In Pike v. Texas EMC Management, LLC, No. 17-0557, 2020 WL 3405812 (June 19, 2020), the Texas Supreme Court clarified the confusing patchwork of appellate opinions addressing jurisdictional standing for partners seeking damages for injuries to the value of partnership interests. The Court also ruled that the plaintiffs’ damages claims were insufficient, effectively erasing over $8M in damages.
In the standard partnership dispute, Partner A and Partner B form “OldCo,” it falls on hard times, the Partners cannot decide how to move forward, and Old Co’s assets/idea end up getting used by a third party, usually under Partner A’s control (“NewCo.”). Because NewCo is successful, Partner B sues alleging breach of fiduciary duty, breach of contract, misappropriation of trade secrets, and multiple other claims for good measure. In Pike, Partner B was awarded over $8.5 million in damages for misappropriation of OldCo’s trade secrets, conspiracy, and breach of the OldCo partnership agreement.
Until Pike, a primary defense against Partner B’s claims is that the injuries it seeks to recover belong to OldCo, and thus Partner B has no “standing” to bring such claims. Multiple decisions from the Texas Courts of Appeals bar someone in Partner B’s situation from suing Partner A and NewCo., often relying upon Wingate v. Hajdik, 795 S.W.2d 717 (Tex. 1990). The Court however noted that Texas statutes now allow some limited recovery of stakeholders to pursue an organization’s claims, and clarified that the general inability of a partner to seek recovery for damages suffered by the partnership under Wingate does not mean that said partner lacks constitutional standing to bring the claims:
For these reasons, we hold that partner or other stakeholder in a business organization has constitutional standing to sue for an alleged loss in the value of in its interest in the organization. In so holding, we are mindful of the statutory provisions that define and limit a stakeholder’s ability to recover certain measures of damages, which protect an organization’s status as a separate and independent entity. Those provisions, however, go to the merits of the claim; they do not strip a court of subject-matter jurisdiction to render a take-nothing judgment if the stakeholder fails to meet the statutory requirements.
Texas Business & Organizations Code Chapters 152 and 153 provide the clarity for who has the capacity to bring the claims (the partnership or the limited partners), and in what circumstances such claims are appropriate. Unfortunately for Partner B, while it was successful in rebuffing the defendants’ standing challenge, the Court ultimately vacated the judgments it obtained for failing to properly support its damages through expert testimony.
The full opinion can be found by clicking the PDF link below.
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