Something Different

Virtually all of my posts have been about core real estate issues. This is not.

In the past when real estate investors needed a new entity, we routinely formed limited partnerships. There was a distinct tax advantage in doing so.

That dynamic changed when our Texas legislature amended the laws. Since limited partnerships became taxable in Texas like all other entities, lawyers shifted to forming limited liability companies as the entity of choice.

This post is about an ex-member of a Texas LLC. I hope you will find it relevant, since virtually all of the real estate entities I work with involve LLCs, and members entering and exiting.

Mark Davis was formerly a member of Highland Coryell Ranch, LLC, a Texas limited liability company. He relinquished his membership in 2005 but later wanted to inspect the books and records of the LLC.

Highland refused. Mark sued.

The trial court entered a Judgment denying Mark the right to access the books and records of Highland. Mark appealed.

Texas law is clear on this point, and allows each owner or member to examine the books and records. Mark Davis asked for a judicial interpretation that the terms “member” and “owner” relate to both present and past members and owners. Highland argued, and the trial court agreed, that those terms refer to only current members and owners.

The Texas Business Organization Code defines both terms. A member means a person who is a member or has been admitted as a member. And, an owner is a member. It seems that the trial court did not find the definitions in the TOC, or perhaps overlooked them.

With that, the Court of Appeals had little trouble reversing the Judgment of the trial court.

Mark Davis wins. Highland must cough up the books and records.

See Davis v. Highland Coryell Ranch LLC; Cause No. 07-15-00269-CV; Tex. App. Dist. 7; April 21, 2016: http://www.texaslawyer.com/id=1202754314762/Davis-v-Highland-Coryell-Ranch-LLC-071500269CV-TexApp-Dist7-03282016?slreturn=20160325193643.  

Lessons learned:

1.      There is confusion about the rights of LLC members and the ability of the members to inspect the accounts of the LLC. Those rights remain with the members even after they sell or cancel their membership interests.

2.      The right way to handle the exit of Mr. Davis should have been in a Settlement Agreement, where Mr. Davis specifically released his entitlement to inspect records of Highland. Apparently that did not happen.

3.      Another means to handle this might be to limit the rights of inspection of the members in a Company Agreement or Operating Agreement, particularly when the members are, well, no longer members. Evidently that did not happen either.

 

 

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Oral deals aren't binding. Right?

David Duarte and Daniel Rojas were long-term friends. Duarte learned how to repair, maintain and program ATM machines. Knowing that Congress passed legislation permitting individuals to own and operate ATMs, Duarte sensed a sure-fire business.

David found several ATMs sitting in an El Paso warehouse. He bought one and approached Daniel about buying the others together. In the fall of 2002 they agreed to enter the ATM business together, splitting profits and losses equally.

So David Duarte testified.

Daniel Rojas had a different memory of the deal. Daniel recalled that he and David were not partners, but rather that Daniel was an independent contractor who was engaged to help David operate the ATM business.

For the initial three years the business was quite successful, but in May 2005 the parties were ready to end their relationship. Daniel told David he was keeping all of the ATMs and was going to pay David $1,000 per month. Duarte received a total of $2,500. Unhappy with the payout, David Duarte sued Daniel Rojas.

At trial Duarte presented evidence that the business was worth $420,000 and that he and Rojas had formed a lawful (but oral) general partnership. Duarte won the lawsuit. Rojas appealed.

Predictably, Rojas claimed that there was no evidence of a partnership.

The Court of Appeals determined that there are five factors to consider regarding the creation of a Texas general partnership: (1) right to receive profits; (2) intent to be partners; (3) right to participate in control of the business; (4) agreement to share losses or liabilities; and (5) agreement to contribute money or property to the business.

The Appellate Court evaluated all five factors and compared each to the facts as presented to the trial court. All five factors were proven to the satisfaction of the Appellate Court. Judgment was affirmed that a Texas oral partnership agreement existed and was enforceable.

And so, dear reader, I am sure you are wondering why this is newsworthy enough to place in my valuable blog. Right?

And here is the answer. Note the total, unmitigated absence of any facts or laws that the partnership agreement must be in writing. It’s not there. Purposefully. Texas law has always been, in my 30-year career and much longer, that general partnerships and joint ventures need not be written and signed to be enforceable.

Texas limited partnerships must be written and signed. Texas general partnerships and JVs – not so much.
See Rojas v. Duarte; 08-11-00072-CV; Texas Court of Appeals 8^th District, El Paso Texas; November 30, 2012.

Lessons learned:

1.      Texas general partnerships and joint ventures might be enforceable even though they are not written.

2.      Oral / verbal partnerships and JVs are tailor-made for problems. Be sure that all of your personal agreements to share income are written and suggest to your principals that they do the same (but without practicing law!).

3.      Best wishes for a healthy, happy and prosperous 2013!

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.