- Although Texas Law does not impose fiduciary duties on members of an LLC, the Texas business Organization Code provides an inference that fiduciary duties do exist.
- Members of an LLC may always contractually expand and/or restrict fiduciary duties.
- Texas courts have found that managers and/or members of an LLC who govern the activities within that LLC owe a fiduciary duty to other members similar to the fiduciary duties officers and directors owe to corporations.
What is a Fiduciary Duty and Do they Exist in LLCs?
A fiduciary duty is a legal duty to act solely in another party’s interests.[1] The individuals to whom a fiduciary owes a duty to are called principals or beneficiaries. [2]
Although Texas Law does not impose fiduciary duties on members of an LLC, the Texas Business Organization Code provides an inference that fiduciary duties do exist. Section 101.401 titled: Expansion or Restriction of Duties and Liabilities of the Texas Business Organization Code states, “The company agreement of a limited liability company may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company or to a member of the company.”[3] The fact that parties may expand or limit fiduciary duties within the company agreement leaves argument open that fiduciary duties do in fact exist within an LLC.
Fiduciary Duties in Texas
As contemplated in Section 101.401 of the Texas Business Organization Code, parties may expand or restrict any duties, including fiduciary duties within the company agreement. Thus, it is important to review the company agreement to determine members’ rights. However, in some cases, a company agreement may never have been formed or the company agreement may not contemplate fiduciary duties. If you fall into the latter scenario, you may need to explore other avenues to establish fiduciary duties.
One such avenue is relying on the precedent set by Texas courts. Texas courts have found that managers and/or members of an LLC who govern the activities within that LLC owe a fiduciary duty to other members that are similar to the fiduciary duties officers and directors owe to corporations. Other courts have taken the position that where a party can show that one managing member of an LLC had control and intimate knowledge over the affairs of the company, which another member does not, the controlling member owes an informal fiduciary duty to the left out member. Further, to impose an informal fiduciary duty in a business transaction, a special relationship of trust and confidence must exist prior to, and apart from, the agreement that made the basis of the suit.
Written by*:
Jorge Mares
WATTS GUERRA, LLP
4 Dominion Drive, Bldg 3, Suite 100
San Antonio, Texas 78257
Phone: (210) 447-0500
Email: jmares@guerrallp.com
*This information is provided to supply relevant information concerning remedies for a breach in fiduciary duties, and should not be received as legal advice. Legal advice is only given to persons or entities with whom Watts Guerra LLP has established an attorney-client relationship. Available remedies vary from case to case and depend on the underlying facts of each. If you have another lawyer, you should consult with your own attorney, and rely upon his or her advice, rather than the information contained herein.
[1] https://www.law.cornell.edu/wex/fiduciary_duty
[2] Id.
[3] TX. Bus Org § 101.401 (emphasis added)
© Watts Guerra LLP 2015
