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Appeals court partially agrees with lower bench on partnership dissolution

State Court

By Charmaine Little | Dec 19, 2019

Justice Tracy Christopher

HOUSTON -- An appeals court weighed in Dec. 5 on a messy dispute amid a dissolution of a partnership, only partially agreeing with a lower court’s ruling.

The Texas 14th Court of Appeals affirmed a judgment from a lower court that denied Shannon Medical Center’s petition for judicial dissolution, and the portion that awarded actual damages to the partnership in question, Regional Cancer Treatment Center, Ltd. Yet the appeals court reversed a disgorgement award in favor of Triad Holdings III L.L.C., ruling there was no proof that Shannon’s profited from the access in rent that was charged and paid to a separate company. 

Considering the new rulings, the appeals court also reversed the attorney fees and related legal costs that were awarded to Triad and the partnership and remanded the case back to the Tom Green County District Court for this part of the case alone.

Shannon took issue with a question charged to the jury over breach of the duty of care that doesn’t back the judgment “because none of the transactions or conduct relied upon give rise to a legally viable claim,” according to the opinion. The question was did Shannon comply with its duty of care to [Triad] and the partnership? 

The jury answered no, leading to Shannon’s argument that the lower court made a mistake in submitting question 6 as it intertwines effective and invalid ideas surrounding responsibility. But Justice Tracy Christopher wrote, “The scenarios that Shannon describes as invalid theories of liability were not submitted to the jury. They instead were merely factual matters that were admitted into evidence without objection or a request for a limiting instruction, and they were not encompassed in question 6.”

Justices Frances Bourliot and Jerry Zimmerer concurred.

Another issue for Shannon Medical Center was that the question for the jury was that it doesn’t properly tackle the partnership agreement and the amendments of the statutory duty of care. It said that the duty of care was forfeited contractually, and that its behavior was fine. Again, the appellate judges disagreed.

“As a matter of law, however, the duty cannot be disclaimed,” Christopher wrote. “A partner must conduct the partnership’s business ‘with the care an ordinarily prudent person would exercise in similar circumstances.’”

On top of that, any partner has the responsibility to release the partner’s responsibilities in good faith, and in a way that the partner believes is in the best interest of the partnership as whole, the court ruled.

While the Shannon Medical Center argued that there’s no proof to back the jury’s verdict that it didn’t act with its proper duty of care, the judges determined that it’s Shannon’s responsibility to show that the evidence shows did, in fact, follow the statutory duty of care, which Shannon failed to do, the judges ruled.

When it comes to Triad’s disgorgement award, the judges agreed with Shannon that it should be reversed because there’s no proof to show Shannon’s alleged profits. When coming up with the award for Triad, the lower court evaluated the jury’s answer to the question of what amount was improperly charged as rent, which the jury answered $575,725.

“But Texas law limits profit disgorgement to the amount of a fiduciary’s profits obtained as a result of the fiduciary breach of duty,” Christopher wrote. The judges supported Shannon’s claim that the partnership did pay its rent to the landlord, SRES, a corporation that’s completely different from Shannon, which serves as SRES’s only shareholder.

Shannon and Triad were initially partners for RCTC, which operated its facilities on property that was leased from Shannon’s subsidiary, Shannon Real Estate Services Inc. Shannon Medical Center initially sued for judicial dissolution in an attempt to oversee RCTC’s operations. Triad, in return, sued Shannon for breach of common-law and statutory fiduciary duties.

Since the court reversed the disgorgement award for Triad, the judges ruled that the case needs to be remanded to lower court to rule on attorney fees again.

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