Isaminger v. Gibbs

Full title: EVELYN HUNTER ISAMINGER, INDEPENDENT EXECUTOR OF THE ESTATE OF JACK S…

Court: Court of Appeals of Texas, Fifth District, Dallas

Date published: Jul 7, 2000

No. 05-99-00978-CV (Tex. App. Jul. 7, 2000)

Opinion

No. 05-99-00978-CV.

Opinion Filed July 7, 2000. DO NOT PUBLISH. Tex. R. App. P. 47.

Appeal from the 14th Judicial District Court, Dallas County, Texas, Trial Court Cause No. 96-11513-A.

Before Justices OVARD, MORRIS, and WRIGHT. Opinion By Justice WRIGHT.

OPINION

CAROLYN WRIGHT, JUSTICE.

Dan Gibbs sued Jack S. Isaminger seeking reimbursement for one-half of a tax liability incurred by a travel agency business which they operated.¹ Following a bench trial, the trial court ordered Isaminger to reimburse Gibbs. In four points of error, Isaminger contends generally that the trial court erred by making certain findings regarding the business entities at issue in the case and by denying him recovery on his requests for contribution and an accounting. We affirm the trial court's judgment.

1 After the lawsuit was filed, Jack Isaminger died and Evelyn Isaminger, as executor of his estate, continued the lawsuit.

Factual and Procedural Background

Gibbs testified that he and Isaminger purchased a franchise travel agency, "Travel With Us," in 1988. They intended to set up a limited partnership with a corporation, Magical Tours, Inc., as the general partner and themselves, together with friends and spouses, as the limited partners. Gibbs arranged for a service in Austin to incorporate Magical Tours, and the charter from the Secretary of State's Office issued in April 1988. Isaminger and Gibbs each owned fifty percent of the corporation's stock. They also served as the directors and officers of the corporation. Later, the corporation filed an assumed name certificate showing Magical Tours, Inc. would conduct business as Travel With Us. Isaminger and Gibbs then contacted friends and organized contributions to the limited partnership. Ultimately, a number of couples, including the Isamingers and the Gibbs, invested in the travel agency. Thereafter, Isaminger's daughter, an attorney, and Gibbs drafted a limited partnership agreement and each limited partner executed an agreement. Gibbs then prepared and signed a certificate of limited partnership for Isaminger's daughter to file with the Secretary of State's office. However, during the course of this lawsuit, Gibbs became aware that the certificate was never filed with the secretary of state. The travel agency was not profitable, and both Isaminger and Gibbs loaned money to the business. In the summer of 1992, Gibbs sent a letter to the limited partners requesting that they contribute more money to the limited partnership and notifying them that without an additional contribution to capital, the limited partnership could "no longer survive. (See Limited Partnership Agreement)." Sometime thereafter, a handwritten letter was sent to the limited partners informing them that "Magical Tours, Inc., as General Partner, will withdraw from the Agreement on August 3, 1992" and that, pursuant to "Article XI, Paragraph 11.2d of the Partnership Agreement, the withdrawal of the General Partner dissolves the partnership 'unless all Limited Partners agree upon a new General Partner.'" On August 29, 1992, Gibbs sent a final letter informing the limited partners that Magical Tours had withdrawn as general partner, no action had been taken to select a new general partner, and the "agency [was] a ship without a rudder." The letter also indicated the agency was being advertised for sale and the limited partners would be given a final financial report once it was sold. Attempts to sell the travel agency were unsuccessful. Gibbs and Isaminger then took over the assets and assumed the obligations of the limited partnership and continued to do business "through the corporation." Both men continued to loan money to the business, although it is undisputed that Isaminger loaned a considerably larger amount. They hired Joan Lyons to manage the day-to-day operations of the business. A short time later, they became aware they owed withholding taxes to the Internal Revenue Service (IRS). Isaminger and Gibbs agreed to pay the delinquent taxes by using the proceeds from two $10,000 certificates of deposit (CDs).² When Gibbs received the funds and interest from his CD, he deposited it into his bank account. A short time later, the IRS seized the account, containing approximately $30,000. Gibbs contacted Isaminger to ask him about his CD, and Isaminger said he was unable to contribute the CD proceeds towards the tax liability because he was broke. Ultimately, each of the two men contributed an additional $4,000 to settle the tax debt. Gibbs sued Isaminger to recover one-half of the money that was levied out of his account for payment of the tax liability. He alleged he was entitled to the money under the theory of contribution, or, in the alternative, pursuant to an oral agreement that each would pay half of the tax liability. Isaminger counterclaimed, alleging that he and Gibbs operated the travel agency as a partnership, not a corporation, and Isaminger was therefore entitled to an accounting. According to Isaminger, any amount he owed Gibbs for the tax debt was offset by Isaminger's contributions to operate the travel agency. Isaminger calculated that, even after the tax liability, Gibbs owed Isaminger at least $77,500. After hearing the evidence and argument of counsel, the trial court awarded Gibbs $13,672.24 together with interest and attorney's fees as reimbursement of the tax payment. The trial court denied Isaminger recovery on his counterclaim for an accounting and offset. Subsequently, the trial court entered findings of fact and conclusions of law. This appeal followed.

Discussion

Isaminger brings four issues for our consideration, complaining that the trial court erred by making certain findings of fact and conclusions of law.³ Generally, Isaminger complains of the trial court's determinations about the business entity formed by Isaminger and Gibbs and its denial of his request for an offset and an accounting. Isaminger concedes that he and Gibbs were jointly and severally liable for the tax debt. The crux of Isaminger's complaint is that the trial court should not have carved out a single transaction (the tax liability) to determine his liability to Gibbs, but should have ordered a general accounting of the entire business relationship and offset his liability on the tax debt accordingly. At issue in this appeal are the following findings and conclusions of the trial court: (1) Travel With Us was formed as a limited partnership, with Magical Tours as the general partner and Isaminger and Gibbs as limited partners; (2) the limited partners in Travel With Us forfeited their interest in Travel With Us, leaving Magical Tours as the sole surviving partnership interest; (3) because Magical Tours and Travel With Us "were owned by the same people and there were no corporate formalities observed," a general partnership consisting of Magical Tours, Isaminger, and Gibbs remained; and (4) Isaminger was not entitled to recovery on his counterclaim for an accounting and offset.⁴ In his first issue, Isaminger contends that the trial court erred by finding that Travel With Us was formed as a limited partnership. According to Isaminger, because a certificate of limited partnership was never filed with the secretary of state, a limited partnership was never formed and Travel With Us was therefore a general partnership. We disagree. Article 6132a-1 of the Texas Revised Limited Partnership Act (the Act), the statute governing formation of limited partnerships at the time Travel With Us was formed, provided as follows: Sec. 201 (a) To form a limited partnership, the partners must enter into a partnership agreement and one or more partners, including all of the general partners, must execute a certificate of limited partnership.

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(b) A limited partnership is formed at the time of the filing of the initial certificate of limited partnership with the secretary of state or at a later date or time specified in the certificate if there has been substantial compliance with the requirements of this section. See Act of April 14, 1987, 70th Leg., R.S., ch. 49, § 1, 1987 Tex. Gen. Laws 92, 97, amended by Act of May 13, 1997, 75th Leg., R.S., ch. 375, § 87, 1997 Tex. Gen. Laws 1516, 1578 (current version at Tex. Rev. Civ. Stat. Ann. art. 6132a-1, § 2.01 (Vernon Supp. 2000)). The commentary for section 2.01(b) provides, in part, as follows:

Section 2.01(b) states that the partnership is formed when there has been substantial compliance with the requirements for filing a certificate. It is not intended that this provision change current case law such as Garrett v. Koepke, 569 S.W.2d 568 (Tex.App._Dallas 1985, writ ref'd n.r.e.), and Schindler v. Marr Associates, 695 S.W.2d 699 (Tex.App.-Houston 1985, writ ref'd n.r.e.) that may protect the limited liability status of putative limited partners when there has been a defective filing of (or even a failure to file) the certificate; however, that situation is now dealt with in detail in Section 3.04.

Tex. Rev. Civ. Stat. Ann. art. 6132a-1, § 2.01 commentary (Vernon Supp. 2000). It is undisputed that Isaminger and Gibbs incorporated Magical Tours in April 1988. Magical Tours, as the sole general partner, together with the other limited partners, executed a limited partnership agreement. Gibbs, together with Isaminger's daughter, drafted a certificate of limited partnership, which he executed and forwarded to Isaminger for his signature with the understanding that Isaminger's daughter would file it with the secretary of state. The certificate, however, was never filed. Thus, with the exception of filing the certificate of limited partnership, the partners completed all of the statutory requirements for formation of a limited partnership. Under these circumstances, we conclude they substantially complied with the statutory requirements for formation of a limited partnership. See Garrett, 569 S.W.2d at 570-71; Schindler, 695 S.W.2d at 703-04. Consequently, we conclude that there is some evidence to support the trial court's determination that Travel With Us was formed as a limited partnership, with Magical Tours as the general partner and Isaminger and Gibbs, among others, as limited partners. Further, after examining the entire record, we conclude that the trial court's determination is not so contrary to the overwhelming weight and preponderance of the evidence that it is clearly wrong and manifestly unjust. Having concluded the evidence is legally and factually sufficient to support the trial court's findings, we overrule issue one. In issue two, Isaminger argues that because Magical Tours "failed to observe and maintain corporate formalities," Isaminger and Gibbs should be treated as general partners. In finding of fact seven, the trial court found: that the limited partners in [Travel With Us] forfeited their interest in [Travel With Us], leaving [Magical Tours] as the sole surviving partnership interest even though it had already left the limited partnership. The fact that both of these entities were owned by the same people and that there were no corporate formalities observed makes [Magical Tours] effectively the remaining general partner as well as the two individuals. Thus, it appears the trial court had two reasons to disregard the corporate entity: (1) both Magical Tours and Travel With Us were owned and operated by Gibbs and Isaminger; and (2) corporate formalities were not observed. With respect to the first reason, we interpret this finding to be similar to the conclusion reached by the supreme court in Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543 (Tex. 1975). In that case, a limited partnership, Fidelity Lease Ltd., was composed of twenty-two limited partners, and a corporate general partner, Interlease Corporation. Id. at 544. Three of the limited partners were also Interlease's officers, directors, and shareholders. Id. The supreme court determined that the three limited partners became liable as general partners because they took control of the business while acting as officers of the sole corporate partner. Id. at 546. In doing so, they disregarded the corporate fiction because it was "difficult to separate their acts for they were at all times in the dual capacity of limited partners and officers of the corporation." Id. at 545. However, after Delaney, the legislature amended the Act to provide that "a limited partner does not participate in the control of the business by virtue of the limited partner's . . . acting as an officer, director, or shareholder of a corporate general partner." See Act of April 14, 1987, 70th Leg., R.S., ch. 49, § 1, 1987 Tex. Gen. Laws 92, 103, amended by Act of May 20, 1991, 72nd Leg., R.S., ch. 901, § 63, 1991 Tex. Gen. Laws 3168, 3228, amended by Act of May 13, 1997, 75th Leg., R.S., ch. 375, § 96, 1997 Tex. Gen. Laws 1516, 1588 (current version at Tex. Rev. Civ. Stat. Ann. art. 6132a-1, § 3.03(b)(1) (Vernon Supp. 2000)). The commentary following section 3.03 of the current Act expressly provides that "[s]ection 3.03(b)(1), like the 1979 amendment to the TULPA § 8, overrules the holding in Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543 (Tex. 1975), that actions as an officer or director of a corporate general partner constitute participation in control of a limited partnership." Because the actions of an officer or director of a corporate general partner do not constitute participation in control of a limited partnership, thus warranting liability as a general partner, the trial court's first reason for disregarding the corporate entity lacks merit. Nor can the finding be upheld on the failure to observe corporate formalities. A lack of corporate formalities alone is insufficient to disregard the corporate entity, especially if the corporation is closely held. See Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex. 1986) (explaining that alter ego is shown from total dealings of corporation and individual, including degree to which corporate formalities have been followed and corporate and individual property have been kept separately, amount of financial interest, ownership and control individual maintains over the corporation, and whether corporation has been used for personal purposes; however, no one factor alone is a sufficient basis for disregarding the corporate fiction). Although we acknowledge the record shows a lack of corporate formalities, observance of corporate formalities is now by statute not even a factor to be considered in determining alter ego. See Tex. Bus. Corp. Act Ann. art. 2.21(A)(3) (Vernon Supp. 2000). Moreover, with only two stockholders, it is apparent that the corporation would be operated less formally than in a large, publicly held corporation. See Torregrossa v. Szelc, 603 S.W.2d 803, 804 (Tex. 1980). Further, we note that Magical Tours maintained its own bank account, books, and filed tax returns. Under these circumstances, we conclude that the evidence does not support the trial court's finding disregarding the corporate entity and determining that after the limited partnership dissolved, the travel agency was operated as a general partnership consisting of Magical Tours, Isaminger, and Gibbs. Rather, we conclude the evidence establishes that the travel agency was operated by Magical Tours. Gibbs testified that after unsuccessfully attempting to sell the travel agency, he and Isaminger took over the assets and assumed the obligations of the limited partnership and continued to do business "through the corporation." Craig Boyer, a certified public accountant, testified that he worked for Travel With Us. Boyer testified that he prepared a tax return in 1992 for the limited partnership, and after that point, he prepared tax returns for a corporation Magical Tours, Inc. d/b/a Travel With Us. The trial court found, and neither party challenges, that Isaminger held out to third persons that Magical Tours had taken over the assets and liabilities of Travel With Us. Although the record does not contain documentary evidence that the corporation assumed ownership of the travel agency, as previously stated, it is not unexpected that business would be conducted somewhat informally with only two stockholders. See Torregrossa, 603 S.W.2d at 804. In reaching this conclusion, we necessarily reject Isaminger's contention that Magical Tours could not have taken over the travel agency because it did not "hold the sole surviving partnership interest after the limited partnership was dissolved" as the trial court found. Isaminger assumes in his brief that the trial court found the limited partners, "exclusive of [Gibbs] and [Isaminger]," forfeited their interests, leaving Magical Tours, as well as Gibbs and Isaminger, as shareholders of the travel agency. However, the trial court found that "the limited partners in [Travel With Us] forfeited their interest in [Travel With Us]" upon dissolution of the limited partnership. We interpret this finding to be that all of the limited partners, inclusive of Isaminger and Gibbs, forfeited their partnership interests, and Isaminger does not challenge this finding. At the time Magical Tours withdrew from the partnership, the Act provided that a person ceased to be a general partner of a limited partnership if he withdrew as provided by section 6.02 of the Act. See Act of April 14, 1987, 70th Leg., R.S., ch. 49, § 1, 1987 Tex. Gen. Laws 92, 106 (current version at Tex. Rev. Civ. Stat. Ann. art. 4.02(a)(1) (Vernon Supp. 2000)). Section 6.02 provided that a general partner could withdraw at any time from a limited partnership and cease to be a general partner by giving written notice to the other partners. See Act of April 14, 1987, 70th Leg., R.S., ch. 49, § 1, 1987 Tex. Gen. Laws 92, 108 (current version at Tex. Rev. Civ. Stat. Ann. art. 6.02(a) (Vernon Supp. 2000)). Thus, Magical Tours ceased to be a general partner, at the latest, as of August 29, 1992, when Gibbs notified the limited partners, in writing, that Magical Tours, Inc. had withdrawn as general partner.⁵ However, when Magical Tours withdrew from the limited partnership, it did not, as Isaminger suggests, forfeit its partnership interest. Rather, under the Act, the partnership interest held by the withdrawn general partner could either be converted to that of a limited partner, or "cashed out" by the remaining partners. See Act of April 14, 1987, 70th Leg., R.S., ch. 49, § 1, 1987 Tex. Gen. Laws 92, 108-09, amended by Act of May 13, 1997, 75th Leg., R.S., ch. 375, § 99, 1997 Tex. Gen. Laws 1516, 1589 (current version at Tex. Rev. Civ. Stat. Ann. art. 6.02(b) (Vernon Supp. 2000)). In this case, there were no remaining partners, all of the limited partners having forfeited their partnership interests. Because there were no remaining partners, Magical Tours partnership interest was never converted to that of a limited partner nor cashed out. Notwithstanding this fact, Magical Tours retained a partnership interest in some form. Thus, the trial court correctly found that Magical Tours was left "as the sole surviving partnership interest even though it had already left the limited partnership." In conclusion, the evidence in this case shows that in 1988, Travel With Us was formed as a limited partnership, with Magical Tours as the sole general partner and Isaminger and Gibbs, among others, as limited partners. In the summer of 1992, the limited partners forfeited their interests in the partnership and Magical Tours withdrew as general partner. At that time, the limited partnership was dissolved. See Act of April 14, 1987, 70th Leg., R.S., ch. 49, § 1, 1987 Tex. Gen. Laws 92, 111-12, amended by Act of May 13, 1997, 75th Leg., R.S., ch. 375, § 101, 1997 Tex. Gen. Laws 1516, 1590 (current version at Tex. Rev. Civ. Stat. Ann. art. 8.01(3) (Vernon Supp. 2000)). Magical Tours retained the only surviving partnership interest, and it assumed the obligations of the travel agency and continued to do business. Although the record contains evidence that Isaminger and Gibbs operated the corporation informally, they were the sole shareholders and officers of a closely-held corporation. Therefore, the evidence is insufficient to disregard the corporate entity and find that Isaminger and Gibbs operated the business as a partnership consisting of Magical Tours and the two men individually. We overrule issue two. Having determined that the travel agency was operated by the corporation after the limited partnership dissolved, we need not address issues three and four. See Tex. R. App. P. 47.1. Accordingly, we affirm the trial court's judgment.