Court Held That Those In Control Of A Limited Liability Company May Owe Fiduciary Duties To The Company And Its Members
In In re Mijares, a plaintiff claimed that a defendant defrauded him and breached fiduciary duties owed to him by charging improper, excessive, and unauthorized expenses to their medical practice, causing the plaintiff’s distributions from the practice to be reduced during the roughly six years that they practiced medicine together. Case No. 19-33121-hdh7, Adv. Proc. No. 19-03243,2022 Bankr. LEXIS 1542 (N.D. Tex. Bankr. June 1, 2022). The plaintiff sought a declaration that his claims for fraud and breach of fiduciary duty were not dischargeable pursuant to sections 523(a)(2)(A) and (a)(4) of the Bankruptcy Code. The court found that the plaintiff held a valid claim against the defendant for fraud and that such claim was not dischargeable.
Regarding the plaintiff’s breach of fiduciary duty claim, the court held:
Under Texas law, to prevail on a breach of fiduciary duty claim, a plaintiff must show (1) a fiduciary relationship between the plaintiff and the defendant, (2) that the defendant breached his fiduciary duty to the plaintiff, and (3) that the defendant’s breach resulted in injury to the plaintiff or benefit to the defendant.
It is not clear whether there was a fiduciary relationship directly between the Plaintiff and the Defendant. Courts generally hold that a managing member of a limited liability company does not necessarily owe fiduciary duties to other members. Although “the Texas statute governing limited liability companies implies that certain duties may be owed, it does not define any such duties, but rather allows the contracting parties to specify the breadth of those duties in the company agreement.”
Per the Company Agreement, both the Plaintiff and the Defendant served as Manager-Members. Article VIII of the Company Agreement provides various rights, duties, and powers of the Managers. Per this section, the Managers “shall have the full, sole, exclusive and complete discretion in the management and control of the business, operations and affairs of the Company; shall make all decisions that are necessary to carry out the business of the Company . . . .” The same section goes on to require that “[a]ll decisions and actions by the Managers shall be made in the best interests of the Company.” Thus, the Company Agreement makes it clear that the Defendant owed a fiduciary duty to MD Request but does not resolve the issue of whether the members owed fiduciary duties to each other because it neither disclaims nor expressly imposes such duties.
Nevertheless, Texas law recognizes that an informal fiduciary relationship, “may arise where one person trusts in and relies upon another, whether the relationship is a moral, social, domestic, or purely personal one.” The existence of a fiduciary duty is a fact-specific inquiry that takes into account the contract governing the relationship as well as the particularities of the relationships between the parties. Some courts have taken into account the “unequal” positions of power of members in a limited liability company, such as when one member exercises superior control over the company.
Both parties testified during trial that the Defendant almost exclusively handled the finances for MD Request. The Defendant did the calculations and remitted payments to the Plaintiff. Through an established course of dealing for the better part of six years, the Plaintiff placed a special confidence in the Defendant to compensate the Plaintiff accurately and honestly for his revenue, which was to be measured as his monthly collections less his half of the shared expenses.
Based on these facts, the Court believes there is a reasonable argument that the Defendant owed fiduciary duties directly to the Plaintiff, but the Court need not make that determination since the Court has already determined the Plaintiff has a claim for fraud, and the damages for breach of fiduciary duty would be the same as those previously identified for fraud.