Texas Supreme Court Clarifies Distinction Between Standing And Capacity In Limited Partnership Disputes

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In Pike v. Texas EMC Management, LLC, the Texas Supreme Court clarified Texas law on “standing” versus “capacity” when it comes to limited partnership disputes. Case No. 17-0557, 2020 WL 3405812 (June 19, 2020).

In Pike, several plaintiffs including a limited partnership, its general partner and one of its limited partners (the “LP Plaintiff”) sued fellow limited partners and others (“Defendants”) for claims that included trade secret misappropriation, breach of fiduciary duty, breach of contract and tortious interference with contract. Id. at *4. A jury found in favor of plaintiffs on several of their claims including claims of breach of fiduciary duty, trade secret misappropriation and conspiracy. Id. Defendants appealed to the Court of Appeals and ultimately to the Texas Supreme Court. Id. at *5.

In the Texas Supreme Court, certain of the Defendants purported to challenge the LP Plaintiff’s “standing” to recover damages for an injury suffered by the partnership. Id. The court was unclear whether Defendants were arguing “standing” in the constitutional sense, or more colloquially to describe a class of persons authorized to sue. Id. If the former, the court’s subject-matter jurisdiction was at issue. Id. The court determined that Defendants were not arguing jurisdictional standing because they sought a take-nothing judgment as opposed to a dismissal based on a lack of subject-matter jurisdiction. Id. at *6. Nevertheless, to resolve any doubt about its jurisdiction, the court analyzed whether the LP Plaintiff had standing to pursue its claim. Id.

The court held that the authority of a limited partner to recover for an alleged injury to the partnership is not a matter of constitutional standing. In explaining its decision, the majority observed that standing and capacity are both essential, albeit separate, requirements. “Standing” is when a plaintiff has been personally aggrieved, regardless of whether it has the legal authority to sue. Id. at *6 (quoting Coastal Liquids Transp. L.P. v. Harris Cty. Appraisal Dist., 46 S.W.3d 880, 884 (Tex. 2001)). “Capacity” is the legal authority to sue, regardless of whether the plaintiff has a justiciable interest in the controversy. Id.

Defendants argued that the LP Plaintiff could not assert its claims because an injury to an organization, including the impairment or destruction of its business, is a claim that is ordinarily vested in the organization. To recover individually, a limited partner or other stockholder must prove “a personal cause of action and personal injury.” Id. at *7 (discussing Wingate v. Hajdik, 795 S.W.2d 717, 719 (Tex. 1990) (internal citations omitted)). The court acknowledged these general principles, but went on to consider whether they affect constitutional standing and the court’s subject-matter jurisdiction. Id.

Texas’s test for standing tracks the federal test; accordingly, the court reviewed decisions from the United States Supreme Court and the Fifth Circuit interpreting Article III standing. Id. In its analysis, the court in Pike concluded that where a plaintiff suffers a concrete injury, such as the diminution in the value of its shares, constitutional standing exists thereby vesting courts with subject-matter jurisdiction. Id. at *8. Because the LP Plaintiff had suffered an injury, it had standing to bring its claim. Id.

Next the court considered whether the LP Plaintiff had the capacity to bring its claim. Id. at *11-12. In doing so, the court reviewed Texas partnership law noting that one partner is liable to another for a “violation of a duty to the partnership or other partners” that causes a “harm to the partnership or the other partners.” Id. at *11 (quoting Bus. Orgs. Code §152.210(2)). Further, one partner “may maintain an action against . . . another partner for legal or equitable relief” to protect individual rights and that the partnership may also bring a derivative claim for its injuries when certain requirements are met. Id. (discussing Bus. Orgs. Code §152.211(a)-(b)). The Texas Supreme Court held that the question of whether a claim brought by a partner “actually belongs to the partnership” is a matter of capacity because it is a “challenge to the partner’s legal authority to bring the suit.” Id. at *11.

Despite identifying these capacity issues and principles, the Texas Supreme Court ultimately held that it was unnecessary to decide whether the LP Plaintiff had the capacity to bring its claims. This is because there was insufficient evidence supporting the damages stemming from the LP Plaintiff’s loss in the value of the partnership. Accordingly, the Texas Supreme Court reversed the judgment in plaintiffs’ favor and rendered a judgment that “plaintiffs take nothing.” Id. at *25.

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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