Opinion ID: 2781383
Heading Depth: 1
Heading Rank: 3

Heading: partnership factors

Text: As noted above, the district court determined that three of the section 152.052 factors were absent: the sharing of profits, expression of the intent to be partners, and contribution of money or property to the purported partnership. It concluded that only two factors are present—the FDIC’s control over the business and the sharing of losses. We address each factor below in the order presented in section 152.052.
The first section 152.052 factor is the “receipt or right to receive a share of profits of the business.” The district court concluded that there was no profitsharing arrangement after examining not only the PAA and LSA to determine whether or not the FDIC and BB&T agreed to share profits but also BB&T’s 8- K and a “Loss Share Questions and Answers” page from the FDIC’s website. 19 We need not go beyond the language of the agreements. Under the PAA, BB&T acquired assets from the FDIC (as Colonial’s receiver) in hopes of recovering money from third parties, as Eagle is trying to do on the Notes in this case. Neither the PAA nor LSA say anything about BB&T sharing any profits (i.e., recovery in excess of what BB&T paid for an asset) with the FDIC. Defendants argue that the LSA establishes profit-sharing through provisions that require BB&T to repay certain funds to the FDIC. The LSA does not support that interpretation. Article II of the LSA provides that if BB&T takes a loss on assets it acquired, the FDIC will reimburse BB&T 80% of the loss up to $5 billion, but if BB&T recovers on assets for which it received a reimbursement, BB&T must then repay the FDIC for the reimbursement. The LSA concerns only the sharing of losses; it has nothing to do with profits. 19 2014 WL 696523, at -6. 8 Case: 14-10353 Document: 00512945235 Page: 9 Date Filed: 02/23/2015 No. 14-10353 Thus, we agree with the district court that there is no evidence of profitsharing under the PAA and LSA.
The district court found that the FDIC and BB&T did not express the intent to be partners in the legal sense, notwithstanding the use of the word “partners” in a press release regarding the FDIC’s loss-sharing program. 20 We agree.
The third section 152.052 factor is the “participation or right to participate in control of the business,” and it is the most important issue in this appeal. The district court set out the correct legal standards for finding control under Texas law. The district court reiterated that control, “like the sharing of profits, has been traditionally viewed as one of the most important factors in determining the existence of a partnership.” 21 In Ingram, the Texas Supreme Court explained that “[t]he right to control a business is the right to make executive decisions.” The district court cited further rules from Texas cases: Facts that may indicate the right to control the business include “exercising authority over the business’s operations, the right to write checks on the business’s checking account, control over and access to the business’s books, and receiving and managing all of the business’s assets and monies.” Texas courts have noted, however, that mere input into the operations of the business does not constitute evidence of a right to control the business. Furthermore, performing administrative tasks for the business does Id. at -7. 20 Id. at  (citing Westside Wrecker Serv., Inc. v. Skafi, 361 S.W.3d 153, 171 (Tex. Ct. 21 App. 2011)). 9 Case: 14-10353 Document: 00512945235 Page: 10 Date Filed: 02/23/2015 No. 14-10353 not evidence a party’s control over the operations of the business. 22 Although the district court set out the correct standards under Texas law, it misinterpreted the PAA and LSA’s provisions granting the FDIC certain oversight authority and erroneously concluded that the FDIC had control over BB&T’s business. First, as the district court conceded, “Much of the language in the PAA and LSA evidence an intent to sell and transfer outright all of the FDIC’s interest in the subject assets.” 23 By way of example, the district court quoted from Article 3.1 of the PAA, which provides that BB&T “purchases from the [FDIC], and the [FDIC] hereby sells, assigns, transfers, conveys, and delivers to [BB&T], all right, title, and interest of the [FDIC] in and to all of the assets . . . .” 24 The district court also noted that another district court has concluded that the FDIC did not form a joint venture with a private company through an LSA which used identical language. 25 Despite acknowledging correctly that the PAA and LSA effected a total transfer of assets from BB&T, the district court concluded that the agreements nevertheless gave the FDIC enough control to rise to the level of a partnership. First, the district court found significant the PAA’s requirement that BB&T “preserve and maintain for the joint benefit of the [FDIC] . . . and [BB&T], all Records of which it has custody for such period as . . . the [FDIC] . . . in its discretion may require . . . .” 26 It cited other provisions requiring 22 Id. (citations omitted) (see Sewing v. Bowman, 371 S.W.3d 321, 334 (Tex. Ct. App. 2012); Rojas, 393 S.W.3d at 841; Knowles v. Wright, 288 S.W.3d 136, 147 (Tex. Ct. App. 2009); and Big Easy Cajun Corp. v. Dall. Galleria Ltd., 293 S.W.3d 345, 349 (Tex. Ct. App. 2009)). 23 Id. at . 24 Id. 25 Id. (citing Bank of the Ozarks v. IS Motel Corp., No. 4:12-CV-0024-HLM, 2012 WL 1134733 (N.D. Ga. Apr. 2, 2012)). 26 Id. at  (quoting PAA). 10 Case: 14-10353 Document: 00512945235 Page: 11 Date Filed: 02/23/2015 No. 14-10353 BB&T to keep books and provide auditor reports to allow the FDIC to determine BB&T’s compliance with the PAA and LSA. 27 Second, the district court reasoned that the standards of care required of BB&T under the PAA and LSA are similar to standards of care for partners under Texas law, 28 such as the duty to act in good faith and the duties of loyalty and care. It based this conclusion on the LSA’s requirement that BB&T obtain FDIC approval before entering into a transaction with one of BB&T’s affiliates and before taking any action to the detriment of transferred assets, as well as the LSA’s requirement that BB&T exercise “best business judgment” and use its “best efforts to maximize collections.” 29 Third and finally, the district court found that “the PAA and LSA provide the FDIC with the right to exercise authority over BB&T’s administration, management, and collection of subject assets” even though “the FDIC does not conduct the day-to-day affairs of the business” because BB&T is required to “collaborate” with the FDIC. 30 Specifically: The terms of the LSA provide the FDIC with explicit authority over the operation of the business. Under the LSA, the FDIC need not make a payment to BB&T if the FDIC determines that the charge-off “should not have been effected by [BB&T].” The FDIC may require BB&T to assign, transfer, and convey any asset back to the FDIC if the FDIC “determines in its discretion that [BB&T] [are] not diligently pursuing collection efforts . . . .” The LSA requires BB&T to prioritize its management and collection efforts, stating that BB&T must “use [its] best efforts to maximize collections with respect to [subject assets] . . . without regard to the effect of maximizing collections on [non-subject assets] . . . .” Additionally, BB&T are prohibited from 27 Id. 28 Id. at . 29 Id. 30 Id. 11 Case: 14-10353 Document: 00512945235 Page: 12 Date Filed: 02/23/2015 No. 14-10353 assigning or transferring their rights under the LSA without the FDIC’s prior written consent, which can be withheld in the FDIC’s “sole discretion.” Moreover, the LSA provides that BB&T must reimburse the FDIC for any recoveries made on the subject assets. Furthermore, the LSA states that BB&T are “responsible to the [FDIC] . . . in the performance of its duties.” Under the terms of the LSA, the FDIC has authority to oversee and control how BB&T manages, collects, and recovers the subject assets—what Plaintiff refers to as “the core functions of the business.” 31 We conclude that these provisions, whether viewed in isolation or together, do not rise to partnership-level control under Texas law. Rather, they grant the FDIC reasonable oversight to ensure that BB&T carries out the contracts entered into by two unrelated entities. All of the provisions must be interpreted in the context of the full PAA and LSA. The purpose of the agreements is to ensure that BB&T maximizes recovery on the transferred assets, not because the FDIC will share in the profits (as established above, it cannot) but because any loss realized by BB&T will be borne largely by the FDIC through the 80% reimbursement provision. It is significant that the provisions the district court focused on are all intended to limit the FDIC’s potential downside due to BB&T’s fault. First, because the FDIC is required to pay 80% of covered losses, it is no surprise that it would want the ability to access and audit BB&T’s books. The LSA specifically states that the purpose of this oversight is to determine compliance with the agreements. Second, we do not agree that the standards of care under the PAA and LSA are equivalent to a partner’s standard of care under Texas law. The 31 Id. (citations and footnotes omitted). 12 Case: 14-10353 Document: 00512945235 Page: 13 Date Filed: 02/23/2015 No. 14-10353 standards set out in the PAA and LSA are all intended to limit the FDIC’s liability under the 80% reimbursement scheme, not establish an across-theboard fiduciary duty. The provisions requiring BB&T to obtain approval before entering into a transaction with a BB&T affiliate or taking an action which would reduce the value of a subject asset are limited requirements that would help prevent the FDIC from having to reimburse BB&T for a loss caused by BB&T’s own actions. Similarly, the “best business judgment” and “best efforts to maximize collections” language does not necessarily signify a partnership obligation because similar duties are also found in contracts between nonpartners. 32 The LSA is silent as to how BB&T is to carry out any profit-making activity. If the PAA and LSA actually created a partnership, the law would supply broad standards of care. There would be no need to set out the specific—and more limited—restrictions found in the PAA and LSA. These contractual provisions are useful precisely because they are the only source of a duty. Finally, all of the provisions cited by the district court supposedly establishing the FDIC’s control over BB&T’s everyday operations are, like the other oversight provisions, merely intended to limit the FDIC’s liability under the 80% reimbursement scheme. The FDIC never exercised control over BB&T’s profits, only BB&T’s actions which might lead to a loss for which the FDIC would be 80% liable. The FDIC could refuse payment if it determined 32 See, e.g., Moreno v. Summit Mortg. Corp., 364 F.3d 574, 575 (5th Cir. 2004) (under certain conditions, one mortgage company was required to use best efforts to close a loan and sell it to a separate mortgage company); Esty v. Beal Bank S.S.B., 298 S.W.3d 280, 289 (Tex. Ct. App. 2009) (bank agreed to use best efforts to secure loan approval and commitment letter for a customer). 13 Case: 14-10353 Document: 00512945235 Page: 14 Date Filed: 02/23/2015 No. 14-10353 that BB&T should not have taken a loss; it could require BB&T to transfer an asset back to the FDIC if BB&T was not diligently pursuing collection efforts; and it could refuse to allow BB&T to assign or transfer its rights under the LSA. All of these provisions are designed to limit the FDIC’s exposure as much as possible while granting BB&T free rein to manage its day-to-day affairs as it sees fit. Examining the PAA and LSA closely, we cannot find the requisite level of control to indicate a partnership. The FDIC no longer owns any of the subject assets and cannot receive any of the profits from BB&T’s sales, but it is required to reimburse BB&T 80% of any loss. The oversight and protective provisions in favor of the FDIC left BB&T relatively free to run its day-to-day affairs profitably however it wished but gave the FDIC the ability to protect itself from unnecessary losses caused by BB&T. Those provisions do not signify a partnership but rather a prudent contract. In sum, the PAA and LSA do not grant the FDIC the right to make executive decisions over BB&T’s day-to-day operations. Thus, we conclude that the district court erred as a matter of law in interpreting the PAA and LSA to find control. This factor is not present here.
The PAA and LSA explicitly agreed to share losses. Thus, this factor is present.
It is uncontested that the FDIC never contributed money or property to the business, so this factor is not met.
We agree with the district court’s determination that the FDIC and BB&T did not share profits, that they did not express an intent to be partners, 14 Case: 14-10353 Document: 00512945235 Page: 15 Date Filed: 02/23/2015 No. 14-10353 and that the FDIC did not contribute money or property to the purported partnership. We also agree that the FDIC and BB&T agreed to share losses. Contrary to the district court, we conclude, as a matter of law, that the PAA and LSA did not grant the FDIC partnership-level control over BB&T’s business. Thus, the only partnership factor present here is the sharing of losses. Under Texas law, “[e]ven conclusive evidence of only one factor normally will be insufficient to establish the existence of a partnership.” 33 Texas law treats “sharing profits as well as control over the business” as “probably . . . the most important factors.” 34 The sharing of losses is an ambiguous factor which is not a hallmark of partnership formation under Texas law. We therefore conclude that there is no partnership between the FDIC and BB&T as a matter of law and that Eagle necessarily is the only proper party plaintiff to this suit. Because complete diversity exists between the proper parties to this suit and the amount in controversy exceeds $75,000, there is diversity jurisdiction under 28 U.S.C. § 1332(a).