What Is a Breach of Fiduciary Duty in Texas?

The three elements

The Texas Supreme Court states the claim in three parts, most recently in First United Pentecostal Church of Beaumont v. Parker (Tex. 2017): the plaintiff must show that a fiduciary relationship existed between the parties, that the defendant breached its fiduciary duty, and that the breach resulted in injury to the plaintiff or benefit to the defendant.

Each element does different work. The first asks whether this defendant owed this plaintiff anything beyond ordinary honesty; that question, which is where most of these cases are won or lost, has its own article: who owes a fiduciary duty in a Texas business. The second asks what the fiduciary did. The third asks what came of it, and its "or" is important: a fiduciary who profited is liable even if the plaintiff cannot point to a loss.

What a fiduciary owes

A fiduciary relationship is one in which one person is entrusted to act for another's benefit. The law responds by imposing duties that an arm's-length counterparty does not have. Texas courts describe them in overlapping terms:

• Loyalty. The fiduciary must act in the interest of the person they serve, not their own. For partners, section 152.205 of the Business Organizations Code spells this out: account for and hold for the partnership any property, profit or benefit derived from the partnership business or from use of its property; refrain from dealing with the partnership on behalf of anyone with an adverse interest; refrain from competing with the partnership or dealing with it in a manner adverse to it.
• Care. The fiduciary must act with the care an ordinarily prudent person would use in similar circumstances. Section 152.206 adds that an error in judgment is not by itself a breach, and that a partner who acts on an informed basis and in good faith is presumed to have met the standard.
• Good faith. Section 152.204(b) requires a partner to act in good faith and in a manner the partner reasonably believes to be in the partnership's best interest.
• Candor and full disclosure. A fiduciary must disclose all material facts the other party needs to make an informed decision about matters within the relationship. Silence that would be permissible between strangers is a breach between fiduciaries.

The duty of loyalty is the one most often breached in business disputes. It is also the one Texas enforces most strictly.

What a breach looks like in a Texas business

Breaches rarely announce themselves. They surface as a pattern in the books, a deal nobody else was told about, or a competitor with a familiar customer list. Recurring examples:

• A managing partner pays himself a salary or management fee that the agreement does not authorize, or inflates one that it does.
• A member of a company's management team steers a contract to a vendor she owns, without disclosing the ownership.
• An officer learns of an acquisition opportunity through the company and takes it personally. Texas treats this as usurping a corporate opportunity.
• A partner forms a competing venture while still a partner and moves clients to it.
• An agent hired to buy property for a client secretly buys it first and resells it to the client at a markup.
• A trustee or executor commingles trust funds with personal accounts or invests them in his own business.
• A fiduciary withholds financial information from the people entitled to it, or gives them misleading summaries, so they cannot see any of the above.

Example

Suppose three equal partners own a Dallas commercial cleaning company. One partner handles operations and the bank accounts. Over two years he routes the company's supply purchases through a distributor owned by his brother-in-law, at prices about 20 percent above market, and receives a quarterly "consulting payment" from the distributor. He never tells the other two. He has breached the duty of loyalty twice: by dealing with the partnership on behalf of a party with an adverse interest, and by taking a benefit derived from the partnership business without accounting for it. He has also breached the duty of disclosure. The partnership's loss is the overpayment; his benefit is the consulting payments. Either satisfies the third element, and Texas law allows the partners to recover both.

Self-dealing and the presumption of unfairness

When a fiduciary enters a transaction with the person they serve, or takes a personal benefit from the relationship, Texas law shifts the burden. The transaction is presumed unfair, and the fiduciary must prove that it was fair, that it was fully disclosed, and that the other side's consent was informed. The Texas Supreme Court applied this rule to a corporate officer's self-dealing in International Bankers Life Insurance Co. v. Holloway (Tex. 1963), and it remains the framework. For a plaintiff this is a considerable advantage: once the fiduciary relationship and the self-interested transaction are shown, the fiduciary has to justify it.

How it differs from fraud and from breach of contract

The same facts frequently support more than one claim. A partner who lied about the books committed fraud and breached his fiduciary duty; a partner who said nothing and quietly overpaid his relative breached his fiduciary duty but may not have committed fraud. The fiduciary claim is often the one that fits, and its remedies, described in remedies for breach of fiduciary duty, are frequently broader.

Common defenses

A defendant accused of breaching a fiduciary duty usually argues one or more of the following:

1. No fiduciary relationship. The parties were arm's-length counterparties, or the relationship of trust did not exist before and apart from the transaction in dispute. This is the most common and often the most successful defense.
2. The agreement permitted it. A partnership or company agreement may identify categories of conduct that do not breach the duty of loyalty, or, for an LLC, may restrict or eliminate duties entirely under section 101.401 of the Business Organizations Code.
3. Full disclosure and consent. The other owners knew and approved.
4. Business judgment. For duty-of-care claims, a decision made on an informed basis and in good faith is presumptively proper even if it turned out badly.
5. Ratification or waiver. The plaintiff learned the facts and continued as before.
6. Limitations. Four years from accrual under section 16.004(a)(5) of the Civil Practice and Remedies Code, subject to the discovery rule and fraudulent concealment.

What it costs a business while it is happening

A fiduciary breach is usually ongoing when it is discovered, which distinguishes it from a one-time fraud. The money continues to leave; the competing business continues to recruit; the books remain closed. The practical first steps are to secure the records that the fiduciary controls, which may require a demand for access under the governing agreement or the Business Organizations Code, and to consider whether emergency relief is needed to stop the conduct. Those steps, and the decisions that follow, are covered in my partner is taking money from the company.

Tina Wysk represents owners, investors and executives on both sides of fiduciary duty disputes in Dallas state and federal courts.