Gary Phillips v. Boo 2 You, LLC George Steven Smith And Linda K. Smith ( 2016 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-14-00406-CV
Gary Phillips, Appellant
v.
Boo 2 You, LLC; George Steven Smith; and Linda K. Smith, Appellees
FROM THE COUNTY COURT AT LAW NO. 4 OF WILLIAMSON COUNTY
NO. 12-0966-CC4, HONORABLE JOHN MCMASTER, JUDGE PRESIDING
MEMORANDUM OPINION
Appellant Gary Phillips appeals from the summary judgment and sanctions order
rendered by the county court at law of Williamson County in a suit seeking to establish the existence
of a partnership. Appellees are George Steven Smith and Linda K. Smith, husband and wife, and
Boo 2 You, LLC, a Texas Limited Liability Company (Boo). We will affirm the judgment.
Phillips pleaded that in the spring of 2010, the parties created a partnership and
entered into an agreement relating to the operation of a business selling Halloween products.
Phillips asserted further that appellees failed to distribute to him his share of the profits, $29,638.80,
claiming that such failure constituted a breach of the partnership agreement as well as a breach of
contract, breach of fiduciary duty, and unjust enrichment.1
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Phillips burdens review of this cause by improperly citing to and relying upon Rule 198
“deemed” admissions when, in fact, those admissions had been set aside by the court before the
summary-judgment hearing. By motion, appellees requested this Court to sanction Phillips based,
Appellees’ motion for summary judgment asserted among other things that there
was no evidence of one or more of the statutory factors that indicated the parties intended to form
a partnership.2
Appellees’ summary-judgment proof shows that Boo is a limited-liability company
engaged in the seasonal business of selling Halloween merchandise on consignment. Steven Smith
is the managing member of Boo and Linda, who is not a member of Boo, helps him operate
the business. For two or more Halloween seasons, Phillips had lent substantial sums of money to
Boo for its annual operations. These loans were evidenced by promissory notes that were repaid
with interest. The summary-judgment proof showed further that in 2010 Phillips approached
Steven Smith about becoming a member of Boo. Smith did not agree to this request, but did offer
Phillips an opportunity to share profits in three of Boo’s stores for the upcoming Halloween season
provided that Phillips pay one-half of the expenses and participate in the operation of those stores
throughout the Halloween season. Phillips contributed one-half of the expenses of the three stores,
but he failed to help in their operation throughout the season. As a result, Boo did not share profits
from the operation of those stores with Phillips, but it did repay him $80,000 with interest for the
loans that he had made to Boo to fund the 2010 season.
in part, upon his citing the “deemed” admissions in his brief, thereby representing to the Court
that such admissions were part of the summary-judgment proof. We will overrule appellees’ motion.
In our review of the record, we will, of course, disregard the deemed admissions.
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It appears that appellees’ motion for summary judgment was drawn pursuant to
Texas Rule of Civil Procedure 166a(i). Although not required, appellees presented supporting
summary-judgment evidence.
2
In his summary-judgment response, Phillips asserted that in March 2010, the parties
signed a Letter of Understanding (LOU) pertaining to the operation of a business engaged in
selling Halloween merchandise. Phillips maintained that the LOU “evidenced both the creation of
a partnership as well as Phillips’s right to one-half of the net proceeds.”
The LOU provides as follows:
Letter of Understanding
This Letter of Understanding (LOU) will confirm what was discussed this date by
Linda and Steve Smith and Gary Phillips.
Steve and Linda Smith dba Boo 2 You, LLC and Gary Phillips have agreed to open
several more stores under the franchise granted to Boo 2 You, LLC by parent
company Spirit Halloween, Egg Harbor Township, New Jersey. The parties have
agreed to open stores in Huntsville and Waco, Texas and any other store
opportunities that Spirit Halloween may grant to Boo 2 You, LLC in the future.
The partnership between the parties has been agreed [sic] to provide for a 50/50 split
in the net proceeds of the above mentioned stores. This shall require both parties to
equally share in the expenses of opening such stores.
This date a check in the amount of $5,000 is being tendered to Boo 2 You, LLC by
Gary Phillips which shall represent 50% of the consignment deposit that is required
by Spirit Halloween. These monies shall be expressly used for this purpose and no
other purpose. It is understood that the consignment deposit shall be the first monies
disbursed to the parties after satisfying all expense associated with the operation of
the stores above. After these monies ha[ve] been disbursed to the respective parties,
all net proceeds shall be split 50/50. Each party shall be individually liable for all
federal, state, local and any other taxes that may be owed.
After a hearing, the trial court granted appellees’ motion for summary judgment and
imposed sanctions on Phillips, concluding that his lawsuit was frivolous and was vexatiously
prosecuted for the purposes of harassment.
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Existence of Partnership
In Texas, a general partnership is an association of two or more persons to carry
on a business for profit as owners, regardless of whether the persons intend to create a partnership
or whether the association is called a “partnership.” Tex. Bus. Orgs. Code § 152.051(b). Factors
indicating that persons have created a partnership include:
(1) receipt or right to receive a share of the profits of the business;
(2) expression of an intent to be partners in the business;
(3) participation or right to participate in control of the business;
(4) agreement to share or sharing:
A. losses of the business; or
B. liability for claims by third parties against the business; and
(5) agreement to contribute or contributing money or property to the business.
Id. § 152.052(a).3
The Supreme Court has adopted a “totality-of-the-circumstances test” for
partnership formation. See Ingram v. Deere, 288 S.W.3d 886, 896 (Tex. 2009). In Ingram, the
court acknowledged that the totality-of-the-circumstances test may be difficult to apply uniformly,
but it offered guidelines for application. See id. at 898. An absence of evidence as to all five factors
will preclude the recognition of a partnership and even conclusive evidence of only one factor
3
The previous statute, Texas Revised Partnership Act, expired on January 1, 2010, several
months before all of the events made the basis of this appeal. General partnerships are now
governed by Chapter 152 of the Texas Business Organizations Code. See Tex. Bus. Orgs. Code
§§ 152.001–.914.
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will normally be insufficient to establish the existence of a partnership. Id. On the other hand,
conclusive evidence of all five factors will establish the existence of a partnership as a matter of law.
Id. Points on the spectrum between the extremes present the “challenge” of the totality-of-the-
circumstances test. Id. In Ingram, the court concluded that the proponent of the partnership
agreement adduced no evidence of any of the five factors, and therefore that there was no
partnership as a matter of law. See id. at 904; see also Hoss v. Alardin, 338 S.W.3d 635, 650
(Tex. App.—Dallas 2011, no pet.) (concluding that because proponent of partnership adduced
no evidence of four factors and only weak evidence of fifth factor, there was no partnership as
matter of law).
In his summary-judgment response, Phillips relies upon his affidavit, his deposition
testimony, the LOU, and the “deemed” admissions as support for all of the section 152.052(a)
factors.
We will consider whether there is any genuine issue of material fact as to the
factors indicative of a partnership. Initially, we observe that statements in Phillips’s affidavit and
deposition to the effect that the parties agreed to enter into a partnership are legal conclusions by
a lay witness and do not prove the existence of a partnership. See Hoss, 338 S.W.3d at 644–45
(citing Ben Fitzgerald Realty Co. v. Muller, 846 S.W.2d 110, 121 (Tex. App.—Tyler 1993,
writ denied)).
Profit Sharing
Phillips claims that he produced “almost insurmountable evidence” that the
partnership existed. He suggests that the LOU memorializes the partnership formation and sets out
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its terms. He points to the language in the LOU providing for a “50/50 split in the net proceeds” of
the three stores as satisfying the profit-sharing factor. See Tex. Bus. Orgs. Code § 152.052(a)(1).
The LOU does refer to a profit-sharing agreement of some character between
the parties arising from the operation of three stores. The Smiths claim, however, that the agreement
was conditioned upon Phillips lending the business $80,000 to be repaid with interest when the
2010 Halloween season’s books were closed and upon Phillips working at the three stores
throughout the 2010 Halloween season. Although nothing in the LOU refers to an “agreement” for
Phillips to provide labor, Steven Smith’s summary-judgment proof indicates that the profit-sharing
agreement included Phillips’s provision of some character of labor at the three stores.
Phillips lent the business the money that was repaid with interest, but he did not
work in the stores through the Halloween season. After a dispute with Linda Smith at the end of the
second week in October, Phillips left work and did not return.
The receipt or right to receive a share of the profits of the business is one factor
indicating that persons have created a partnership. However, an agreement to share profits does
not, alone, establish the fact of partnership because partnerships are not the only business
arrangements in which profits are shared. See Tex. Bus. Orgs. Code § 152.052(b)(1). If persons
sharing profits do not intend to share them as co-owners, they are not partners. See Strawn Nat’l
Bank v. Marchbanks, 74 S.W.2d 447, 450 (Tex. Civ. App.—Eastland 1934, writ ref’d); see also Tex-
Co Grain Co. v. Happy Wheat Growers, Inc., 542 S.W.2d 934, 936–37 (Tex. Civ. App.—Amarillo
1976, no writ). Furthermore, the Texas Business Organizations Code in its definition of partnership
recognizes ownership as an element of partnership. See Tex. Bus. Orgs. Code § 152.051(b). Upon
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this authority, the Smiths then argue that the profit-sharing agreement was not based upon Phillips’s
co-ownership of the business, but instead upon his performance of work at the stores for the
Halloween season.
To the contrary, Phillips summary-judgment proof indicates that he did not have a
commitment to work at the stores. Instead, he was working there for “fun” and to have something
to do to fill out the days.
We conclude that the summary-judgment record raises a genuine issue of fact as to
this factor.
Expression of Intent to Be Partners
The expression of an intent to be partners in the business is one of the factors
employed in determining whether a partnership exists. See id. § 152.052(a)(2). The Supreme Court
in Ingram made clear that this factor is distinct from the other four factors and that courts, in
reviewing facts said to support this factor, should only consider evidence not specifically probative
of the other factors. See 288 S.W.3d at 900.
As we understand Phillips’s brief, he relies primarily upon the LOU to establish that
the parties intended to form a partnership. However, because Phillips relied upon the LOU in his
effort to demonstrate the right to receive a share of the profits of the business, he may not also rely
upon the LOU to establish an intent to form a partnership. See id. There is no other summary-
judgment proof that the parties even discussed or used the word “partnership” to describe their
relationship other than Phillips’s non-probative deposition testimony regarding the execution of the
LOU and the single mention of “partnership” in the LOU.
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When considering whether the parties expressed an intent to be partners, courts
should review the putative partners’ speech, writing, and conduct. Id. at 899. Evidence of intent
to become partners could include the parties’ statements that they are partners, one party holding
the other party out as a partner on the business’s letterhead or name plate, or a signed partnership
agreement. Id. at 900.
Phillips does not direct our attention to any proof in his summary-judgment response
that the parties referred to each other as partners, held themselves out as partners, or had stationery,
letterhead, business cards, or a bank account for the claimed partnership. Accordingly, there is no
summary-judgment proof that the parties expressed an intent to be partners in the business.
Control
Shared rights to control the business, along with shared rights to profits, are generally
considered the most important factors in establishing the existence of a partnership. Id. at 896. In
his deposition, Phillips admitted that he had no control or managerial authority.
Sharing of Losses and Liability for Third-Party Claims
In his affidavit, Phillips tries to characterize his loans to Boo as his risk of loss. But
there is no summary-judgment proof that the parties even discussed losses or liabilities for claims by
third parties, much less agreed that Phillips’s loan of $80,000 for expenses would cap his exposure
for losses. See id. at 902 (finding no evidence of this factor when the parties never discussed losses,
only expenses).
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Contributions of Money or Property
For the 2010 Halloween season, Steven Smith asked Phillips for several loans totaling
$80,000 for operation of the business. These sums were repaid along with 12% interest in less
than a year. Phillips characterizes the $80,000 loan as a “capital contribution” with no further
explanatory argument or authority. Viewed in isolation, Phillips’s loans might be regarded as
partnership contributions. However, we are charged not to view the partnership evidence in isolation
but rather in the “totality of the circumstances.” Id. at 897–98.
Phillips and the Smiths had a history of a lender–borrower relationship for some
time before 2010. The money Phillips lent in 2010 and its repayment at 12% interest are entirely
consistent with their past lender–borrower pattern. These loans appear less like a contribution from
a partner and more akin to a loan from a lender. We conclude that the summary-judgment proof does
not raise a genuine fact issue on this factor.
We have determined that Phillips failed to raise fact issues with respect to four of the
five statutory factors. Phillips raised a fact issue as to only an agreement to share profits. Most of
the summary-judgment proof, however, was inconsistent with the proposition that Phillips and the
appellees formed a partnership. Under the totality-of-the-circumstances test prescribed by Ingram,
we conclude that the summary-judgment proof failed to raise a genuine issue of fact as to the
existence of a partnership. See Hoss, 338 S.W.3d at 650.
Phillips’s Remaining Claims
Appellees moved for summary judgment on Phillips’s claims for breach of
contract, breach of fiduciary duty, and unjust enrichment. The court granted the motion for summary
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judgment in its entirety. As we read Phillips’s brief, he has either failed to complain on appeal of
the court’s disposition of these claims or has failed to provide briefing and argument in support of
any such complaints. Appellate complaints are required to be supported by argument and authority,
and if not so supported, the complaints are waived. See Tex. R. App. P. 38.1 (requiring appellate
brief to include “clear and concise argument for the contentions made, with appropriate citations to
authorities and to the record”); Hale v. Ramsey, 524 S.W.2d 436, 438 (Tex. Civ. App.—Austin 1975,
no writ) (citing Rayburn v. Giles, 182 S.W.2d 9, 13 (Tex. Civ. App.—San Antonio 1944,
writ ref’d)); see also Fredonia State Bank v. General Am. Life Ins. Co., 881 S.W.2d 279, 284
(Tex. 1994) (acknowledging appellate courts’ discretion to deem inadequately briefed issues
waived).
Order Setting Aside Rule 198 Admissions
In his reply brief, Phillips, for the first time, attacks the trial court’s order setting aside
the Rule 198 admissions. Phillips’s argument will not be considered. An appellant may not include
in his reply brief a new issue not raised in the original brief. Howell v. Texas Workers’ Comp.
Comm’n, 143 S.W.3d 416, 439 (Tex. App.—Austin 2004, pet. denied) (citing Tex. R. App. P. 38.1
(limiting appellant’s reply brief to “addressing any matter in the appellee’s brief”)).
Sanctions Order
The court granted appellees’ motion for sanctions and signed an order requiring
Phillips to pay appellees $10,000 in attorney’s fees and costs for filing the suit that the court found
to be “frivolous and vexatiously prosecuted for the purposes of harassment.” See Tex. Civ. Prac. &
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Rem. Code § 10.001 (signing of pleading or motion indicates, among other things, signatory’s belief
that document not presented for “any improper purpose,” including to harass, cause delay, or
increase costs; and claims, defenses, and legal contentions are warranted and nonfrivolous).
The court considered the motion for sanctions immediately following the summary-
judgment hearing. Appellees’ counsel’s affidavit proving up attorney’s fees in the sum of $7,500
was before the court as was the summary-judgment proof. At the hearing, counsel represented that
his attorney’s fees had increased to $16,000 from the date of his affidavit to the date of the summary-
judgment hearing
Appellees’ counsel directed the court’s attention to: (1) an element of Phillips’s
damage claim and (2) several discovery matters previously heard by the court. With respect to the
damage claim, Phillips sought $6,250 for the “useful life” of shelves that appellees had purchased
with money that Phillips had lent them even though the loan had been fully repaid with interest.
Under the circumstances, Phillips had no legitimate claim to property purchased with funds from his
loan. Counsel also recalled to the court’s attention several discovery hearings in which Phillips had
attempted to obtain appellees’ financial records reflecting transactions occurring after the time period
involved in the lawsuit.
An appellate court reviews a trial court’s imposition of sanctions for an abuse of
discretion. Low v. Henry, 221 S.W.3d 609, 614 (Tex. 2007); Bennett v. Grant, 460 S.W.3d 220, 255
(Tex. App.—Austin 2015, pet. filed). The reviewing court must determine that the sanctions were
appropriate or just. See American Flood Research, Inc. v. Jones, 192 S.W.3d 581, 583 (Tex. 2006).
A sanction is just if there is a direct nexus between the improper conduct and the sanctions
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imposed, and if the sanction is not excessive. See id. (citing TransAmerican Nat. Gas Corp.
v. Powell, 811 S.W.2d 913, 917 (Tex. 1991)).
The trial court had before it the summary-judgment record demonstrating the lack
of merit of Phillips’s partnership claim. The court could also consider the fanciful damage claim
(the shelves) and the history of Phillips’s harassing discovery battles. Phillips does not defend his
damage theory (the shelves), nor does he dispute the occurrence of the discovery hearings. Further,
Phillips does not contend that the amount of the sanctions order was excessive. We conclude that
the sanction order was just and not an abuse of discretion.
The judgment is affirmed.
Bob E. Shannon, Justice
Before Justices Goodwin, Bourland, and Shannon*
Affirmed
Filed: May 13, 2016
* Before Bob E. Shannon, Chief Justice (retired), Third Court of Appeals, sitting by assignment.
See Tex. Gov’t Code § 74.003(b).
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