Breach of Fiduciary Duty in Texas: What Business Owners Need to Know

Breach of fiduciary duty is one of the most powerful — and most frequently litigated — claims in Texas business law. It arises when someone entrusted with authority over another person's interests uses that authority for their own benefit instead. In a business context, this typically means a partner, officer, director, or majority owner exploiting their position at the expense of the company, its investors, or other owners.

What Is a Fiduciary Duty?

A fiduciary duty is a legal obligation requiring one party (the fiduciary) to act in the best interests of another (the beneficiary). Texas law recognizes fiduciary relationships as imposing two core duties:

Duty of loyalty — the fiduciary must subordinate their personal interests to the interests of the beneficiary. They cannot profit from their position at the beneficiary's expense, cannot take opportunities that belong to the entity, and cannot engage in transactions that create undisclosed conflicts of interest.

Duty of care — the fiduciary must act with the level of care that a reasonable person in a similar position would exercise under similar circumstances. This is not a guarantee of good results, but it does require informed, considered decision-making rather than gross negligence or reckless indifference.

Texas courts have recognized these duties in relationships including general partners, LLC members and managers, corporate directors and officers, attorneys with their clients, trustees with beneficiaries, and agents with their principals.

When Does a Fiduciary Duty Exist in a Texas Business?

General Partnerships

Texas law imposes fiduciary duties on general partners by default under the Texas Business Organizations Code. Each general partner owes duties of loyalty and care to the other partners and to the partnership itself. These duties cannot be eliminated entirely by the partnership agreement, though they can be modified in certain respects.

Limited Liability Companies

In Texas LLCs, fiduciary duties are primarily defined by the operating agreement. The TBOC provides default duties for members and managers, but Texas law expressly allows operating agreements to modify, restrict, or eliminate most fiduciary duties — with the exception that the agreement cannot authorize conduct involving bad faith, intentional misconduct, or knowing violation of the law.

Corporations

Directors of Texas corporations owe fiduciary duties to the corporation and, derivatively, to its shareholders. Officers owe duties to the corporation through the agency relationship. The business judgment rule protects directors and officers from personal liability for honest business decisions made in good faith with reasonable information — but it does not protect self-dealing, conflicts of interest, or bad faith conduct.

Informal Fiduciary Relationships

Texas courts also recognize fiduciary duties in informal relationships where one party reposes special trust and confidence in another. This doctrine is applied narrowly but can be relevant in situations involving close business partners, agents with broad discretionary authority, or relationships with significant information asymmetry.

Common Forms of Breach in Texas Business Disputes

Self-Dealing Transactions

The most classic breach — a fiduciary enters into transactions on both sides, using their position to benefit themselves at the company's expense. Texas courts scrutinize self-dealing closely.

Usurping a Corporate Opportunity

A fiduciary who diverts to themselves a business opportunity that should have gone to the company breaches their duty of loyalty. The "corporate opportunity doctrine" in Texas asks whether the opportunity was related to the company's existing business and whether the fiduciary's position gave them access to it.

Diverting Revenue or Assets

Partners or managers who route company revenues to themselves through fraudulent invoicing, undisclosed fee arrangements, or direct transfers commit both a fiduciary breach and potentially conversion and fraud.

Competing with the Business

Using the fiduciary position to set up or operate a competing business, solicit the company's clients, or redirect business relationships is a breach of the duty of loyalty in the absence of express authorization.

Failure to Disclose Material Information

Fiduciaries are required to disclose material information relevant to their principals' decisions. In the context of a buyout, a majority owner who buys out a minority owner's interest while withholding information about an impending favorable transaction may breach their duty of candor.

Remedies Available Under Texas Law

Actual damages — compensation for the economic harm caused by the breach, including lost profits, diverted revenues, and the value of usurped opportunities.

Disgorgement — the fiduciary is required to give up the profits they gained from the breach, even if those profits exceed the plaintiff's actual losses.

Exemplary (punitive) damages — available in Texas where the breach involves fraud, malice, or gross negligence. Texas Civil Practice and Remedies Code § 41.003 requires clear and convincing evidence and caps recoveries.

Injunctive relief — courts can enjoin ongoing breaches, prevent dissipation of assets, or require the fiduciary to take specific actions.

Accounting — a court-ordered accounting of all transactions in which the fiduciary was involved.

Constructive trust — property acquired through a breach of fiduciary duty may be subject to a constructive trust, meaning the breaching fiduciary is deemed to hold the property in trust for the benefit of the injured party.

The Business Judgment Rule and Its Limits

Texas courts apply the business judgment rule to protect directors and officers from liability for honest, informed business decisions that turn out poorly. However, the rule does not protect self-dealing, uninformed decisions, bad faith conduct, or knowing violations of law.

Statute of Limitations

The statute of limitations for breach of fiduciary duty in Texas is 4 years from the date the claim accrues. The discovery rule may apply where the breach was inherently undiscoverable — the limitations period runs from when the plaintiff knew or should have known of the breach.

Practical Steps If You Suspect a Breach

Document everything now. Before contacting the fiduciary, gather and preserve the documents that evidence the suspected breach.

Do not confront the fiduciary directly without counsel. Statements made in confrontation can be used in litigation.

Assess whether emergency relief is needed. If the fiduciary is actively diverting assets, emergency injunctive relief may be necessary.

Consult a Texas attorney with specific fiduciary duty experience. Breach of fiduciary duty litigation is technically complex.