Texas Supreme Court Agrees to Review Controversial Ruling Regarding Texas Partnerships

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On June 28, 2019, the Texas Supreme Court agreed to review a ruling from the Fifth Court of Appeals in Dallas in the case of Energy Transfer Partners LP et al. v. Enterprise Products Partners LP et al, No. 529 S.W.3d 531 (Tex. App.—Dallas, 2017), a case that has drawn significant attention in the Texas energy industry and may have important implications on Texas partnership law.

Background

In early 2011, Enterprise Products Partners, L.P. (“Enterprise”) and Energy Transfer Partners, L.P. (“ETP”) discussed building a pipeline to transport crude oil from Cushing, Oklahoma to the Gulf Coast. Prior to beginning construction of the pipeline, the parties engaged in an “open season” to secure commitments from oil shippers and demonstrate whether the pipeline would be economically feasible. After securing only one commitment during the “open season” Enterprise approached a competitor of ETP about building a similar pipeline, and then proceeded to build the pipeline with the competitor instead of ETP.

Despite signing preliminary agreements that required certain conditions to be met, ETP sued Enterprise, saying that, due to their working relationship, ETP and Enterprise were partners under a five-factor statutory test[1] for determining whether a partnership exists under the Texas Business Organizations Code (the “TBOC”). As partners, ETP argued, Enterprise’s actions in building a pipeline with ETP’s competitor was a breach of Enterprise’s duty of loyalty to ETP. In 2014, a Dallas jury agreed with ETP that ETP and Enterprise were partners pursuant to the five-factor partnership test, and awarded ETP approximately $535 million in damages.

Subsequently, the Fifth Court of Appeals in Dallas reviewed the case and reversed the jury’s determination. The Fifth Court of Appeals held that there was no partnership because a preliminary letter agreement regarding the development of the pipeline included certain conditions precedent (specifically, approvals by both parties’ boards of directors and execution of definitive agreements) that were unmet and that the parties had not waived such conditions to permit the formation of the partnership. The Fifth Court of Appeals held that the five-factor partnership test was not the sole source of determining partnership formation, and the fact that the conditions precedent were not met precluded the formation of any partnership.

Following the Fifth Court of Appeals’ reversal, ETP petitioned the Texas Supreme Court to review and reverse the Fifth Court of Appeals’ decision. Among other arguments, ETP contends that the Fifth Court of Appeals erred in holding that other evidence (namely, the letter agreement containing the unmet conditions precedent) nullified all other evidence establishing a partnership under the five-factor partnership test.

On June 26, 2019, the Texas Supreme Court granted review and set the case for oral argument on October 8, 2019.

Our View

The trial and appellate court decisions in Energy Transfer Partners have created considerable uncertainty in determining whether a partnership is established in any particular situation. The Supreme Court will determine whether the five-factor test is determinative in establishing a partnership or whether, even if there is evidence supporting the establishment of a partnership under the statutory five-factor partnership test, parties may be able to contractually abrogate protections under Texas’ partnership laws by using conditions precedent in early letters of intent.

As shown in Energy Transfer Partners, whether or not a partnership is deemed established can have significant ramifications with respect to the duties and obligations persons engaged in business together have to each other, with potentially meaningful economic and reputational impacts. Practitioners in the energy industry and other sectors where partnerships are an integral part of doing business should take note of the significant implications posed by Energy Transfer Partners.

Footnotes

[1] The five-factor partnership test indicating that persons have created a partnership includes: the persons’ (1) receipt or right to receive a share of the profits of the business; (2) expression of an intent to be partners in the business; (3) participation or right to participate in the control of the business; (4) agreement to share or sharing in the losses of the business or liability for claims by third parties against the business; and (5) agreement to contribute or contributing money or property to the business.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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