities Corporation, Limited Partner 50%

'And in the event of the transfer of the interest of the Limited Partner, its successor in interest shall be entitled to the share set forth opposite the Limited Partner's name.

'. . .' (Emphasis added).

Over the years, due to the negative cash flow position of Limited ¹ in its ownership and management of the University Gardens apartment complex, Mrs. Byrd extended a number of advances to Limited in the form of loans in order that the partnership could continue in operation by meeting its pressing financial obligations. The amount of the loans she made to Limited totalled $1,431,827 inclusive of interest. Mrs. Byrd also made contributions to the capital of Limited in 1964 and 1965 in the amount of $88,833.47. There was a controversy in the courts below as to whether some of the monies expended by Mrs. Byrd throughout the life of Limited, and evidenced by promissory notes were in reality 'loans' to Limited or whether they were 'unsecured capital contributions.' The lower courts held these monetary extensions to be 'loans' and as such subject to full repayment to her by Limited upon dissolution. As a result, an issue below was also whether the debit balance in Mrs. Byrd's capital account should be offset against these 'loans' to the partnership before any final cash distribution was made as between the partners. The lower court holdings on the points relative to the loans are not before us for review. We are concerned only with the parties' arguments relative to the questions presented which involve the deficit evident in Mrs. Byrd's capital account.

The key to the present dispute involves the $1,987,344 capital deficit evident in Mrs. Byrd's capital account as substantially created by depreciation. The partnership computed depreciation upon its buildings on an accelerated basis known as the declining balance method, then allowed at a rate of 200 percent of the straight line rate over the estimated useful lives of the assets. The controversial deficit of nearly $2,000,000 came into existence in the following manner. As the articles of agreement earlier set out reveal, the parties agreed that 'for tax purposes they will share all net losses of the partnership according to the actual losses suffered by each party.' In order to clarify the amount of loss each party was intended to suffer, the agreement further provided, 'Park Cities Corporation shall not be financially responsible for any of the losses of the partnership in excess of its capital contribution' which was set at $100. Thus, it seems clear that when taken together, these two provisions reveal that Mrs. Byrd as the general partner was to be financially responsible for all losses incurred by the partnership in excess of the initial capital contribution of $100 made by Park Cities. It was this allocation of 100 percent of the depreciation losses to Mrs. Byrd's capital account that created the controversy now before us. Each of the accountant's reports showed clearly that Mrs. Byrd had used the depreciation allowance upon the partnership properties as a credit upon her personal income tax obligations to the extent allowed by law.

The dispute before us has resolved itself into two central points that Park Cities as petitioner has urged throughout the litigation. Park Cities maintains that the courts below erred in failing to conclude that the debit balance or deficit in Mrs. Byrd's capital account is an asset of the partnership. Further, Park Cities urges as error the failure of the courts below to declare that Mrs. Byrd was liable to the partnership for this $1,987,344 ultimate debit balance or deficit in her capital account. Cumulative losses on the books of the partnership in the amount of $2,076,177 were debited to Mrs. Byrd's capital account. She had made capital contributions of $88,833 in 1964 and 1965. This left Mrs. Byrd with the capital deficit in controversy totaling $1,987,344 as of February 12, 1972. Both parties' arguments are based upon the theory that the final accumulated depreciation charged to Mrs. Byrd's capital account exceeded $1,987,344 and thus depreciation alone fully accounts for the controversial deficit. The depreciation allocation is the major concern of the parties here since the court of civil appeals has apparently held that the debit balance in a partner's capital account is to be disregarded if an approximately corresponding amount of depreciation has been charged against the partnership assets and income. ²

If the deficit created by the allocation of all of the depreciation charges to Mrs. Byrd's capital account is to be treated as an asset, her estate will presently be...