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Avoiding the Fiduciary Duty “By Ambush” in the Business World, Part 1

On Behalf of | Jun 13, 2016 | Business, Firm News, Law

In the previous installment of it’s discussion of fiduciary duties, with focus especially on Texas law, Holmes PLLC addressed fiduciary duties in the context of corporations and limited liability companies, two commonly used business entities in Texas. In this installment the firm addresses fiduciary duty law as it applies to general partnerships and informal business relationships.  Fiduciary duties in these business contexts present thorny questions and can present significant disruptions to business people, without their knowing a fiduciary duty has arisen.

Ambush Part 1

Unlike lawyers and trustees, who want to be labeled as fiduciaries to provide incentive for the principal/beneficiary to enter a relationship with them (by reducing the principal’s risks and chance of abuse by the professional), businessmen rarely want to become fiduciaries. If a businessman is labeled a fiduciary, he will be burdened with additional “duties” – such as having to offer further opportunities to his colleagues, and/or put his colleagues’ interests ahead of his own interests. Sometimes businessmen become fiduciaries unwittingly and sometimes by law.
Frequently, the fiduciary duty “by ambush” arises in the context of general partnerships and informal business relationships – so called, relationships of “trust and confidence.”

A businessman can become a fiduciary formally, apart from the context of corporations and limited liability companies.  In a general partnership (including LLPs), there are various fiduciary duties. A partner owes a duty of care to both the partnership and the other partners. Tex. Bus. Orgs. Code § 152.204(a). Texas Business Organizations Code (BOC) Section 105.206 defines the duty of care as a duty to act in the conduct and winding up of the partnership business with the care of an ordinary prudent person under similar circumstances. A partner is said to act with a duty of care if the partners acts on an informed basis, in good faith, and in a manner the partner reasonably believes to be in the best interest of the partnership.  Id. at §§ 152.206 & 152.204(b). The duty of loyalty is a bit different, because it deals with practices such as self-dealing, usurpation, competition, conflicts of interest. The BOC specifically states that a partner does not breach this duty simply because his conduct furthers his own benefit and that a partner is not a trustee and thus cannot be held to a trustee standard.  Id. at §§ 152.204(c), (d). The BOC also imposes a standard of good faith on partners; this standard deals with the partners exercising any rights and powers in conducting partnership business or winding up the partnership. Id. at § 152.204(b). Note this is a standard and not a duty.

In a limited partnership (including limited liability partnerships, LLPs), there are also various fiduciary duties.  Case law displays that general partners are held to fiduciary standards.  See Hughes v. St. David’s Support Corp., 944 S.W.2d 423 (Tex. App. – Austin 1997, writ denied). “[I]n a limited partnership, the general partner stands in the same fiduciary capacity to the limited partners as a trustee stands to a trust.” Id. However, statutory law negates the trustee standard and holds that a general partner in a limited partnership has the liabilities of a partner in a general partnership to the partners and the partnership itself, unless of course the limited partnership statutes or the partnership agreement state otherwise. Tex. Bus. Orgs. Code § 153.152(a)(2). Note however, that some courts continue to use the trustee standard despite the BOC rejection of that idea. See McBeth v. Carpenter, 565 F.3d 171, 177 (5th Cir. 2009). The fiduciary duties of a limited partner to the other partners and to the partnership itself are uncertain; it is usually analyzed on a case-by-case basis. BOC Section 153.003(b) and (c) clarifies that a limited partner is not held to the duty standard of a general partner solely on the status of being a limited partner.

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.