Most Dallas business lawyers recognize that Texas law does not impose fiduciary duties on the members of a limited liability company. The LLC members are free to impose fiduciary duties upon themselves in an operating agreement, but members take comfort knowing that the state does not require these high and uncompromising duties on them.
Except when that duty is imposed by the Texas Family Code.
Michael Ishee found out the hard way, as seen in the recently released opinion of Ishee v. Ishee, No. 09-15-00197-CV (Tex. App.—Beaumont, May 25, 2017).
Michael owned a minority interest in a limited liability company (the “LLC”). He and his wife, Janice Ishee, divorced and as part of the decree, Michael assigned her a percentage of his membership interest in the LLC. Just three years later, Janice sued Michael and the LLC alleging that she did not receive any distributions, and claimed that Michael breached a fiduciary duty to her. Michael testified that he did not have any control over the business’s accounting or distributions, and did not believed he owed a fiduciary duty to Janice.
The court recognized that as an assignee that Janice had no right to participate in the management of the business. Tex. Bus. Orgs. Code §§ 101.1115(a) and 101.108(b). The court also found that “nothing in Chapter 101 of the Business Organizations Code creates a fiduciary duty between the members of a limited [liability] company and those who become assignees of a member’s rights upon a member’s divorce.” See id. §§ 101.101-.114. Further, the court cited case law providing that the fiduciary duties existing between spouses typically terminate upon the divorce. See Solares v. Solares, 232 S.W.3d 873, 881 (Tex. App.—Dallas 2007, no pet.); In re Marriage of Notash. 118 S.W.3d 868, 872 (Tex. App.—Texarkana 2003, no pet.).
Despite business statutes specifically not imposing fiduciary duties on LLC members, and the customary termination of a fiduciary duties upon divorce, the court ruled that Michael owed a fiduciary duty to his ex-wife. Why?
One rarely cited Family Code statute imposes such a duty. Texas Family Code section 9.011(b) provides that “[t]he subsequent actual receipt by the non-owning party of property awarded to the owner in a decree of divorce or annulment creates a fiduciary obligation in favor of the owner and imposes a constructive trust on the property for the benefit of the owner.” Essentially, if one ex-spouse receives property owed to the other, then s/he has a fiduciary obligation to turn the property over to the other. Using section 9.011(b), the court found that Michael had a “fiduciary duty to remit to Janice her percentage of the amount of income, loss, or distributions he actually received from [the LLC].”
It goes without saying that it is a bad idea to obligate yourself to be a fiduciary to your ex-spouse. Thus, when an LLC member obtains a divorce and divides property, that member should ensure that s/he fully understands the duties due to the ex-spouse—to avoid being a defendant in an expensive lawsuit.