State of Texas v. Jerome N. Smith

State v. Smith IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS, AT AUSTIN NO. 3-91-582-CV THE STATE OF TEXAS, APPELLANT vs. JEROME N. SMITH, APPELLEE FROM THE DISTRICT COURT OF TRAVIS COUNTY, 299TH JUDICIAL DISTRICT NO. 495,147, HONORABLE JERRY DELLANA, JUDGE PRESIDING The State of Texas, appellant, filed suit against Jerome N. Smith, appellee, Rex F. Gallaway, and Pirates Pub, a Texas General Partnership (the "Partnership"), (1) to recover payment of employment taxes and penalties owed to the Texas Employment Commission ("TEC"). Following a bench trial, the court rendered judgment that the State recover $1,802.15 in taxes and penalties from the Partnership and Gallaway. The court determined, however, that Smith was not liable to the State because he was not a partner in the Partnership. In two points of error, the State raises legal and factual sufficiency arguments challenging the trial court's findings and conclusions regarding Smith's liability. We will affirm the trial court's judgment. BACKGROUND The Partnership owned and operated a bar and restaurant in Dallas called Pirates Pub (the "Pub"). The Pub operated for approximately nine months during 1987. Gallaway and Eric Lenington were principals in the business. (2) Smith also participated in business operations both before and after the Pub's opening. Before the Pub opened, Smith signed documents applying for a mixed-beverage permit on behalf of the Partnership and signed as a tenant on a lease agreement covering the Pub premises. Afterwards, Smith signed various reports submitted to the TEC relating to the business operations of the Pub. In December 1990 the State filed suit against the Partnership, Gallaway, and Smith to recover employment taxes and penalties owed to the TEC. Smith claimed at trial that he was an employee, not a partner in the Partnership, and, therefore, was not liable for any amounts owed by the Partnership to the TEC. In its findings of fact and conclusions of law, the trial court found that Smith was not a partner and concluded that he was not indebted to the State for the amount owing. LEGAL SUFFICIENCY OF THE EVIDENCE In its first point of error, the State asserts that the evidence is legally insufficient to support the trial court's finding that Smith was not a partner in the Partnership. The sole basis for this argument is the State's contention that Smith's liability was conclusively demonstrated under the theory of "partner by estoppel." 1. Waiver We conclude the State has waived the partner-by-estoppel ground of recovery. The partner-by-estoppel theory has been codified in the Texas Uniform Partnership Act: (1) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such a person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made: (a) When a partnership liability results, he is liable as though he were an actual member of the partnership . . . . Tex. Rev. Civ. Stat. Ann. art. 6132b §, 16 (West 1970). Thus, being an actual partner in a partnership is not required. Rather, only two elements must be established for a finding of partner-by-estoppel: "(1) representation that the one sought to be bound is a member of a partnership [and] (2) reliance by one to whom the representation is made by giving credit to the partnership." Paramount Petroleum Corp. v. Taylor Rental Ctr., 712 S.W.2d 534, 537 (Tex. App.--Houston [14th Dist.] 1986, writ ref'd n.r.e.) (emphasis added). We conclude, for two reasons, that the State waived the partner-by-estoppel ground of recovery. First, the State did not plead the partner-by-estoppel theory, either by specifically pleading the statute or by generally pleading that independent ground of recovery. Theories and grounds of recovery that are not pleaded are waived unless tried by consent. Purselley Indus., Inc. v. Engle, 717 S.W.2d 662, 664 (Tex. App.Tyler 1986, writ ref'd n.r.e.); Crozier v. Horne Children Maint. & Educ. Trust, 597 S.W.2d 418, 421 (Tex. Civ. App.San Antonio 1980, writ ref'd n.r.e.); see also Tex. R. Civ. P. 301. Moreover, from our review of the record, it does not appear that this is one of the "exceptional case[s] where it clearly appears from the record as a whole that the parties tried the unpleaded issue." Ranger Ins. Co. v. Robertson, 707 S.W.2d 135, 142 (Tex. App.Austin 1986, writ ref'd n.r.e.). Second, even if the partner-by-estoppel ground of recovery had been pleaded or tried by consent, the trial court did not make any findings of fact relating to that theory; the court merely found in general terms that Smith was not a partner in the Partnership. The State did not request the trial court to make additional findings of fact regarding the partner-by-estoppel theory; accordingly, the State waived that ground of recovery. See, e.g., Augusta Dev. Co. v. Fish Oil Well Servicing Co., 761 S.W.2d 538, 542 (Tex. App.Corpus Christi 1988, no writ). 2. Legal Sufficiency of Evidence Even if the State had not waived the partner-by-estoppel ground of recovery, the evidence does not conclusively establish that Smith is liable under that theory. The standard for reviewing the sufficiency of the evidence to support a negative fact-finding by the court is identical to the standard for reviewing a jury's negative finding (more accurately described as a "non-finding"). Anderson v. City of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991). We must first consider only the evidence and inferences tending to support the finding of the trier of fact, disregarding all evidence and inferences to the contrary. If there is no evidence that affirmatively supports the finding, we must examine the entire record to see if the contrary proposition is established as a matter of law. Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex. 1989); Holley v. Watts, 629 S.W.2d 694, 696 (Tex. 1982); Texas & N.O. R.R. v. Burden, 203 S.W.2d 522, 528-31 (Tex. 1947). Thus, to prevail on its first point of error, the State must demonstrate (1) that there is no evidence to support a finding that Smith was not liable under a partner-by-estoppel theory; and (2) that the evidence conclusively established Smith's liability under such theory. In considering the first element (representation), we must determine whether there was any evidence that Smith did not represent himself as a partner to the TEC. We conclude there was. At trial, the State submitted into evidence a TEC status report that appeared to indicate Smith had signed as a partner on behalf of the Partnership. Smith signed the report, and his signature appears next to the word "partner." Smith testified, however, that "I didn't put [the word `partner'] there," that the printed word "partner" was not in his handwriting, and that he had no idea who inserted the word on the form. The State also submitted into evidence quarterly reports the Partnership provided to the TEC. These reports do not have Smith listed as an employee. However, Smith testified that he was not listed because he was never paid with funds listed on the payroll reports submitted to the TEC. Phillip Speicer, the accountant who prepared the reports, also testified that Smith was considered an employee, but was classified as subcontract labor and, therefore, was not listed on the TEC reports. We conclude that Smith's and Speicer's testimony constitutes some evidence that Smith did not represent himself as a partner to the TEC. At a minimum, such testimony prevents the evidence from conclusively showing that Smith did represent himself as a partner. In considering the second element (reliance), the question is whether there is any evidence that, in giving credit to the Partnership, the TEC did not rely on any representation that Smith was a partner. We conclude there was. The State contends that it relied on the representation contained in the TEC status report submitted by the Partnership in establishing the Partnership's TEC tax account. However, the status report only requires that the form be signed by the "owner, officer, partner, or authorized representative" (emphasis added). Thus, the TEC's own form does not require that the document be signed by a party upon whom tax liability may be imposed, e.g., a partner. As a result, had Smith signed the status report as authorized representative, e.g., manager, the TEC would have established the tax account anyway. Accordingly, the fact that an authorized representative other than a partner may sign the status report initiating the creation of a TEC tax account raises a reasonable inference that, in establishing the tax account, the TEC did not rely on any representation that Smith was a partner. The State also contends that Smith represented himself as a partner "in a public manner" and, therefore, pursuant to article 6132b, section 16, liability may be imposed by virtue of his public representation. Considering the element of public representation, the State submitted into evidence several documents provided to the Texas Alcoholic Beverage Commission ("TABC") in which Smith signed as a partner of the Partnership, as well as a lease agreement executed by Smith and Gallaway as tenants of the Pub premises. We will assume without deciding that these documents constitute evidence of public representations. Nonetheless, considering the element of reliance, there is no indication that the TEC was aware of these documents submitted to the TABC when the TEC established the tax account. Under the partner-by-estoppel statute, even a public representation must be communicated to the person giving credit and such person must give credit on the faith of such public representation. There is no evidence that anyone informed the TEC of Smith's public representations; therefore, there is no evidence that the TEC relied on any such public representations. Accordingly, we conclude the State failed to conclusively prove that it relied on Smith's public representations in extending credit to the Partnership. We overrule the State's first point of error. FACTUAL SUFFICIENCY OF THE EVIDENCE In its second point of error, the State complains that the trial court's general finding that Smith was not a partner was against the great weight and preponderance of the evidence. In this point of error, the State does not rely on the partner-by-estoppel theory. The standard of review for deciding a factual-sufficiency point of error is well established. The court must consider and weigh all the evidence and should set aside the judgment only if it is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); In re King's Estate, 244 S.W.2d 660, 661 (Tex. 1951); see also Pool v. Ford Motor Co., 715 S.W.2d 629 (Tex. 1986). "A partnership is an association of two or more persons to carry on as co-owners a business for profit." Tex. Rev. Civ. Stat. Ann. art. 6132b, § 6(1) (West 1970). This relationship must be based on an agreement between the parties that is either express or implied. Coastal Plains Dev. Corp. v. Micrea, Inc., 572 S.W.2d 285, 287 (Tex. 1978); City of Corpus Christi v. Bayfront Assocs., Ltd., 814 S.W.2d 98, 107 (Tex. App.--Corpus Christi 1991, writ denied). Because there is no express agreement to form a partnership under the facts of this case, the agreement must be implied from the relationship of the parties. The essential elements of an implied partnership are: (1) agreement to share net profits; (2) agreement to share net losses; (3) mutual right of control or management; and (4) community of interest in the venture. Further, an important, although not essential, element is the intention of the parties to form a partnership. Coastal Plains, 572 S.W.2d at 287; City of Corpus Christi, 814 S.W.2d at 107-08. The State claims that all five elements are present under the facts of this case. We disagree. First, the State claims that evidence was presented demonstrating an agreement to share net profits. The State argues that evidence demonstrating that Smith was not listed as an employee on TEC quarterly reports and was not paid when the partnership had no money demonstrates that he was not an employee receiving a salary, but rather, a partner sharing in profits and losses. Smith testified that he understood he was to share in the profits from the business. However, Smith also testified that his agreement with Gallaway was to receive a salary of $400 per week as an employee. Further, Speicer testified that Smith was considered subcontract labor and paid as an employee. Receipt of profits as wages does not constitute prima facie evidence that a person is a partner. See Tex. Rev. Civ. Stat. Ann. art. 6132b, § 7(4) (West 1970). Both Smith and Speicer testified to Smith's status as an employee. The fact that Smith was not paid regularly does not necessarily indicate an agreement to share in profits. Second, the State asserts that evidence was presented demonstrating an agreement to share net losses. The State acknowledges that Smith never testified that he agreed to share losses. However, the State claims that the obligation to share losses can be presumed if an agreement to share profits is demonstrated. Because the trial court was entitled to conclude that no such agreement existed, the State may not take advantage of this presumption. In addition, the State claims that Smith did in fact share in losses because he was not paid his salary regularly and several checks that were issued to him were subsequently voided. However, the fact that Smith "participated" in losses because he was not paid his salary is not necessarily evidence of an agreement to share losses. Third, the State claims that evidence was presented demonstrating a mutual right of control or management. Both Smith and Speicer testified that Smith was authorized to sign checks on an account for the Pub. However, both Smith and Speicer also testified that the checking account was canceled one to three months after the Pub was opened and a new account was established that did not authorize Smith to sign checks. Smith also testified that he only wrote checks under the direction of either Gallaway or Lenington and that Lenington had "complete control" over the finances. As further evidence of control and management, the State also points out that Smith managed the bar and took in daily receipts. However, Smith testified that the receipts were turned in daily to the office where Gallaway and Lenington "handled everything." Fourth, the State claims that evidence was presented demonstrating a community of interest in the business venture. The State submitted into evidence a TABC permit application, signed and sworn to by Smith, indicating that he invested $15,000 of personal funds in the Partnership. Smith testified, however, that although he signed the document and swore to its accuracy under oath, he never made such investment. Further, Speicer testified that he "set-up and completed all of the books that were done on the business and there was never any capital contribution by Mr. Smith." The State also contends that Smith invested his personal services and skills in the Partnership by serving as the manager and cooking and bartending at the Pub. However, Smith testified that he was to be paid a salary for these services. In other words, he did not intend such services to constitute an investment. Finally, the State claims that evidence was presented demonstrating that Smith and Galloway intended to form a partnership. The State claims that considerable evidence was provided demonstrating that Smith intended to be a partner in the Partnership: (1) Smith filed an assumed name certificate indicating that he and Gallaway were doing business under the name of "Pirates Pub"; (2) Smith applied for a mixed beverage permit through the TABC indicating that he was a partner in the Partnership; and (3) Smith signed a lease agreement as tenant covering the Pub premises. This evidence constitutes some evidence of Smith's intention to form a partnership. However, the State must also establish that Gallaway intended to form a partnership. Speicer testified that Smith was never considered a partner in the Partnership; rather, Gallaway and Lenington considered him "simply a manager there who did their bidding because he had no place else to go." After reviewing all the evidence presented, we conclude that although the record certainly contains evidence that Smith was a partner, the trial court's finding that Smith was not a partner in the Partnership was not so against the great weight and preponderance of the evidence as to be clearly wrong and unjust. Accordingly, we overrule the State's second point of error. CONCLUSION We affirm the judgment of the trial court. J. Woodfin Jones, Justice [Before Chief Justice Carroll, Justices Jones and Kidd] Affirmed Filed: January 20, 1993 [Do Not Publish] 1. The Partnership and Gallaway are not parties to this appeal. 2. The State did not file suit against Lenington as a partner in the Partnership, and the issues of his status and potential liability are not material to this appeal.