Marshall v. Marshall
735 S.W.2d 587, 1987 Tex. App. LEXIS 8272 (1987)
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Rule of Law:
Under the Texas Uniform Partnership Act (UPA), which adopts the entity theory of partnership, profits distributed from a partner's separate property partnership interest during a marriage are community property.
Facts:
- Arlene O. Marshall and J.W. “Woody” Marshall remarried on March 18, 1983, approximately five months after their first divorce.
- Before the second marriage, Woody Marshall owned an interest in Marshall Pipe and Supply Company, an oil and gas partnership, which was his separate property.
- During the second marriage, the partnership disbursed a total of $542,315.72 to Woody.
- From these funds, the partnership paid $125,375.50 for Woody's 1982 income tax liability, a separate debt he incurred before the second marriage.
- Woody also gave over $63,000 in funds, derived from the partnership distributions, to his daughter and grandson during the marriage.
- During the marriage, Arlene started a business, Leasing Telephone Concepts, Inc. (LTC), which incurred $60,000 in debt.
- The couple used household furnishings that had been purchased by the partnership before their marriage.
Procedural Posture:
- Arlene Marshall and Woody Marshall each filed for divorce in a Texas trial court.
- The suits were consolidated, with Woody designated as petitioner and Arlene as cross-petitioner.
- The trial court entered a final decree of divorce on December 31, 1985.
- The trial court's division of property characterized the partnership distributions to Woody as his separate property, denied Arlene's claim for reimbursement for community funds used to pay Woody's separate tax debt, and characterized the debt from Arlene's business as her separate obligation.
- Arlene Marshall appealed the property division to the Texas Court of Appeals, and Woody Marshall and the partnership filed cross-points of error.
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Issue:
Are distributions of profits from a spouse's separate property partnership, received during the marriage, considered community property under the Texas Uniform Partnership Act?
Opinions:
Majority - Stewart, Justice
Yes. Under the entity theory of partnership adopted by the Texas Uniform Partnership Act (UPA), distributions of profits received by a spouse from a separate property partnership during marriage are community property. The court rejected Woody's argument that the distributions were a return of his separate capital, explaining that the UPA fundamentally changed prior law. Under the UPA, a partnership is an entity that owns the partnership property; the partners own only their interest in the partnership (the right to receive profits). Therefore, when profits are distributed during marriage, they are community property income, regardless of the separate character of the underlying partnership interest. The court distinguished the pre-UPA case of Norris v. Vaughan, holding its 'mutation of capital' reasoning is inapplicable to partnership distributions after the adoption of the UPA. The court also found that a separate property agreement from the parties' first marriage did not apply to their second marriage.
Analysis:
This case is significant for clarifying the interplay between Texas partnership law and community property principles after the state's adoption of the Uniform Partnership Act. It firmly established that the UPA's 'entity theory' supersedes the older 'aggregate theory' for characterizing partnership distributions in a divorce. The decision effectively limits the precedent of Norris v. Vaughan, making it clear that proceeds from a separate property business entity, when distributed as profits during marriage, are presumptively community property. This provides a bright-line rule for family law practitioners and prevents spouses from using the partnership form to shield income from the community estate by labeling profit distributions as returns of separate capital.
