Fiduciary Claims in Partnerships and Corporations

By: Laurie Pierce     

     Parties asserting breach of fiduciary duty claims against a person in his capacity as a managing partner of a limited partnership or as an officer or director of a corporation will attempt to impose the broadest definition of fiduciary duty possible.  Plaintiffs in business fiduciary litigation often attempt to apply the same standards for fiduciary duties applicable to a trustee (the highest fiduciary duty known in law), to a partner of a partnership or a director or officer of a corporation.  This does not reflect current Texas law.  The duties owed by a partner to the partnership and other partners, and by an officer or director of a corporation to the corporation, are the duties of loyalty and care.[1]  Ultimately, the standards dictate the questions the jury will answer in deciding a defendant’s fate.

I.Duties of Partners in Partnerships

     As of January 1, 2010, all Texas partnerships are subject to the Texas Business Organizations Code (“TBOC”).  Prior to the effective date of the TBOC, general and limited partnerships were governed by the Texas Revised Partnership Act (“TRPA”), Tex. Rev. Civ. Stat. art. 6132b.   The primary purpose of the TBOC was to organize the various provisions governing Texas business entities – the Legislature made only non-substantive revisions to the TRPA.  See TBOC § 1.001.[2]

     In the TRPA, recodified as the TBOC, the Texas Legislature expressly defines the standards of conduct owed by a partner to the partnership and the other partners as the duty of loyalty and the duty of care.  TBOC §152.204; TRPA art. 6132b-4.04 (expired).  Section 152.204 governs the standard of care owed by partners and managing partners in both general and limited partnerships.  TBOC §§ 153.152; 153.153.  Section 52.204 provides as follows:

     Sec. 152.204.  GENERAL STANDARDS OF PARTNER'S CONDUCT.  (a)  A partner owes to the partnership, the other partners, and a transferee of a deceased partner's partnership interest as designated in Section 152.406(a)(2):

     (1)  a duty of loyalty; and

     (2)  a duty of care.

          (b)  A partner shall discharge the partner's duties to the partnership and the other partners under this code or under the partnership agreement and exercise any rights and powers in the conduct or winding up of the partnership business:

     (1)  in good faith; and

     (2) in a manner the partner reasonably believes to be in the best interest of the partnership.

          (c)  A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner's conduct furthers the partner's own interest.

          (d)  A partner, in the partner's capacity as partner, is not a trustee and is not held to the standards of a trustee.

     The TBOC (and before it, the TRPA) unambiguously define a partner’s standard of conduct in terms of the duty of loyalty and care, rather than in terms of “fiduciary” duties, and expressly rejects the notion that a partner is held to the same standard of conduct as a trustee owes to its beneficiaries.  See Id. § 152.204(d).  The Legislature’s decision not to use the concept of a “fiduciary” was intentional:     

     Subsection (a) states specifically that a partner owes to the partnership and the other partners duties of loyalty and of care. . . .  Section 4.04 does not use the term “fiduciary.” This section defines partner duties and implies that they are not to be expanded by loose use of “fiduciary” concepts from other contexts or by the rhetoric of some prior cases. Similarly, subsection (f) specifically states that a partner as such is not a trustee and is not held to the same standards as a trustee, thus further attempting to restrict reliance on the unfortunate language of prior law. The term “fiduciary” is inappropriate when used to describe the duties of a partner because a partner, unlike a true trustee, may legitimately pursue the partner's own self interest and not solely the interest of fellow partners or the partnership.

TRPA art. 6132b-4.04, Comment of Bar Committee 1993) (emphasis added); see also McClure & Nichols, Fraud, Fiduciaries, and Family Law, 43 Tex. Tech L. Rev. 1081, 1089 (2011).

     Red Sea Gaming, Inc. v. Block Investments (Nevada) Co., 338 S.W.3d 562 (Tex. App. – El Paso 2010, pet. denied), involved breach of partnership duty claims that were brought by a withdrawing partner of a limited partnership against the continuing partner.  The defendant argued on appeal that the jury was improperly instructed on “fiduciary” duties, because (as discussed above) the Texas legislature has expressly rejected a fiduciary duty standard for partners in a partnership.  Id. at 567.  The court agreed that the jury should not be instructed on breach of “fiduciary” duty and that the jury charge should reflect the Texas statute with respect to the duties owed by partners – the duties of loyalty and care.  Id. at 568.  The court also held that the jury charge properly omitted, as it must, any instruction to the jury relating to a fiduciary’s requirement to subordinate his own interest, and properly included, as it must, an instruction that “a partner does not violate a duty or obligation merely because the partner’s conduct furthers the partner’s own interests.”  Id.

II.Duties of Directors and Officers in Corporations

     In Texas, directors and officers owe the same duties as partners (the duties of loyalty and care), plus one additional duty – the duty of obedience (which requires a director to avoid committing an ultra vires act).  Gearhart Indus., Inc. v. Smith Int’l Inc., 741 F.2d 707, 719 (5^th Cir. 1984).  Thus, as in a partnership fiduciary duty case, a broader fiduciary duty standard should not be applied to a case involving allegations of breach of fiduciary duty by officers and directors of a corporation.

III.Pattern Jury Instructions

     Prior to 2012, the only breach of fiduciary duty questions reflected broad fiduciary duties that went far beyond the statutorily-defined duties owed in partnerships and the common law duties applied to corporations discussed above.  Defendants in business fiduciary cases were faced with the uphill battle of convincing the court to use a jury instruction outside the Texas Pattern Jury Charge question.  In 2012, the Committee on Pattern Jury Charges of the State Bar of Texas revised the fiduciary duty questions.  There are now breach of fiduciary duty questions for fiduciary duties defined by common law (PJC 104.2, 104.3), and separate fiduciary duty questions for duties defined by statute (PJC 104.4, 104.5).  The latter questions are specifically intended to apply in partnership fiduciary litigation, but should also be applied to corporate fiduciary litigation as the duties owed are the same.

     While the changes to the Pattern Jury Charges will go a long way to resolve confusion created by holdings in older cases conflating the duties applicable in business fiduciary cases with those applicable in trust or other fiduciary cases, counsel should be aware that many will still attempt to impose the most onerous standards possible in developing their case, especially in pre-trial depositions and motion practice, before the jury charge is ever addressed.