Partnership and Joint Venture Disputes

Real estate investors often enter into joint ventures on a project-by-project basis. These tend to arise ad hoc and without significant planning. Sometimes the party with money finds a contractor and decides to enter into a profit-sharing arrangement instead of or on top of the normal payment for labor and materials. Other times, the wholesaler or a realtor decide to go into business with the investor instead of sticking to the traditional roles. Partnerships do not happen as often. Generally, when people decide to turn their job-by-job joint ventures into a longer-term and broader relationship, they have the foresight to formalize the arrangement through the formation of a Limited Liability Company or other entity with a formal operating agreement and/or bylaws.

“A partnership is generally defined as an association among two or more persons to carry on as co-owners a business for profit. See, e.g., Tex.Rev.Civ.Stat.Ann. art. 6132b, sec. 6 (Vernon 1970). A joint venture is similar, but is generally limited to a single transaction. C.C. Roddy, Inc. v. Carlisle, 391 S.W.2d 765 (Tex.Civ.App.—Fort Worth 1965, writ ref’d n.r.e.).” Harrington v. Harrington, 742 S.W.2d 722, 724 (Tex. App.—Houston [1st Dist.] 1987, no writ) (emphasis added). “Under Texas law, joint ventures are legal entities described as being ‘in the nature of a partnership engaged in the joint prosecution of a particular transaction for mutual profit.’ Brown v. Cole, 155 Tex. 624, 631, 291 S.W.2d 704, 709 (1956).” Lawler v. Dallas Statler-Hilton Joint Venture, 793 S.W.2d 27, 33 (Tex. App.—Dallas 1990, writ denied). “Generally, joint ventures are governed by the rules applicable to partnerships. Truly v. Austin, 744 S.W.2d 934, 937 (Tex.1988); Hackney v. Johnson, 601 S.W.2d 523, 526 (Tex.Civ.App.—El Paso 1980, writ ref’d n.r.e.).” Id.; Blackburn v. Columbia Med. Ctr. of Arlington Subsidiary, L.P., 58 S.W.3d 263, 273 (Tex. App.—Fort Worth 2001, pet. denied). “Texas, since the adoption of the Uniform Partnership Act, expressly follows the entity theory of partnership for most purposes. Haney v. Fenley, Bate, Deaton and Porter, 618 S.W.2d 541, 542 (Tex.1981).” Id.

In 1961, Texas adopted the Texas Uniform Partnership Act (TUPA). Ingram v. Deere, 288 S.W.3d 886, 894 (Tex. 2009). Whereas the common law required evidence of each factor to establish a partnership, TUPA imposes a totality-of-the-circumstances test and emphasizes that “profit sharing” is the most important factor. Id. at 896-98. Additionally, “A partner is not entitled to receive compensation for services performed for a partnership.” Tex. Bus. Orgs. Code § 152.203.

Often, in partnership or joint venture disputes, one of the parties will bring a breach of fiduciary duty claim. A formal fiduciary relationship, which arises as a matter of law, exists between partners and joint venturers. Moore v. Bearkat Energy Partners, LLC, 10-17-00001-CV, 2018 WL 683754, at *8 (Tex. App.—Waco Jan. 31, 2018, no pet.) (explaining the difference between formal and informal fiduciary relationships). “[U]nder Texas law, ‘the issue of control has always been the critical fact looked to by the courts’ in determining whether to impose fiduciary responsibilities on individuals . . .’” Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355, 391 (Tex. App.—Houston [1st Dist.] 2012) (pet. granted, judgm’t vacated by agr., Ct. App. opinion not withdrawn). In a formal fiduciary relationship, the fiduciary duty arises as a matter of law, whereas the existence of an informal fiduciary duty typically requires a factfinding. Meyer v. Cathey, 167 S.W.3d 327, 330 (Tex. 2005) (“In certain formal relationships . . . a fiduciary duty arises as a matter of law.”).

In real estate disputes involving development projects, ownership of the assets may be one of the most crucial issues. The law regarding when a joint venture owns property can be vague at times. Under Tex. Bus. Orgs. Code § 152.102(b), property is partnership property when the acquisition instrument so indicates or where property is acquired with partnership property. But, Section 152.002 of the Tex. Bus. Orgs. Code does not specify Section 152.102 as being one of the provisions that the partnership agreement cannot vary. As a result, a partner may allege an express or implied agreement as to property ownership different from how title to the property was taken. “[U]nder well-established partnership principles, ownership of property intended to be a partnership asset is not determined by legal title, but rather by the intention of the parties as supported by the evidence.” Foust v. Old Am. County Mut. Fire Ins. Co., 977 S.W.2d 783, 786 (Tex. App.—Fort Worth 1998, no pet.).

Membership in a Limited Liability Company is a matter of fact for the jury to decide, not for the trial court to rule on. Rocklon LLC v Paris, 2016 Tex. App. LEXIS 11393 (Beaumont 2016). “For a person who becomes a member of an LLC after it is formed, his or her membership is effective ‘on approval or consent of all of the company’s members.’ Tex. Bus. Orgs. Code Ann. § 101.103.” Dixon v. Freese, 3:13CV236-LG-JMR, 2014 WL 11444119, at *4 (S.D. Miss. Apr. 14, 2014), aff’d, 615 Fed. Appx. 245 (5th Cir. 2015). Admission to the company may occur as of the first date that the admission is reflected in the company’s records. Tex. Bus. Orgs. Code Ann. § 101.103 (West).

Copyright, Ian Ghrist, 2019, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.