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Avoiding the Fiduciary Duty “By Ambush” in the Business World, Part 2

On Behalf of | Jun 20, 2016 | Business, Firm News, Law

Ambush Part 2

A businessman can also become a fiduciary informally in situations that give rise to a special relationship of confidence and trust.  Texas law recognizes an “informal fiduciary duty” that arises from relationships of “trust and confidence” that are “moral, social, domestic or purely personal . . . .”  Meyer v. Cathey, 167 S.W.3d 327, 330-331 (Tex. 2005).  However, “[c]ourts do not create fiduciary relationships lightly.”  Env’t Procedures, Inc. v. Guidry, 282 S.W.3d 602, 628 (Tex. App. – Houston [14th Dist.] 2009, pet. denied).  Parties to a contract do not fall into an informal fiduciary relationship by virtue of the contract: “the special relationship of trust and confidence must exist prior to, and apart from, the agreement made the basis of the suit.”  Meyer, 167 S.W.3d at 331 (emphasis added).  “[T]he nature of the relationship between the parties” ultimately determines whether an informal fiduciary relationship has arisen.  Gregan v. Kelly, 355 S.W.3d 223, 228 (Tex. App. – Houston [1st  Dist.] 2011, no pet.).  And, when reviewing the parties’ relationship, a court first should consider “whether the party claiming to be owed a fiduciary relationship justifiably placed special confidence in the other party to act in his best interest,” such as when the plaintiff “is in fact accustomed to be guided by the judgment or advice” of the party bearing the fiduciary duty.   Id.

The court next should examine “the length of time that the parties [have] dealt with each other, in part, to determine whether their dealings continued for such a time that one party is justified in relying on the other to act in his best interest.”  Gregan, 355 S.W.3d at 229.  “But even relationships of trust and confidence that are of long duration are not necessarily informal fiduciary relationships.”  Id.  “Where the underlying facts are undisputed, determination of the existence, and breach, of fiduciary duties are questions of law, exclusively within the province of the court.”  See generally Meyer v. Cathey, 167 S.W.3d 327, 330 (Tex. 2005).  Texas law imposes fiduciary duties only under narrow circumstances, and “[i]t is well settled that not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship.”  Id. at 330.

It is well established that Texas law imposes fiduciary duties in certain formal relationships, as discussed above and in instances of agents owing fiduciary duties to principals.  Id.; Greater Houston Radiation Oncology, P.A. v. Sadler Clinic Ass’n, P.A., 384 S.W.3d 875, 898 (Tex. App. – Beaumont 2012, pet. denied) (“[F]ormal fiduciary relationships that arise as a matter of law, such as partnerships and principal-agent . . . .”).  However, “[a] principal-agent relationship is not presumed, and the party asserting the relationship has the burden of proving it.”  First Nat’l Acceptance Co. v. Bishop, 187 S.W.3d 710, 714 (Tex. App. – Corpus Christi 2006, no pet.) (citation omitted).  To prove agency, the party claiming its existence must prove that they had “both the right to assign task[s] and the right to control the means and details by which [the other party] will accomplish the task.”  Id.  “The right of control is the supreme test in establishing an agency relationship.”  Id.  If a party exercises substantial control over details of accomplishing an assigned task, then that party may be the others principal/beneficiary. See id. (“The principal’s extent of control over the details of accomplishing the assigned task primarily distinguishes the status of agent from that of independent contractor.”).  “Generally, to establish that one person has acted for another in a normal agency relationship, there must be an agreement between the two persons, and one must exercise some control over the other”).  See Xarin Real Estate, Inc. v. Gamboa, 715 S.W.2d 80, 84 (Tex. App. – Corpus Christi 1986, writ ref’d n.r.e.).

This conundrum of an unwanted fiduciary duty being placed upon someone can be avoided by skillful and thoughtful planning.  There are statutory ways to modify the duties and liabilities: modification and indemnification.  Under general partnership law, a partnership agreement cannot fully eliminate the duties of care, loyalty, of obligation of good faith, but it can in fact modify the duties as long as it is “not manifestly unreasonable.” Tex. Bus. Orgs. Code § 152.002(b)(2),(3), (4).  The Texas Business Organizations Code (BOC) sets forth that the duty of care cannot be eliminated, but the standards by which it is to be measured can be set.  Likewise, the duty of loyalty cannot be eliminated, but partners may specify the types of activities that do not violate the duty.  The obligation of good faith may also be defined in the agreement.  The BOC specifies that a partnership agreement of a general partnership may adopt BOC provisions or “other” provisions for indemnification “which will be enforceable.”  Id. at § 8.002.  The partnership agreement ultimately governs the relationships between the partners, except as to the extent the BOC restricts it under Section 152.002(b).

Limited Partnership statutes are a bit different.  The BOC does not really address the degree that the duties and liabilities of a general partner in a limited partnership can be modified by agreement “[e]xcept as provided by this chapter, the other limited partnership provisions, or a partnership agreement, a general partner of a limited partnership . . . (2) has the liabilities of a partner in a partnership without limited partners to the partnership and to the other partners.” Id. at § 153.152(a)(2).  The same provisions concerning indemnification that govern corporations, govern limited partnerships.  Id. at §§ 8.001-8.152.

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.