Stanley v. Reef Securities, Inc.
314 S.W.3d 659, 2010 WL 2252633, 2010 Tex. App. LEXIS 4270 (2010)
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Rule of Law:
A charging order is the exclusive remedy for a creditor to satisfy a judgment from a debtor's partnership interest, but it does not prevent a creditor from using a turnover order to seize partnership distributions once they are in the debtor partner's possession. Once distributed, the funds become the partner's personal property and are no longer considered a 'partnership interest'.
Facts:
- Robert H. Stanley, a securities broker, formerly worked for Reef Securities, Inc., and their employment relationship ended in a dispute over their agreement.
- Stanley owns 90% of a limited liability company, Stanley Interests, LLC.
- Stanley Interests is the sole general partner of a limited partnership, R.H.S. 1996 Partners, Ltd. (R.H.S.).
- Stanley is also the sole limited partner of R.H.S.
- Stanley is the president, secretary, and sole employee of Stanley Interests, performing all of its work.
- As president of Stanley Interests, Stanley determines his own 'salary'.
- R.H.S. pays Stanley approximately $20,000 per month directly, even though Stanley claims to be an employee of Stanley Interests, which has never paid him.
Procedural Posture:
- Reef Securities, Inc. sued Robert H. Stanley for damages arising from an employment agreement.
- The dispute was resolved through arbitration, resulting in a judgment of $526,186 in favor of Reef Securities.
- Reef Securities obtained a writ of execution from the trial court, which was returned 'nulla bona', indicating no assets were found to seize.
- Reef Securities filed a postjudgment application in the trial court for a turnover order and appointment of a receiver to collect the judgment.
- The trial court granted the turnover order, concluding the monthly payments Stanley received were non-exempt partnership distributions, but denied the request for a receiver.
- Stanley appealed the trial court's turnover order to the Court of Appeals, and Reef Securities cross-appealed the denial of its request for a receiver.
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Issue:
Does the Texas Business Organizations Code, which makes a charging order the exclusive remedy to satisfy a judgment from a debtor's 'partnership interest', prevent a judgment creditor from using a turnover order to seize partnership distributions after they have been paid to the debtor partner?
Opinions:
Majority - Justice Lang-Miers
No, the Texas Business Organizations Code's provision for a charging order as the exclusive remedy against a partnership interest does not prevent a creditor from using a turnover order to seize partnership distributions after they have been paid to the debtor. The court reasoned that there is a critical distinction between a 'partnership interest'—the right to receive future distributions—and the distributions themselves once they have been paid. The charging order statute exclusively governs claims against the partnership interest itself to protect the partnership from disruption. However, once a distribution is made to a partner, it ceases to be a partnership interest and becomes that partner's personal property. As personal property, these funds are subject to collection remedies like a turnover order. The court also held that the monthly payments were not exempt 'current wages' because Stanley was a partner of R.H.S., not an employee, and partners are generally not entitled to compensation for services absent an agreement. Thus, the payments were non-exempt partnership distributions subject to the turnover order.
Analysis:
This decision clarifies the scope and limitations of two key creditor remedies in the context of partnerships and LLCs. It establishes that while a charging order is the sole method to attach a debtor's ownership interest in a partnership, it does not immunize the actual cash distributions once they land in the debtor's hands. This prevents debtors from using partnership structures as an impenetrable shield to avoid judgments, ensuring that creditors can reach non-exempt funds after they are distributed. The ruling is significant for asset protection and judgment collection, as it confirms that the character of funds changes upon distribution, moving them from a protected partnership interest to seizable personal property.
