Issues Surrounding Distributions from Texas Family Limited Partnerships

The starting point in the division of a marital estate is the characterization of the parties' property as separate or community. Allen v. Allen, 704 S.W.2d 600, 603 (Tex. App. – Fort Worth 1986, no writ). Property acquires its characterization at the inception of title. Henry S. Miller Co. v. Evans, 452 S.W.2d 426, 430 (Tex. 1970). Property owned by a spouse before the marriage is separate property. Tex. Const. art. XVI, § 15; Tex. Fam. Code Ann. § 3.001(1) (West 2006). Property possessed by the spouses upon the dissolution of the marriage is presumed to be community property. Tex. Fam. Code Ann. § 3.003(a) (West 2006); Estate of Hanau v. Hanau, 730 S.W.2d 663, 667 (Tex. 1987). A party claiming property as separate has the burden to overcome that presumption by clear and convincing evidence. Tex. Fam. Code Ann. § 3.003(b); Harris v. Harris, 765 S.W.2d 798, 802 (Tex. App. – Houston [14th Dist.] 1989, writ denied). "Clear and convincing" evidence means the measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established. Tex. Fam. Code Ann. § 101.007(b); In re C.H., 89 S.W.3d 17, 25 (Tex. 2002).

To overcome the presumption of community, a spouse must trace and clearly identify the property claimed as separate. Hanau, 730 S.W.2d at 667; Cockerham v. Cockerham, 527 S.W.2d 162, 167 (Tex. 1975). If separate and community property have been so commingled as to defy segregation and identification, the statutory presumption prevails. Hanau, 730 S.W.2d at 667 (citing Tarver v. Tarver, 394 S.W.2d 780 (Tex. 1965)). When separate property has not been commingled or its identity can be traced, however, the statutory presumption is dispelled. Harris, 765 S.W.2d at 802.

With these principles in mind, we turn to the characterization of a spouse's partnership interest and the distributions made from a Texas Family Limited Partnership ("FLP"). The Supreme Court has determined that the only partnership–related property a trial court can award upon dissolution of a partner's marriage is the partnership interest, not the partnership property. McKnight v. McKnight, 543 S.W.2d 863, 867–68 (Tex. 1976). A partnership "interest" is a partner's right to receive his share of the profits and losses and to receive distributions. Tex. Bus. Orgs. Code Ann. §1.002(68) (West Pamph. 2009). "Partnership property" is not property of the individual partners; a partner's "interest" does include an ownership interest in partnership property. Id. §152.101 (West Pamph. 2009); Marshall v. Marshall, 735 S.W.2d 587, 594 (Tex. App. – Dallas 1987, writ ref'd n.r.e.). Nor does a partner retain an ownership interest in his capital contribution; rather, the contribution becomes partnership property. Lifshutz v. Lifshutz, 199 S.W.3d 9, 26 (Tex. App. – San Antonio 2006, pet. denied). Thus, a partner's right to receive his share of the profits is the only partnership right subject to characterization. Marshall, 735 S.W.2d at 594.

Partnership earnings are owned by the partnership prior to distribution to the partners and cannot be characterized as either separate or community property. Cleaver v. Cleaver, 935 S.W.2d 491, 494 (Tex. App. – Tyler 1996, no writ). "[A] partnership can be an effective means of preserving the separate property character of assets contributed to the partnership and the undistributed income thereon." Lifshutz, 199 S.W.3d at 26 (citation omitted) (emphasis added). The partner's spouse has no interest in the assets of a partnership until they are actually distributed. Id. The portion of partnership income retained in the capital account is therefore partnership property, and as such, is neither the separate nor community property of either party. See Cleaver, 935 S.W.2d at 494. In fact, even the increase in the partnership interest remains partnership property and would not constitute property acquired after marriage until distributed. See Lifshutz, 199 S.W.3d at 26; Cleaver, 935 S.W.2d at 494.

The Marshall case, Marshall v. Marshall, 735 S.W.2d 587 (Tex. App. – Dallas 1987, rehearing denied), remains the leading authority that the distributions from the limited partnership are community property. In Marshall, the husband owned a separate property interest in a partnership. The partnership engaged in oil and gas exploration and production. Id. at 594. The partnership acquired all of its oil and gas leases before the marriage. Id. The partnership disbursed $542,315.72 to the husband during the marriage. Id. The husband maintained that only the $22,400.00 paid as salary was community property. Id. The court rejected the husband's argument and held that the distributions of partnership income or profits were community property. Id. at 595. So, if the partner receives her share of the profits during marriage, those profits are also community property, regardless of whether the partner's interest in the partnership is separate or community in nature. Even if the distribution was of an asset or cash, and the distribution was from the capital account, Marshall states that the "mutation of a partner's separate contribution" does not apply and the distributions will be characterized as community property because the partnership becomes the owner of the capital contribution. As such, in this case, all of the partnership distributions that a spouse received during the marriage would be considered community property.

Continue Reading...

A Disproportionate Division of Property is Overturned

A Texas judge is charged with making a “just and right” division of a couple's community property upon divorce. To overturn a division of property, a party must show that the division is manifestly unjust and unfair. In Michelena v. Michelena, the Thirteenth Court of Appeals reversed a trial court's decision to award 86% of the community estate to the ex-husband.

When dividing community property, a trial court must use its discretion. When using its discretion, the trial court should consider many factors, among which are these:

(1) the spouses' capacities and abilities;

(2) benefits which the party not at fault would have derived from the continuation of the marriage;

(3) business opportunities;

(4) relative physical conditions;

(5) relative financial conditions;

(6) disparity of ages;

(7) size of separate estates;

(8) the nature of the property; and

(9) disparity of earning capacity.

On appeal, the ex-wife asserted that the ex-husband was at fault in the break-up of the marriage, that he had a sizable separate estate relative to her, and that he had superior business opportunities and earning capacities. The ex-husband did not dispute these assertions, and the record supported them. Accordingly, the Court of Appeals reversed the case for a new division of the parties' community estate.

El Paso Court: No Fault-Based Property Division?

In a puzzling opinion, Chafino v. Chafino, the El Paso Court of Appeals appears to have limited the extent to which a court may consider fault in the breakup of a marriage in dividing the parties' community estate. 

Ms. Chafino sued her husband for no-fault divorce ("insupportability") as well as for divorce on the grounds of adultery and cruelty.  At trial, Mr. Chafino denied adultery, but Ms. Chafino's private investigator videotaped Mr. Chafino entering a room at a local Motel 6 with a woman not his wife.  Three hours and twenty minutes passed before the couple emerged.  Mr. Chafino's paramour was subpoenaed to court where she admitted the affair.  She testified that Mr. Chafino had not informed her that he was married.

The trial court awarded Ms. Chafino 70% of the community estate, but Ms. Chafino appealed, arguing unsuccessfully that the trial court should have awarded her even more of the community estate given Mr. Chafino's misconduct.  At this point the El Paso Court said:  "In a fault-based divorce, the court may also, in making a disproportionate division, consider the conduct of the errant spouse."

The Court's opinion does not say whether the trial court granted the Chafino divorce on a fault ground or on insupportability, but nearly all divorces in Texas are granted based on insupportability even when a fault-based ground is proved at trial.  The Court does suggest, by its choice of language, that a spouse must plead and prove a fault-based ground for divorce if the trial court is to take account of fault in the property division.

If this is what the Court meant to say, then its holding departs from the many Texas cases that hold that fault in the breakup of the marriage may be considered in dividing the community estate even when no fault-based ground for divorce is pled.  Nevertheless, the Beaumont Court of Appeals, in Phillips v. Phillips, did hold that fault cannot be used as a factor in dividing the community estate when a "no-fault" divorce is sought.

What do we learn from these cases?  If the opposing party is at fault, then the divorce petition should allege both fault and no-fault grounds for divorce.  Fault in the breakup of the marriage should be specifically pled as a ground for property division.  The trial court should be encouraged to grant the divorce based on fault grounds or at least make findings of fault on the part of the other spouse.  Otherwise, the trial court might be foreclosed from considering fault in the property division.