If your business partner is also your life partner, you need to consider a recent Texas high court decision. (read more)
Gonzalez v. Maggio, 500 S.W.3d 656 (Tex. App. – Austin 2016) is a Texas case that illustrates the complexities of ending a business partnership along side of ending a personal partnership. The Texas Court of Appeals reviewed how a husband and wife, who were also law partners, would divide their clients, fees, and remaining clientele.
The case arose out of a divorce in which the husband and wife had also formed a law partnership during their marriage. There was no written partnership agreement but it was undisputed that they shared in the capital, profits and losses 50/50.
After the divorce, the husband and wife agreed that the wife would no longer be a member of the law firm and that the partnership would simply dissolve. They also agreed that their liabilities and any other outstanding issues would be resolved after the divorce was finalized. The parties later realized that simply their agreement did not terminate the partnership. Instead, under the Texas Business Organizations Code, the partnership would not be legally terminated until all of the obligations of the partnership had been fulfilled.
The husband sent a letter to all existing clients giving them the option of staying with the husband after the termination of the partnership or moving with the wife. The husband and wife were able to settle many of their cases prior to the finalization of the divorce. However, issues arose with the division of the legal fees.
At trial, the court divided the partnership assets and liabilities into “two buckets.” Bucket 1 was made up of 30 partnership-originated cases that settled; 25 of which had been resolved by the husband, and 5 of which were resolved by the wife. Bucket 2 consisted of 40 cases, of which the husband was counsel on 33, the wife was counsel on 6, and 1 had been referred to an outside attorney. The court found that the total fee amount for bucket 1 to be approximately $90,000.00 for which the court awarded the husband and wife each one-half. Bucket 2 was awarded to the husband and wife based on their involvement post-dissolution of the marriage. The husband appealed, arguing that the trial court had no authority to award interests in either Bucket 1 or 2 because the assets were never assets of the community. Husband argued that they were partnership property, not marital property. Wife argued that the division could be upheld on any theory supported by the evidence and further that the trial court acted properly in winding up the partnership.
The Court of Appeals agreed that the wife’s theory could support a division of the Bucket 1 items. However, as to Bucket 2 cases the Court of Appeals found that the trial court’s award of a percentage in the ongoing contingent fee contracts was inconsistent with the Texas Business Organizations Code which provided that a partner is only entitled to cash distributions during the winding up process if the partnership agreement allows.
In this case, there was no partnership agreement, therefore the court’s award of a percentage of interest in the cases created an award of partnership property that was prohibited. As such, Husband argued that the wife forfeited her right to any fees when the partnership dissolved and the wife withdrew from representing certain clients.
The Court of Appeals held that both the husband and the wife had continuing obligations to the partnership and confirmed the final judgment, including the division of Bucket 1 cases, but reversed and remanded for further proceedings the division of Bucket 2 cases.
If you anticipate issues such as this with your divorce proceedings, contact Dallas family law attorneys at McClure Law Group at 214-692-8200.