Court Reverses Receivership Order In Partnership Dispute Because The Probate Court Did Not Have Jurisdiction To Enter A Rehabilitative Receivership

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In In re Estate of Hallmark, an executrix of an estate filed suit in probate court for declarations regarding a partnership and sued the other partners. No. 11-18-00187-CV 2020 Tex. App. LEXIS 7063 (Tex. App.—Eastland August 31, 2020, no pet. history). One partner filed a cross-claim against the other partner for mismanagement and sought a receivership, which was granted. The managing partner then appealed.

The court of appeals held that the probate court did not have jurisdiction to enter the receivership. The trial court’s order held that it was awarding a receivership under the Texas Civil Practice and Remedies Code Chapter 64 and under the Texas Business Organizations Code. However, the Business Organizations Code provides that “[a] receiver may be appointed for a domestic entity or for a domestic entity’s property or business only as provided for and on the conditions set forth in this code.” Id. (citing Tex. Bus. Orgs. Code § 11.401). Because the partnership was a domestic entity, the receivership order had to stand, if at all, under the Texas Business Organizations Code.

The court then looked at the Texas Business Organizations Code and held that because the receivership order gave the receiver control over the entirety of the partnership’s business, it was a rehabilitative receivership and not one for a specific asset. The court held: “the characterization of the receivership order as a rehabilitative receivership under Section 11.404 or a receivership for specific property under Section 11.403 is significant from a jurisdictional standpoint because a rehabilitative receivership can only be ordered by a district court.” Id. Because the probate court did not have statutory jurisdiction under the Texas Organizations Code to award a rehabilitative receivership, the court reversed the order.

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