Ingram v. Deer - Existence of a Business Partnership in Texas

Last month the Texas Supreme Court heard the case of Ingram vs. Deer in a dispute over the existence of a partnership between two professionals.

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FACTUAL AND PROCEDURAL BACKGROUND

Ingram, a licensed psychologist, and Deere, a board certified psychiatrist, entered into an oral agreement in 1997, which provided that Deere would serve as the medical director for a multidisciplinary pain clinic. Deere contended that they agreed he would receive one-third of the clinic’s revenues, Ingram would receive one-third, and the remaining one-third would be used to pay the clinic’s expenses. Deere also claimed that when he and Ingram began working together, Ingram told him their work “was a joint venture, or [they] were partners, or [they] were doing this together.” Ingram contended that they only agreed Deere would receive one-third of the clinic’s revenues and that there was no agreement as to the other two-thirds.

Fourteen months after Deere began working at the clinic, Ingram prepared a written agreement to memorialize their arrangement. The document was entitled “Physician Contractual Employment Agreement” and stated that Ingram was the “sole owner” of the clinic. Deere refused to sign the document, claiming that it contradicted their initial arrangement. Immediately after Deere received the document, he ceased working at the clinic. Deere later sued Ingram, asserting claims of common law fraud, statutory fraud, fraudulent inducement, breach of contract, breach of fiduciary duty, and declaratory judgment and seeking specific performance, damages, and attorneys’ fees. The jury found that Deere and Ingram entered into a partnership agreement and that Ingram breached the agreement and his fiduciary duty to Deere. The trial court entered judgment on the jury verdict awarding damages of (1) $34,249.68 for compensation owed Deere through March 1999, (2) $2,525,437.00 for Deere’s share of the partnership’s revenue from April 1999 through the time of trial, (3) $2,500,000.00 for Deere’s share of revenue to accrue after trial, and (4) $27,500.00 in attorneys’ fees for the trial stage with additional fees in the event of a motion for new trial and various appeals. Ingram filed a motion for judgment non obstante veredicto (judgment n.o.v.) or judgment notwithstanding the jury's verdict. After a hearing, Judge David Evans signed a new judgment, eliminating a portion of the damages awarded by the jury and reducing the award of attorneys’ fees. Following his decision, Judge Evans recused himself without explanation, and the case was assigned to Judge Merrill Hartman. Ingram then filed a second motion for judgment n.o.v. or, in the alternative, a motion for new trial. Judge Hartman signed a judgment n.o.v. and rendered a take-nothing judgment in Ingram’s favor. The court of appeals reversed the trial court’s take-nothing judgment on the second motion for judgment n.o.v. and reinstated the trial court’s judgment on the first motion for judgment n.o.v. The court held that Ingram waived his right to challenge the existence of a partnership because he failed to raise the issue in his second motion for judgment n.o.v. 198 S.W.3d 96, 100. Without discussing whether Deere and Ingram created a partnership, the court held that there was legally sufficient evidence to support the jury’s finding that the partnership continued to exist through the time of trial. Id. at 101–02. However, the court affirmed the trial court’s ruling that Ingram did not owe Deere a fiduciary duty, as there was no evidence of a confidential relationship between Deere and Ingram that would give rise to an informal fiduciary duty. Id. at 102–03.
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In its legal analysis of Texas partnership law, the Texas high court reasoned as follows, and quote:

Partnership Law.

1. Texas Common Partnership Law.

Under the common law, the Court recognized that a partnership or joint enterprise “presupposes an agreement to that end,” which could be either express or implied. Donald v. Phillips, 13 S.W.2d 74, 76 (Tex. 1929). The Court explained that the “intention of the parties to a contract is a prime element in determining whether or not a partnership or joint venture exists.”2 Coastal Plains Dev. Corp. v. Micrea, Inc., 572 S.W.2d 285, 287 (Tex. 1978) (citing Luling Oil & Gas Co. v. Humble Oil & Ref. Co., 191 S.W.2d 716, 722 (Tex. 1946) (“[A] court would not declare that a partnership existed unless that intention clearly appeared . . . .”)). The common law also considered that profit sharing was the most important factor shedding light on the intention to establish a partnership. See Friedlander v. Hillcoat, 14 S.W. 786, 787 (Tex. 1890) (“A common interest in the profits is an essential element to constitute a partnership.”).

These two elements were incorporated into a five-factor test that developed under the common law for partnership formation:
(1) intent to form a partnership,
(2) a community of interest in the venture,
(3) an agreement to share profits,
(4) an agreement to share losses, and
(5) a mutual right of control or management of the enterprise. Coastal Plains, 572 S.W.2d at 287 (citing Brown v. Cole, 291 S.W.2d 704, 709 (Tex. 1956), and Luling Oil & Gas, 191 S.W.2d at 722). These factors continued to guide the question of partnership formation when Texas promulgated and later amended statutory regimes governing partnerships.

2. Texas Statutory Law

The Texas Uniform Partnership Act (TUPA) was passed in 1961 and substantially adopted the major provisions of the Uniform Partnership Act (UPA), which itself was adopted in every state except Louisiana after it was approved by the National Conference of Commissioners on Uniform State Laws in 1914. See Harry J. Haynsworth, IV et al., Should the Uniform Partnership Act Be Revised?, 43 Bus. Law. 121, 121 (1987); Revised Unif. P’ship Act, 6 U.L.A. 45 (1997). TUPA was replaced by TRPA, effective January 1, 1994,3 the result of a project of the Partnership Law Committee of the State Bar of Texas Section on Business Law and the Texas Business Law Foundation. Act of May 31, 1993, 73rd Leg., R.S., ch. 917, § 1, 1993 Tex. Gen. Laws 3887, 3893. TRPA carried forward some of the common law modifications in ways relevant to this case that were promulgated in TUPA. The partnership in this case was allegedly formed in 1997. It is uncontested that TRPA governs this dispute; rather, the parties contest whether Deere has proven the existence of a partnership under TRPA.

TRPA provides that “an association of two or more persons to carry on a business for profit as owners creates a partnership.” Tex. Rev. Civ. Stat. art. 6132b-2.02(a). Unlike TUPA,5 TRPA articulates five factors, similar to the common law factors, that indicate the creation of a partnership. They are:(1) receipt or right to receive a share of profits of the business;(2) expression of an intent to be partners in the business;(3) participation or right to participate in control of the business;(4) sharing or agreeing to share:(A) losses of the business; or(B) liability for claims by third parties against the business; and(5) contributing or agreeing to contribute money or property to the business.Id. art. 6132b-2.03(a).

The common law required proof of all five factors to establish the existence of a partnership. See Coastal Plains, 572 S.W.2d at 287. However, TRPA contemplates a less formalistic and more practical approach to recognizing the formation of a partnership. First, TRPA does not require direct proof of the parties’ intent to form a partnership. Tex. Rev. Civ. Stat. art. 6132b-2.02 (stating that two or more persons may form a partnership regardless of “whether the persons intend to create a partnership”). Formerly, the intent to be partners was a “prime,” although not controlling, element in the creation of a partnership. Coastal Plains, 572 S.W.2d at 287. Instead, TRPA lists the “expression of intent” to form a partnership as a factor to consider. Tex. Rev. Civ. Stat. art. 6132b-2.03(a)(2). Second, unlike the common law, TRPA does not require proof of all of the listed factors in order for a partnership to exist. Third, sharing of profits—deemed essential for establishing a partnership under the common law—is treated differently under TRPA because sharing of profits is not required. Cf. Friedlander, 14 S.W. at 787 (“A common interest in the profits is an essential element to constitute a partnership.”). Still, TRPA comments note that the traditional import of sharing profits as well as control over the business will probably continue to be the most important factors. Tex. Rev. Civ. Stat. art. 6132b-2.03 Comment of Bar Committee. Additionally, TRPA recognizes that sharing of losses may be indicative of a partnership arrangement but states that such an arrangement is “not necessary to create a partnership.” Id. art. 6132b-2.03(c). TRPA also restates and extends the list of circumstances in TUPA that do not by themselves indicate that a person is a partner.7 Id. art. 6132b-2.03(b).

The question of how many of the TRPA factors are required to form a partnership is a matter of first impression for this Court. The TRPA factors seem to serve as a proxy for the common law requirement of intent to form a partnership by identifying conduct that logically suggests a collaboration of a business’s purpose and resources to make a profit as partners. After examining the statutory language and considering that TRPA abrogated the common law’s requirement of proof of all five factors, we determine that the issue of whether a partnership exists should be decided considering all of the evidence bearing on the TRPA partnership factors. While proof of all five common law factors was a prerequisite to partnership formation under the common law, the totality-of-the-circumstances test was, in some respect, foreshadowed in Texas case law. As Justice Jack Pope wrote for the San Antonio Court of Appeals,No single fact may be stated as a complete and final test of partnership. Each case must rest on its own particular facts and the presence or absence of the usual attributes of a partnership relation. The earlier Texas rule indicated that profit sharing was the controlling test.

The Texas Supreme Court reasoned that it is now generally held that such a test is not all-inclusive and controlling . . . . The absence of an express provision obligating the parties to share in the losses is also important and indicates that no partnership existed. But this feature too is not controlling.Davis v. Gilmore, 244 S.W.2d 671, 673–74 (Tex. Civ. App—San Antonio 1951, writ ref’d) (citations omitted). Many states apply this totality-of-the-circumstances test.

Whether a partnership exists must be determined by an examination of the totality of the circumstances.

Evidence of none of the factors under the Texas Revised Partnership Act will preclude the recognition of a partnership, and even conclusive evidence of only one factor will also normally be insufficient to establish the existence of a partnership under TRPA. However, conclusive evidence of all five factors establishes a partnership as a matter of law. In this case, Deere has not provided legally sufficient evidence of any of the five TRPA factors to prove the existence of a partnership. In this case, after going through its legal analysis of Texas partnership common and statutory law, the Court reversed the court of appeals’ judgment and reinstated the trial court’s take-nothing judgment.

Factors in considering the "totality of circumstances" in determining whether a partnership exists should therefore include the following:

1. Profit sharing;
2. Expression of intent to be partners;
3. Control;
4. Sharing of liability for third party claims; and
5. Contribution of money or property;


If you are a business owner or "partner" in Texas, contact a business litigation and trial attorney in Austin, Texas to evaluate your partnership case.