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Avoiding the Fiduciary Duty as an Officer of a Company, Part 2

On Behalf of | May 31, 2016 | Business, Firm News, Law

Another business relationship that gives rise to fiduciary duties is the Limited Liability Company.  The Texas Business Organizations Code does not expressly define or impose duties on members or managers of the LLC.  However, the provisions do suggest these duties may exist.  When a managing member or manager of the LLC acts as an agent of the LLC they owe a duty of care pursuant to agency. Restatement (Third) of Agency § 8.08. Moreover, under agency principles, a duty of loyalty is owed by the manager in a manager-managed LLC and a by a member in a member-managed LLC. Restatment (third) of agency §§ 8.01-8.06.  In the LLC context, Texas courts distinguish that breach of fiduciary duty disputes arise principally between members and very rarely arise in the context of member breaching a duty to the LLC itself. Allen v. Devon Energy Holdings, L.L.C. 367 S.W.3d 355 (Tex. App. – Houston [1st Dist.] 2012, pet. granted, judgm’t vacated w.r.m.).

Just like Corporations, there are statutory ways to modify duties and liabilities of members and managers.  These include exculpation and indemnification, which is usually addressed in the governing documents of the LLC. There is very little case law in Texas addressing exculpation; Allen v. Devon Energy is the only case to date that discusses the contractual ability of parties to place restrictions on the liability of persons in charge.  The Court pointed out that LLCs are “free to expand or eliminate, as between themselves, any and all potential liability of” a manager of the LLC as the members see fit.  The Texas Business Organization Code (BOC) §101.401 permits the increase and/or restriction of the fiduciary duties of managers and members in the LLC government documents.   Additionally, an LLC has the power to renounce company opportunities. Tex. Bus. Orgs. Code § 2.101(21).

Sections 8.002, 101.052, and 101.042 of the BOC address indemnification. The current LLC indemnification laws do not stipulate any particular circumstances where indemnity is required; the provisions also do not place limitations of the type of liabilities that can be indemnified. It seems, from the opinions of Courts, that they decide the policy on the power of indemnification.

Apart from the foregoing formal fiduciary relationships, business relationships give rise to fiduciary duties – these duties can stem from codes, statutes, or case law.  There is a growing trend, certainly in Texas, for parties to claim that their business relationships gave rise to fiduciary duties.  In the next installment, Holmes PLLC will survey these “informal” fiduciary relationships, which present unique challenges for many business people in Texas.

Holmes PLLC is a law firm that specializes in fiduciary duty work, including the creation of fiduciary relationships or litigation about them.  The firm frequently advises its clients on the nature and existence of fiduciary duties, and on whether such duties affect their business interests.

The information presented at this site and by this firm should not be understood to be formal legal advice, nor the formation of an attorney-client relationship.