Fiduciary Duties and Partnership Representative Risks

Apartnership representative may have common law fiduciary duties to the partnership, to a limited liability company (LLC), and/or to its members. This may include a duty of care, a duty of loyalty, a duty of good faith and fair dealing, and a duty to disclose information to other partners. A partner’s fiduciary duties may even include a duty to act in the best interests of the other partners.

The BBA framework often places partnership representatives in positions that present a conflict of interest. For example, a partnership representative may be placed in the position of having to decide what is in the best interest of current and past partners — and the answer will often not be the same. A partnership representative may also be placed in the position of making decisions that may benefit the PR, him or herself, at the expense of other partners. The predictable — and even likely — conflicts of interest are one of the primary reasons that every partnership or LLC needs to have amended its partnership or operating agreement to comply with the BBA.

Under general partnership law, a general partner owes a fiduciary to all partners. As a result, a partnership representative — particularly a PR that is, itself, a partner or member — should seek legal counsel with respect to its position and any important, binding decisions that may affect the partnership or its partners under the BBA.

What is a fiduciary?

A fiduciary is a person or entity that stands in a particular position of trust and responsibility to another. A fiduciary has a legal duty to the fiduciary’s principal or beneficiary. This fiduciary duty describes an obligation to act in the interest of the principal or beneficiary. It represents the highest standard of care imposed by the law.[1]

A fiduciary relationship is typically marked by a relationship that involves a principal or beneficiary who places confidence, reliance, and trust in the fiduciary due to the fiduciary’s position, expertise, or authority. Typical examples of fiduciaries include executors, personal representatives, administrators, trustees, agents, partners, and powers of attorney.

Texas law, for example, recognizes two categories of fiduciary relationships or duties: formal and informal.[2] A formal fiduciary duties arise as a matter of law as a result of certain formal and special relationships. For example, corporate directors and officers,[3] employees,[4]partners,[5] trustees, principals, and other formal relationships may give rise to formal fiduciary duties.

Fiduciary duties can also arise “informally.” Informal fiduciary duties “arise from ‘a moral, social, domestic, or purely personal relationship of trust and confidence.’”[6]

The Fiduciary Duty

Courts have recognized that “[a] fiduciary duty is the highest duty recognized by law.” Rawhide Mesa-Partners, Ltd. v. Brown McCarroll, L.L.P., 344 S.W.3d 56, 60 (Tex. App.— Eastland 2011, no pet.) As such, a fiduciary owes the beneficiary the duties of ” . . . loyalty and good faith, integrity of the strictest kind, fair, honest dealing and the duty not to conceal matters which might influence his actions to his principal’s prejudice.” Hartford Cas. Ins. v. Walker County Agency, Inc., 808 S.W.2d 681, 688 (Tex. App. – Corpus Christi 1991, no writ) (citing Douglas v. Aztec Petroleum Corp., 695 S.W.2d 312, 318 (Tex.App. – Tyler 1985, no writ)).

In general, a fiduciary owes his principal a high duty of good faith, fair dealing, honest performance, and strict accountability. Among the agent’s fiduciary duties to his principal are the duty not to compete with the principal on his own account in matters relating to the subject matter of the agency and the duty to deal fairly with the principal in all transactions between them. Commonly cited fiduciary duties include the duties of: (1) care, (2) loyalty, (3) accountability, (4) confidentiality, (5) full disclosure, (6) fairness, and (7) good faith and fidelity.

In Texas, a fiduciary’s duties are generally described as the following: a duty of loyalty, a duty of care, a duty of obedience, and a duty of good faith and fair dealing.

Duty of Loyalty. Under the duty of loyalty, the fiduciary must act in good faith and not allow personal interests to prevail over corporate or other interests.

Duty of Care. Under the duty of care, the fiduciary must perform his duties with the care that an ordinarily prudent person would use under similar circumstances. The duty of care requires diligence and prudence in managing the corporations’ or others’ affairs.

Duty of Obedience. The dutyof obedience requires a director or officer to avoid ultra vires actions.

Duty of Good Faith. The duty of “good faith and fair dealing” is one of many duties that fiduciaries owe to each other. The duty of good faith and fair dealing requires parties to deal fairly with one another. As a fiduciary duty, it requires a party to place the interest of the other party before his own.

The Elements of a Breach of Fiduciary Duty

A claim for breach of fiduciary duty under Texas law requires the plaintiff to plead the following elements: “(1) the existence of a fiduciary duty, (2) breach of the duty, (3) causation, and (4) damages.” First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214, 220 (Tex. 2017); Punts v. Wilson, 137 S.W .3d 889, 891 (Tex. App.–Texarkana 2004); Kelly v. Gaines, 181 S.W.3d 394, 414 (Tex. App.–Waco 2005).

Damages for Breach of Fiduciary Duty

A successful plaintiff may recover the following types of damages for a breach of fiduciary duty claim in Texas:

Actual damages and lost profits. “Actual damages” means damages recoverable at common law. These may include direct losses from the breach, as well as indirect or economic damages.
Exemplary damages. An intentional breach of a fiduciary duty may give rise to punitive/exemplary damages.
Other damages/remedies. Other remedies may also be available, such as a constructive trust; forfeiture of fees; profit disgorgement; an accounting; rescission; injunction; and appointment or removal of a receiver or trustee.

Common scenarios that may give rise to fiduciary claims include misappropriation of assets by a trustee or agent, as well as embezzlement, commingling of assets, and self-dealing in the context of a fiduciary relationship.

[1] Rawhide Mesa-Partners, Ltd. v. Brown McCarroll, L.L.P., 344 S.W.3d 56, 60 (Tex. App.— Eastland 2011, no pet.) (“A fiduciary duty is the highest duty recognized by law.”).

The fiduciary owes the beneficiary the duties of ” . . . loyalty and good faith, integrity of the strictest kind, fair, honest dealing and the duty not to conceal matters which might influence his actions to his principal’s prejudice.” Hartford Cas. Ins. v. Walker County Agency, Inc., 808 S.W.2d 681, 688 (Tex. App. – Corpus Christi 1991, no writ) (citing Douglas v. Aztec Petroleum Corp., 695 S.W.2d 312, 318 (Tex.App. – Tyler 1985, no writ)).

[2] Jones v. Blume, 196 S.W.3d 440, 447 (Tex. App.–Dallas 2006) (“A fiduciary relationship may be formal or informal. Fiduciary duties arise as a matter of law in certain formal relationships, including attorney-client and trustee relationships.”)

[3] Courts have recognized a fiduciary duty owed by corporate officers and directors to the corporation, which prohibits officers and directors from usurping corporate opportunities for personal gain and requires them to exercise their “uncorrupted business judgment for the sole benefit of the corporation.”

[4] When a fiduciary relationship of agency exists between employee and employer, the employee has a duty to act primarily for the benefit of the employer in matters connected with his agency. The employee has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the company’s business.

[5] Fitz–Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256, 264 (1951) (“The relationship between … partners … is fiduciary in character, and imposes upon all the participants the obligation of loyalty to the joint concern and of the utmost good faith, fairness, and honesty in their dealings with each other with respect to matters pertaining to the enterprise.”)

[6] Most informal relationships, such as friendships or even familial relationships, will not necessarily give rise to any special relationship that imposes fiduciary duties on the parties. Jones v. Thompson, 338 S.W.3d 573, 583–84 (Tex. App.—El Paso 2010, pet. denied) (mere subjective trust resulting from an informal and confidential relationship does not create a fiduciary relationship) (citing Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997) (Texas courts are reluctant to recognize informal fiduciary relationships)).

Fiduciary Duties and Partnership Representative Risks