Court Opinion

ID: 8413853
Source: CourtListenerOpinion
Date Created: 2022-11-02 20:39:07.070734+00
Date Added: 2024-06-11T16:48:05.638586
License: Public Domain

PATRICK E. HIGGINBOTHAM, Circuit Judge,
dissenting:
The parties have framed this dispute as one involving difficult questions of partnership law and res judicata. But to these eyes, this case is simpler. Under Texas law, a party suing for breach of contract “can ultimately recover for its lost profits or its lost investment but not both.”1 Yet the outcome of this appeal is that Akuna Matata has now achieved a result with two suits that it could not have achieved with one — it has recovered both. I respectfully dissent.
I.
Akuna Matata invested $250,000 with Garrison Ltd. as part of a partnership to drill gas wells in Colorado County, Texas. At some point, a dispute arose over the scope of the partnership. Garrison claimed that the partnership was to drill only one well that had turned out to be a dry hole. Akuna countered that the partnership covered a series of wells, several of which were profitable. In February 2002, Akuna sued Garrison in Texas state court. Following a bench trial, the state trial court ruled in favor of Akuna, finding that a partnership existed for the development of “a number of producing wells in Colorado County, Texas.” The state trial court awarded Akuna $225,309 in damages — equal to its $250,000 investment less two payments that it had received from Garrison — but denied any net profits and all other relief not expressly granted. Garrison appealed to the Texas Court of Appeals. In January 2005, the Court of Appeals affirmed the judgment and damages award.2
In October 2005, Akuna filed a new suit in federal court seeking dissolution of the partnership ánd a share of the partnership profits. Garrison responded that there was no partnership to dissolve because any relationship between the two had ended when the state trial court “refunded” Aku-na’s capital contribution. In October 2010, after years of litigation and the transfer of the case to a second district judge, the district court granted Akuna’s motion for summary judgment. The district court rejected Garrison’s argument that the partnership had already been dissolved by the state court action, reasoning that the “trial court merely awarded Plaintiff damages for Defendants’ breaches” and did not invoke the procedure under Texas law for dissolving a partnership by judicial decree. The court did not pause to further parse the makeup of the damages award. Several more years of wrangling followed. In September 2013, the district court determined that Akuna owned 8.532 percent of the partnership based upon its relative capital contribution.3 The court thus awarded Akuna 8.532 percent of the profits earned by the partnership between January 2004 and August 2007.4
*284II.
On appeal, Garrison argues that Akuna’s federal suit was barred by res judicata because the state trial court dissolved the partnership and rejected Akuna’s request for a portion of the profits. The majority concludes otherwise, holding that the state trial court did not dissolve the partnership because it “did not specifically decree ‘dissolution’ or winding up of the partnership.” Citing Article 6132b-8.01, the majority warns that a contrary result would undermine the goal of providing clear dissolution procedures, which benefit creditors and the public alike. While I acknowledge the importance of this goal, I view the words of the Texas Court of Appeals as controlling. The Court of Appeals stated that the state trial court “elected to award Akuna Matata reliance damages for its reliance on the partnership agreement.”5 As the majority acknowledges, the court then explained that “reliance damages seek to restore the status quo at the time before the contract.”6 That is, in the words of Aku-na’s brief to the Court of Appeals, reliance damages “seek to place the plaintiff in the same position as he would have been in if he had never entered into the contract.”7 In this case, this means that the state trial court placed Akuna and Garrison in the same position as if the partnership had never been created. This result made it unnecessary for the state courts to invoke the formal procedures for dissolving a partnership or enter a decree of dissolution — in effect, the partnership agreement had been rescinded.8 The district court could not partition and distribute the profits of a partnership that did not exist.
Despite this language, the majority protests that the district court’s approval of reliance damages in an amount equal to Akuna’s net investment did not reduce its capital account to “zero” because a partner’s capital account may consist of more than its initial contribution. Although I agree with this general statement of the law, the majority does not confront the detail of Akuna’s capital account. Akuna’s only contribution to the partnership was its $250,000 investment — it did not provide any other services or resources.9 Akuna also cannot argue that its initial contribution produced profits that should be credited to its capital account; the state trial court found that it “produced no credible or reliable evidence of net profits of any partnership.” This is not a case in which a partner’s capital account just happened to reach zero or a partner just happened to receive an award of damages that equaled its capital contribution. To the contrary, the Court of Appeals explicitly characterized the reliance damages as “reimbursement ” of Akuna’s “substantial investment.” 10 The upshot is that the majority *285holds that Akuna remained in a partnership with Garrison — fully entitled to a portion of the profits — even though it no longer had any of its own money at risk and continued to contribute nothing in terms of services or other resources.11 Put another way, Akuna shared in the profits and upside of the partnership, but not the corresponding obligations and risks.12 Texas law does not require such a result.
Indeed, Texas law forbids the outcome reached here: a double recovery.13 In Foley v. Parlier, the Texas Court of Appeals considered another dispute involving a partnership relationship that “soured.”14 During trial, the court required the plaintiff “to choose between recovery for breach of contract and fraud.” That is, the plaintiff had to choose whether he would affirm the partnership agreement — and recover the profits and other benefits that he was owed under that agreement — or repudiate the agreement — and get his investment back.15 On appeal, the plaintiff argued that the trial court erred by making him choose. The Court of Appeals disagreed, holding that the plaintiff was not entitled to disaffirm the partnership agreement and receive the benefits of that same agreement. As the court put it, “[h]e cannot have both. [The plaintiff] cannot both ‘retain all the benefits of the transaction and escape all of the obligations.’ ” 16 Aku-na was put to a similar choice in this case. The state trial court’s decision placed Aku-na in a dilemma. Though the trial court *286found the existence of a partnership, it concluded that Akuna had not produced any reliable evidence of profits. Therefore, if Akuna had affirmed the partnership agreement and asked for expectancy damages, it would have received nothing for its efforts in state court. Akuna apparently did not like this result, so instead it defended the trial court’s damages award as reliance damages intended “to restore the status quo before the contract.” 17 In other words, Akuna chose to disaffirm the partnership agreement and get its investment back.18 Akuna cannot now recover profits allegedly owed under that same repudiated agreement.
The majority responds that there is no inconsistency because the district court “awarded damages from 2004-07, a period following th[e state court] judgment until the termination of the partnership.” This assertion, however, is incorrect both as a factual and a legal matter. The district court may have limited the damages award to the period from January 2004 to August 2007, but this was only because Akuna failed to offer acceptable proof of damages prior to 2004 — not because the district court endeavored to avoid a double recovery. Moreover, the state court judgment had not been entered as of January 2004. The state trial court did not enter its final findings of fact and conclusions of law until June 2004; even assuming the majority is otherwise correct, the district court thus awarded a double recovery, at least, for the period from January to June 2004. But the details of the timeline are ultimately irrelevant. As explained in Foley, the purpose of the rule against double recoveries is to prevent a plaintiff from recovering on the basis of two “inconsistent” or “alternative” remedies.19 “Remedies are inconsistent when one of the remedies results from affirming the transaction and the other results from disaffirming the transaction.”20 Regardless of whether the relevant time periods overlap, or to what degree, the majority has allowed Akuna to recover on the basis of one remedy that disaffirms the partnership agreement and another that affirms that same agreement.
This classic formulation of contract law implements a basic common sense reality. It is illogical and inequitable for an individual to receive a full return of his investment and later claim that he is entitled to a return on that same investment, with no attendant downside risk. At Akuna’s urging, the Texas Court of Appeals ordered the return of Akuna’s investment. If Akuna wanted the partnership to continue, it could have conceded that it was entitled to a take-nothing judgment — but it chose to disaffirm the partnership agreement and ask for its money back.21 The end result is that Akuna contributed nothing to its *287partnership with Garrison — it paid none of the expenses, it had none of its money at risk, and it contributed no services or skills — yet it now recovers over $250,000 in profits for its non-efforts. Indeed, it would have recovered much more if it had done a better job of proving damages. One may fairly ask if Akuna would have taken the same position if Garrison’s efforts had produced losses rather than profits. But things have turned out differently. Through protracted litigation and incomplete legal arguments, Akuna has fallen into an investment that defies both Texas law and common sense — a free ride.
III.
For the reasons stated above, I respectfully dissent.

. Amigo Broad., LP v. Spanish Broad. Sys., Inc., 521 F.3d 472, 485 (5th Cir.2008).

. Tex. Nom Ltd. P’ships v. Akuna Matata Invs., Ltd., No. 04-04-00447-CV, 2005 WL 159459 (Tex.Ct.App. Jan. 26, 2005).

. The district court found that Garrison's capital contribution was $2,680,000. It then divided ($250,000) by ($250,000 + $2,680,000) to calculate Akuna's ownership interest.

. See Tex. Nom Ltd. P’ships, 2005 WL 159459, at *4 (“The record reveals that the percentage of ownership of each partner in this case was based on the relative amounts of the partner's capital contribution ... and profits and any return on capital were to be based on the percentage of the partner’s capital contribution.”).

. Id. at *5.

. Id. (emphasis added).

. Brief of Appellee at 46 & n. 30, Tex. Nom Ltd.. P'ships (No. 04-04-00447-CV), 2004 WL 2863328.

. See Zapffe v. McElroy, 364 S.W.2d 299, 301 (Tex.Ct.App.1963) (holding that a plaintiff suing for recovery of his capital contribution “in effect, s[ought] to rescind the alleged partnership arrangement, contending same never legally came into being due to fraudulent representations”); cf. Volpe v. Schlobohm, 614 S.W.2d 615, 617 (Tex.Ct.App.1981) ("A partnership agreement, like any other agreement or relationship, may be rescinded when proper grounds exist.”); Caplen v. Cox, 42 Tex.Civ.App. 297, 92 S.W. 1048, 1050-51 (1906).

. See Tex. Nom Ltd. P’ships, 2005 WL 159459, at *5 (“[NJeither party disputes that Akuna Matata contributed $250,000 in capital to the partnership. This was Akuna Matata's only obligation under the parties’ agreement, which it fully performed.” (emphasis added)).

. Id. at *6 (emphasis added).

. Cf. Rodgers v. RAB Invs., Ltd., 816 S.W.2d 543, 548 (Tex.Ct.App.1991) ("The outgoing partner’s right to profits ends when he receives the value of his interest."); Hughes v. Aycock, 598 S.W.2d 370, 376-77 (Tex.Ct.App.1980) (explaining that — even if an outgoing partner has yet to receive the value of his interest — he can only recover "what portion of those profits are directly attributable to his capital investment”).

. Such an uneven partnership would likely qualify as a "sham” under federal tax law. See, e.g., Chemtech Royalty Assocs., L.P. v. United States, 766 F.3d 453, 464 (5th Cir.2014); Comm’r v. Williams, 256 F.2d 152, 154 (5th Cir.1958).

. See Amigo Broad., LP v. Spanish Broad. Sys., Inc., 521 F.3d 472, 485 & n. 14 (5th Cir.2008); Yeng v. Zou, 407 S.W.3d 485, 491 (Tex.Ct.App.2013) (“Recovering both benefit-of-the-bargain or expectancy damages and out-of-pocket or reliance damages for the same loss is inconsistent and impermissible because it is a double recovery.”); Mays v. Pierce, 203 S.W.3d 564, 577-78 (Tex.Ct.App.2006).

. 68 S.W.3d 870, 876 (Tex.Ct.App.2002).

. Id. at 882, 885.

. Id. at 885 (quoting Hendon v. Glover, 761 S.W.2d 120, 122 (Tex.Ct.App.1988)); see also Peterson v. Barrow, 105 S.W. 212, 213 (Tex. Civ.App.1907) ("It is manifest that she could not recover back the purchase price paid by her for a one-half interest in the business, with interest thereon from the date of such payment, and also to recover a one-half interest in the profits of the business. To hold otherwise would allow her to repudiate her contract, and at the same time receive all of the benefits that accrued to her. thereunder, and it goes without saying it that such is not the law.”); Arthur Linton Corbin, 12 Corbin on Contracts § 1223 (rev. ed. 2002) ("The plaintiff will not be given judgment for his money back and at the same time a judgment for the value of the performance promised him.”).
The Court of Appeals recognized this principle in this very case. On appeal, Garrison argued that the state trial court’s award of damages was inconsistent with its finding that Akuna had not produced any evidence of lost profits. The Court of Appeals rejected this claim, explaining that the trial court had "elected” to award reliance damages “rather” than expectancy damages — which would have included lost profits. See Tex. Nom Ltd. P’ships v. Akuna Matata Invs., Ltd., No. 04-04-00447-CV, 2005 WL 159459, at *5-6 (Tex.Ct.App. Jan. 26, 2005). This reasoning assumes that the state trial court had to "elect[j” either reliance damages or expectancy damages, not both.

. Brief of Appellee, supra, at 46-47 (citing Foley, 68 S.W.3d at 884-85).

. Indeed, Akuna arguably made this choice even earlier when it drafted the findings of fact and conclusions of law signed by the state trial court. See Brief of Appellants at 8, Tex. Nom Ltd. P’ships (No. 04-04-00447-CV), 2004 WL 2269504.

. See Foley, 68 S.W.3d at 882.

. Id.; accord Sanderson v. Smith, No. 12-08-00442-CV, 2010 WL 2784302, at *3 (Tex.Ct.App. July 14, 2010); Aegis Ins. Holding Co., L.P. v. Gaiser, No. 04-05-00938-CV, 2007 WL 906328, at *3 (Tex.Ct.App. Mar. 28, 2007).

.Again, an excerpt from Akuna's brief is instructive: "The trial court, finding breach of agreement and evidence of fraud, awarded a conservative measure of damages in the amount of Akuna's initial investment, less offsets. To have done anything less would have allowed Garrison to be unjustly enriched and continue in violation of the agreement the trial court found it reached with Akuna." Brief of Appellee, supra, at 46.