CASE PROBLEM #1
In 1984, our friends Lloyd and Kathy contacted me and my wife Carolyn about investing in a
business venture being assembled by their friends Jo and Glen. Jo and Glen were residents of
Texas and Illinois, respectively, and were soliciting investors to put up a $100,000 down payment
on a mobile home park in San Marcos that they would hold for awhile and then sell; at that time,
real estate prices were rising rapidly, so this seemed a sound investment. As described to us, the
plan was for Jo and Glen to put up $40,000 and get the other $60,000 from investors in blocks of
$5,000; each block would give the investor 5% of the rental and sale profits. The rest of the
purchase price would be financed by promissory notes.
The investors were to be limited partners.
Unlike a general partnership, in which all partners are
jointly and severally liable for all debts accrued by the partnership, limited partners have no
liability beyond the amount of their investment. Lloyd and Kathy put up $25,000 and Carolyn and
I put up $15,000; four other investors put up $5,000 each. On April 24, 1984, Carolyn, I, Lloyd
and Kathy met with Glen and Jo to sign the papers. We did not know the other investors.
Things seemed fine until November, 1988, when I came home after refereeing a Houston-Rice
football game to find a registered demand letter sent by an attorney representing three people I
never heard of. They had bought promissory notes on the mobile home park property and,
because Glen and Jo had not paid on the notes for months, were looking to the other investors for
payment. Not knowing what was going on, I contacted John McGee, on our BLAW faculty, and
we went to the Hays County courthouse (no computer records then) where we learned that Glen
and Jo had actually bought the property in 1983, financing it through a small down payment and
three promissory notes; pocketed the $60,000 alleged down payment from us investors; and then
sold the promissory notes to the three men whose attorney was now contacting us. Jo was still in
Austin, but Glen had disappeared.
We also found that the paperwork needed to create a limited partnership had never been filed with
the Texas Secretary of State, so we eight investors were general partners. The other four investors
were a high school teacher, a bead maker/club musician, and a Texas State MBA student, all of
whom pleaded poverty, and a construction company owner who said he would file for bankruptcy