Derivative Suit Standing: Asshaser v. Wells Fargo Foothill, 263 S.W.3d 468 (Tex. App.—Dallas 2008, no pet.).
The Dallas Court of Appeals recently upheld the granting of a plea to the jurisdiction based on a limited partner's lack of standing to bring a claim individually that belongs to the limited partnership. The case held: "Without a breach of a legal right belonging to a plaintiff, that plaintiff has no standing to litigate." 263 S.W.2d at 471 (citing Nauslar v. Coors Brewing Co., 170 S.W.3d 242, 249 (Tex. App.—Dallas 2005, no pet.); Cadle Co. v. Lobingier, 50 S.W.3d 662, 669-70 (Tex. App.—Fort Worth 2001, pet. denied). "Only the person whose primary legal right has been breached may seek redress for an injury." 263 S.W.3d at 471 (citing Nauslar, 170 S.W.3d at 249; Nobles v. Marcus, 533 S.W.2d 923, 927 (Tex.1976) ("Without breach of a legal right belonging to the plaintiff no cause of action can accrue to his benefit.")). A Plea to the Jurisdiction is one of the very few motions under Texas Civil Procedure that can result in the dismissal of the lawsuit based solely on the plaintiff's pleadings. "The plaintiffs have the burden of alleging facts, if taken as true, affirmatively demonstrating a court's jurisdiction to hear a case." 263 S.W.3d at 471 (citing Nauslar v. Coors Brewing Co., 170 S.W.3d at 248). "Standing, as a component of subject matter jurisdiction, cannot be presumed, and the burden of alleging facts affirmatively showing the trial court's subject matter jurisdiction lies squarely with appellants." 263 S.W.3d at 473 (citing Bowles v. Wade, 913 S.W.2d 644, 649 (Tex. App.—Dallas 1995, pet. denied), abrogated on other grounds by Essenburg v. Dallas County, 988 S.W.2d 188 (Tex. 1998)). However, the court construes the pleadings in favor of the plaintiff. 263 S.W.3d at 471 (citing Nauslar, 170 S.W.3d at 249).
The plaintiffs were individuals who invested a total of $30 million in several Texas limited partnerships for the purpose of constructing a shopping mall. The project ran short of money, and Wells Fargo was asked to provide additional financing. That loan was later restructured, and Wells Fargo became a limited partner. Later a new lender was brought in, who provided additional financing but also bought out Wells Fargo's interest. Eventually, the project failed, and the plaintiff's lost their entire investment. Plaintiffs sued everyone associated with the project asserting individual claims for fraud and breach of fiduciary duty. Wells Fargo filed a plea to the jurisdiction, claiming lack of standing. The trial court sustained the plea, and the appellate court affirmed, holding that the breach of fiduciary duty claims asserted against Wells Fargo belonged to the limited partnerships and could not be brought by the limited partners individually. 263 S.W.3d at 472, reaffirming the holding in Nauslar v. Coors Brewing Co., 170 S.W.3d 242, 251 (Tex. App.—Dallas 2005, no pet.). The court stated: "We concluded Nauslar did not have a separate, individual right of action for injuries to the limited partnership that diminished the value of his ownership interest in the entity. Id. Willow, as the limited partnership, was the entity who suffered the direct injury from the harm to the limited partnership's worth and any loss to plaintiffs was both 'indirect to and duplicative of' the entity's right of action. Id. at 251. We concluded by noting '[t]he right of recovery is Willow's alone, even though the economic impact of the alleged wrongdoing may bring about reduced earnings, salary, or bonus.' Id." The court held that the plaintiff's complaint was that the money they invested in the limited partnerships was "squandered." The court held that these claims belong to the limited partnerships.
The plaintiff's predicament in this case is reminiscent of that in the landmark corporate law case of Cates v. Sparkman, 11 S.W. 846 (Tex. 1889), in which the plaintiff owned lands with coal deposits and entered into an agreement with the defendants to develop the deposits. The defendants formed a corporation, and the plaintiff placed the land into the corporation in exchange for stock. The project failed, and the plaintiff lost his land and was left with worthless stock. Similarly, the plaintiffs in Asshauser v. Wells Fargo Foothill, placed their money into the companies in exchange for limited partnership units for the purpose of developing a shopping mall; the project failed, and the plaintiffs lost their money and were left with worthless paper. In both situations, the representations, commitments and agreements that induced the plaintiffs to enter into the transactions were made to them in their individual capacities, and therefore they argued that the failure to keep those commitments was a wrong done to the plaintiffs individually, and certainly the plaintiffs felt the pain of the financial losses as individuals. However, both courts held, in essence, that once the money or property goes into the company, the duties regarding the management and use of those assets also go into the company. The plaintiffs in Asshauer attempted to persuade the court that the standing rule should apply only to preexisting entities, and that the limited partners should be able to sue individually if the fraud and breach of fiduciary duties was somehow involved in the creation of the limited partnership. The court of appeals did not bite, holding that there was no such exception that would confer standing where it did not otherwise exist. 263 S.W.3d at 472.
The plaintiffs also argued that the limited partnerships should be ignored entirely because they were from the start a sham to perpetrate a fraud. The court rejected that argument out of hand as contrary to the limited partnership statute. Id. at 473. The court did state that if Wells Fargo had acted to control the partnership, then it might be liable as a general partner, but that the plaintiffs had not alleged facts that would establish this theory. Id. (Actually, even if Wells Fargo was a de facto general partner, that would not change the lack of standing of the limited partners to sue on claims belonging to the limited partnership.) Finally, the court held that the limited partnership could not be pierced or ignored under an "alter ego," "sham to perpetrate a fraud," or similar theory because such a theory is not available for a limited partnership, for the reason that there is no "veil" to pierce in a limited partnership because a general partner is always primarily liable. Id. at 474 (citing Pinebrook Props., Ltd. v. Brookhaven Lake Prop. Owners Ass'n, 77 S.W.3d 487, 499-500 (Tex. App.—Texarkana 2002, pet. denied)). The court concludes: "Appellants further argue to refuse them standing to pursue their claims will result in an incurable injustice and provide a roadmap for other 'fraudsters' to entice other unsuspecting investors into a scheme that defrauds them of millions. Although appellants' allegations, if true, may amount to an egregious tale of mismanagement or deception, we refuse to alter the clear language of the limited partnership act and case law to afford them standing to sue."
The court's analysis is somewhat confused and misleading on these last points. If the plaintiffs were defrauded into entering into the partnership transaction in the first place, that is if they relied on false representations in exchanging their money for limited partnership units, then obviously the limited partnership form would not shield the fraud. In that case, the plaintiff's individually would have claims for fraud, and there would be no standing issue whatsoever. And, of course, the formation of the limited partnerships (or at least the investment transactions in which the plaintiffs participated) could be rescinded. The issue of "piercing" the "veil" of the limited partnership for the purpose of allowing one limited partner to sue another is a complete nonsequitor. If Wells Fargo had participated in the fraud or conspired in the fraud, then the plaintiffs would have individual claims against Wells Fargo without regard to whether or not Wells Fargo was a limited partner. The appellate opinion indicates that the plaintiffs did make these kinds of fraud claims in the lawsuit. Apparently, however, (although the court does not disclose this) Wells Fargo's participation in the challenged transaction came well after the plaintiffs had allegedly been defrauded into participating. If so, then any fraud that Wells Fargo committed in connection with the funding of the project would have been a fraud solely on the limited partnership.