Private Sale of Partnership Interests Violated UCC
In Bruce v. Cauthen, 2017 WL 455578 (Tex. App. — Houston [14th Dist.] February 2, 2017), the court held, on rehearing, that a partner was prohibited under the Uniform Commercial Code of the State of Texas (the “Texas UCC”) from purchasing, at a private sale, a former partner’s minority interest in the partnership. David Bruce (“Bruce”) and Misty Cauthen (“Cauthen”) were partners in Kingwood Place Investments #1, LP (the “Partnership”), a partnership formed for the purpose of holding an undeveloped parcel of property pending development. Cauthen held a 39.6% limited partnership interest in the Partnership, and Bruce held the remaining 60.4% interest directly or indirectly. When business disagreements arose between Cauthen and Bruce, Cauthen ceased making payments to the Partnership for her share of the Partnership’s expenses. Under the partnership agreement, each partner granted a lien on its partnership interests to the Partnership and the other partner to secure its obligation to pay Partnership expenses. In February of 2014, Bruce notified Cauthen that her Partnership shares would be sold at a foreclosure sale, and on March 6, 2014, a private foreclosure sale was held. Bruce was the only bidder, and acquired Cauthen’s shares for $51,234.02- the amount of her missed payments to the Partnership. Cauthen brought suit, alleging wrongful foreclosure on her interests in the Partnership in violation of the Texas UCC, among other claims. The trial court granted Cauthen’s motion for summary judgment on her wrongful foreclosure claim, and a jury awarded her $469,044.73 on her wrongful foreclosure claim, and awarded her additional sums on breach of contract and breach of loyalty claims. Bruce appealed. On appeal, Bruce alleged that the trial court erred in granting summary judgment on the wrongful foreclosure claim. Bruce noted that, although Section 9.610(c)(2) of the Texas UCC prohibits a secured party from purchasing collateral at a private sale if the collateral is not “of a kind customarily sold on a recognized market or subject of widely distributed standard price quotations”, the partnership agreement for the Partnership included provisions permitting sale of the Partnership interests at a private sale, and included an acknowledgment by each partner that such a sale would be deemed to be commercially reasonable. The appeals court disagreed and stated that, notwithstanding the language in the partnership agreement which permitted the private sale of Partnership interests, because the partnership agreement did not expressly waive Section 9.610(c)(2) of the Texas UCC, the purchase of Partnership interests by the secured party at such a sale remained prohibited. The appeals court therefore affirmed the trial court’s decision to grant summary judgment.
