Texas Supreme Court Holds That A Director Of A Corporation Cannot Hold An Informal Fiduciary Duty To A Stockowner
In re Estate of Poe, shortly before his death, Dick, who was the sole director of Poe Management, Inc. (PMI), authorized the corporation to issue new shares that he bought for $3.2 million. No. 20-0178, 2022 Tex. LEXIS 544 (Tex. June 17, 2022). This made Dick the majority owner of PMI, which was the general partner of several Poe-owned businesses. As a result of the purchase, Dick’s death vested control of the family enterprise in the two co-executors of Dick’s estate rather than Dick’s son, Richard, who was PMI’s only other shareholder. Richard sued Dick’s estate for breaching formal fiduciary duties and also breaching informal fiduciary duties to him. The trial court and court of appeals ruled for Richard, and Dick’s co-executors appealed to the Texas Supreme Court.
The Court first discussed the formal fiduciary duties owed by a director:
Under Texas law, the business and affairs of a corporation are managed through a board of directors. Directors owe a fiduciary duty to their corporations in the actions they take as directors. A director’s fiduciary status creates three broad duties: duties of obedience, loyalty, and due care. These fiduciary duties run to the corporation, not to individual shareholders or even to a majority of shareholders. As we explained in Ritchie, a director’s fiduciary duty includes a duty to dedicate “uncorrupted business judgment for the sole benefit of the corporation.
The Court then turned to informal fiduciary duties:
Our Court has recognized that an “informal” fiduciary duty may arise from “a moral, social, domestic or purely personal relationship of trust and confidence.” We have described the types of confidential relationships that can give rise to a fiduciary duty imprecisely as those “in which influence has been acquired and abused, in which confidence has been reposed and betrayed.” But we have always made clear that “we do not create such a relationship lightly.” And we have never recognized an informal fiduciary duty within the context of the operation or management of a corporation, in which the corporation’s directors have clearly defined duties to exercise their business judgment for the sole benefit of the corporation.
In this case, Richard alleged that, based on their personal relationship of “confidence and trust,” Dick owed a fiduciary duty to Richard individually. Richard alleged that Dick had to manage PMI in a manner consistent with Richard’s best interest. The Court disagreed with this argument:
Here, the jury was asked whether Richard justifiably placed trust and confidence in Dick “to operate PMI in a manner that was consistent with Richard’s best interest.” We have never held, in Ritchie or elsewhere, that a corporation’s director, while owing formal fiduciary duties to the corporation requiring him to manage the corporation’s affairs for the sole benefit of the corporation, simultaneously owes an informal fiduciary duty to a shareholder to operate the corporation for that shareholder’s benefit or consistent with the shareholder’s best interest. On the contrary, Ritchie suggests those two duties are incompatible. We reaffirm this principle today and hold that a director cannot simultaneously owe these two potentially conflicting duties. By electing to form and own PMI as a corporation, the parties disclaimed the existence of duties regarding the management of the corporation’s affairs beyond those that exist by statute or arise from the corporation’s formation documents or other agreement. Accordingly, we conclude the probate court erred in submitting Question 1 because, as a matter of law, a corporation’s director cannot owe an informal duty to operate or manage the corporation in the best interest of or for the benefit of an individual shareholder. A director’s fiduciary duty in the management of a corporation is solely for the benefit of the corporation.
The Court then went through an analysis concerning charge errors, and held that submission of the informal fiduciary duties was harmful error. The Court rendered that there was no informal fiduciary duty claim in this case, and remanded for further proceedings on other claims.
Interesting Note. Texas courts have held that you have to judge parties’ actions by the duties that they owe in the capacity that they are acting. For example, in Benge v. Thomas, a trust owned an interest in a limited partnership that contained mineral interests. No. 13-18-00619-CV, 2020 Tex. App. LEXIS 6888 (Tex. App.—Corpus Christi August 27, 2020, no pet.). Benge, the beneficiary, sued Missi, the trustee, for various claims of breach of fiduciary duty arising from the operation of the limited partnership and other issues. The court of appeals first addressed Benge’s claim that Missi breached her fiduciary duty to the trust by allowing the limited partnership’s general partner to make objectionable transactions. Benge claimed that Missi breached her fiduciary duty in her capacity as trustee because she should have prevented the general partner from making the transactions. The court disagreed:
AFT Property as general partner had the authority to make these decisions. The evidence establishes as a matter of law that the 2012 Trust as a limited partner had no decision-making rights regarding AFT Minerals’ assets. Benge’s complaints all involve alleged damages to AFT Minerals and not to Benge herself. Thus, AFT Minerals would have had to bring these claims and not Missi in her capacity as trustee or Benge as a remainder beneficiary.
Id. The court clearly delineated the capacity in which the defendant was acting and judged her conduct by the relevant standard. In other words, the court did not blend the capacities together and judged her in her trustee capacity for all actions taken in all capacities.
Further, in Adam v. Harris, a court of appeals held that a clear line exists between actions of a trustee and those of an officer of a corporation owned wholly or in part by the trust, even where the same person “wears both hats.” 564 S.W.2d 152, 156-57 (Tex. App.—Houston [14th Dist.] 1978, writ ref’d n.r.e.). The Adam court stated:
It is uncontested that while Robert Adam was a trustee of the testamentary trust and, by virtue of that position, a director of the truckline company, insurance for the company’s trucks was purchased from Adam Gordon Insurance Agency, an agency owned by Robert Adam’s brothers. The Harrisons assert that this is self-dealing in violation of section twelve of the Texas Trust Act, Tex.Rev.Civ.Stat.Ann. art. 7425b-12 (Supp.1978), and that Robert Adam and all those who knowingly participated in this breach of trust are liable as joint tortfeasors for any profits they may have made. The flaw in this argument, however, is that whatever breach of fiduciary duty Robert Adam committed was in his capacity as director of the truckline corporation and not in his capacity as trustee. Robert Adam did not self-deal with the trust property, the shares in the corporation, but rather with the corporation’s property, the monies used to purchase the insurance for the trucks. Section twelve of the Texas Trust Act directs that a “trustee shall not buy nor sell . . . any property owned by or belonging to the trust estate . . . from or to . . . a relative . . . .” Here, no property either entered or left the trust res ; the trustee neither bought nor sold trust property. Under these circumstances we hold that no cause of action for self-dealing lies against anyone on the basis of the beneficiary-trustee relationship.
The Poe decision strengthens the argument that a party wearing multiple hats (capacities) should solely be judged by the duties imposed upon the person by the had that they are wearing when they are making an act. This is good precedent for parties that set themselves up in multiple capacities. If Dick’s actions were done solely in his capacity as a director, then he should only be judged by his director duties. That is not particularly new precedent in Texas (as seen above).
Yet, the opinion oddly states that a person magically disclaims an informal confidential relationship capacity by entering into a director (and presumably officer) position in a company. This is certainly new to Texas jurisprudence. In Ritchie v. Rupe, the Texas Supreme Court held: “Absent a contractual or other legal obligation, the officer or director has no duty to conduct the corporation’s business in a manner that suits an individual shareholder’s interests when those interests are not aligned with the interests of the corporation and the corporation’s shareholders collectively.” 443 S.W.3d 856, 868 (Tex. 2014) (emphasis added). The court stated in a footnote to the italicized language above that: “We have recognized that in some circumstances a special relationship of trust may arise between parties prior to and independent from the parties’ business relationship, which can give rise to informal fiduciary duties.” Id. at n. 58. This was based on the following language from Schlumberger Tech. Corp. v. Swanson, which stated:
An informal relationship may give rise to a fiduciary duty where one person trusts in and relies on another, whether the relation is a moral, social, domestic, or purely personal one. See Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex. 1962); Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256, 261 (Tex. 1951). But not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship. See Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594 (Tex. 1992). In order to give full force to contracts, we do not create such a relationship lightly. See Thigpen, 363 S.W.2d at 253. Accordingly, while a fiduciary or confidential relationship may arise from the circumstances of a particular case, to impose such a relationship in a business transaction, the relationship must exist prior to, and apart from, the agreement made the basis of the suit. See Transport Ins. Co. v. Faircloth, 898 S.W.2d 269, 280 (Tex. 1995).
959 S.W.2d 171, 176-77 (Tex. 1997).
In Consolidated Gas & Equip. Co. v. Thompson, the Texas Supreme Court previously acknowledged that in some circumstances business associates can owe informal fiduciary duties:
The usual cases of fiduciary relationship have been attorney-and-client, partners, close family relationships such as that of parent-and-child, and joint adventurers, particularly when there is an agreement among the joint adventurers to share financial gains and losses. This Court in Gaines v. Hamman, supra, as well as in Thigpen v. Locke, supra, recognized that a fiduciary relationship could arise outside of those relationships listed above when, over a long period of time, the parties had worked together for the joint acquisition and development of property previous to the particular agreement sought to be enforced.
405 S.W.2d 333, 336-37 (Tex. 1966).
So, an officer or director of a company should be able to hold multiple capacities, including an informal fiduciary duty, to a stockholder. The author believes that the Poe decision above should be narrowly construed to limit a director or officer from having informal fiduciary duties to a stockholder in the context of the operation of the business. It should not limit a director having an informal fiduciary duty to a stockholder in other contexts. For example, if a father steals money from a non-business joint account with his son, he should be held liable for a breach of fiduciary duties in the context of an informal confidential relationship (if one is proved) even though the father is a director of a company where the son owns stock.
Further, the Poe decision should not be read to hold that a stockholder disclaims other formal fiduciary duties from a director which may apply like attorney-client, trustee-beneficiary, executor-beneficiary, husband-wife, etc. See Adam v. Marcos, 620 S.W.3d 488 (Tex. App.—Houston March 18, 2021, pet. denied) (an attorney sued the client for breaching a partnership agreement, and the court of appeals held that the partnership agreement was presumptively invalid because the attorney owed fiduciary duties to the client when it was entered into). Once again, though the director has multiple capacities, his or her conduct should be judged by the capacity in which he or she is acting. If he or she is acting in multiple capacities, he or she should be judged in all relevant capacities. To the extent that the Texas Supreme Court holds otherwise, Poe is terrible precedent in Texas that may allow wrong-doers to breach fiduciary duties and get away with it.