Remedies When a Partner Breaches the Partnership or Operating Agreement

The agreement is a contract, with extra enforcement

Owners sometimes treat the operating agreement as a formality and are surprised that it binds like any other contract. It binds harder. Section 101.052 of the Business Organizations Code provides that the company agreement governs the LLC's internal affairs, may be enforced by or against the company even if the company never signed it, and binds every member, manager and assignee whether or not they signed it. Section 152.210 makes a partner liable to the partnership and the other partners for a breach of the partnership agreement, and section 152.211 lets a partner sue the partnership or another partner to enforce the agreement or his rights under chapter 152, including through an accounting. The ordinary contract remedies apply, and the Code adds a few.

What counts as a breach

• Failing to fund a required capital contribution or loan.
• Transferring or pledging an interest without the consent or right of first refusal the agreement requires.
• Taking an action that needed a member or manager vote without holding it: a large contract, new debt, hiring a relative, changing compensation.
• Ignoring the distribution waterfall or a tax-distribution clause.
• Competing or soliciting in violation of a covenant in the agreement.
• Refusing to honor a buy-sell trigger, a put or a call.
• Withholding records the agreement or the Code requires.
• Disclosing confidential information the agreement protects.

Some of these are also breaches of fiduciary duty. The two claims can run together, but they have different elements and remedies, and the agreement may have eliminated or restricted the fiduciary duty while leaving the contract term intact, which section 101.401 permits for LLCs. The fiduciary side is covered in what fiduciary duties partners and LLC managers owe.

The remedies, one by one

Damages

The measure is what you would have had if the agreement had been performed: the distribution you were owed, the value lost when an unauthorized deal went bad, the profit diverted by a competing venture. Where the breach harmed the company rather than you personally, the claim belongs to the company and is brought derivatively, with the closely held exception that lets a court treat it as yours and pay you directly (section 101.463). Which it is matters for pleading and for who gets the money.

Specific performance

Money is often the wrong remedy for an ownership dispute. Texas courts order specific performance of agreements to buy or sell an interest, to honor a right of first refusal, and to unwind a transfer made in violation of restrictions, because a partnership interest has no ready market substitute. A partner who refuses to close under a shotgun clause or a put he triggered can be ordered to close. The standards are in when a court will force the other side to perform.

Temporary restraining order and injunction

Where the breach is continuing, a court can stop it while the case proceeds: bar a transfer of the interest, freeze a prohibited distribution, enjoin a competing venture, require that a vote be held before an action is taken. Texas Rules of Civil Procedure 680 through 684 govern the procedure, and the applicant must show a probable right to relief and probable irreparable injury in the interim.

Declaratory judgment

Many agreement disputes are really disputes about meaning: does 'available cash' include the reserve, did the trigger occur, is a transfer to a trust a 'transfer.' A declaratory judgment under Civil Practice and Remedies Code chapter 37 answers the question, and section 37.009 lets the court award costs and reasonable attorney's fees as are equitable and just.

Accounting

An equitable accounting makes the controlling owner reconstruct the finances under court supervision, usually through a forensic accountant. Section 152.211 names it as a partner's remedy, and courts grant it in LLC cases where the books are in one owner's hands.

Attorney's fees

Civil Practice and Remedies Code section 38.001 allows a party who prevails on a claim for breach of a written or oral contract to recover reasonable attorney's fees from an individual or an organization, after presenting the claim and allowing 30 days for payment. Since the 2021 amendment, that includes LLCs and partnerships, which earlier case law had excluded. Most agreements also contain their own fee clause, often prevailing-party, which governs over the statute where they differ. Fee exposure runs both ways and shapes settlement from the first letter; see recovering attorney's fees in a Texas contract case.

Expulsion, forced sale and dissolution

An LLC member cannot be expelled (section 101.107), but the agreement can make a breach a trigger for a forced sale of the breaching member's interest at a formula price, and courts enforce that as a contract. For a general partner, section 152.501(b)(5) lets a court expel a partner who willfully or persistently committed a material breach of the partnership agreement, and section 152.503 makes a wrongfully withdrawing partner liable for damages. For either entity, a partner whose conduct makes it not reasonably practicable to carry on the business with him supports a judicial winding up under section 11.314.

Example

Suppose a Dallas real estate LLC's agreement requires members to fund capital calls pro rata within 30 days and provides that a member who fails to fund is diluted by a formula and loses his vote until cured. One of three members refuses a $200,000 call, then sells his interest to his brother-in-law without offering it to the others as the right of first refusal requires. The other members can enforce the dilution and vote suspension as written, sue to set aside the transfer and compel the offer the agreement required, recover any damages the delayed funding caused the project, and seek fees under section 38.001 and the agreement's fee clause. If the agreement had been silent on defaults, they would have a damages claim for the unfunded call and specific performance on the transfer, but no dilution, which shows why default provisions matter more than owners think when they sign.

Defenses you will hear

The other side will argue that the clause does not mean what you say, that you breached first and your breach was material, that the members waived the requirement by past practice, that the action was ratified, or that the agreement was amended orally or by conduct. Whether you may stop your own performance because he breached is governed by the material breach doctrine, explained in material breach vs. minor breach; stopping your capital contributions over a minor breach of his can convert you into the defaulting party. Waiver by past practice is the most common defense and the reason to insist on written consents even among friendly owners.

Deadline

Breach of a written agreement generally carries a four-year limitations period under Civil Practice and Remedies Code section 16.004, as does breach of fiduciary duty. Each missed distribution or unfunded call is a separate breach with its own accrual date. Where the breach is a transfer or a competing venture, the date you learned of it should be recorded now. The details are in how long you have to sue for breach of contract in Texas.

When to involve a litigator

At the first clear breach, before responding in a way the agreement could treat as a waiver or a default of your own. The litigator reads the agreement for the default and remedy provisions, decides whether the claim is yours or the company's, sends the chapter 38 presentment letter that starts the fee clock, and prepares for a temporary injunction if the breach is continuing. Tina Wysk represents owners enforcing and defending partnership and company agreements in Dallas state and federal courts and in arbitration.