In In re Silver State Holdings, in a bankruptcy proceeding a trustee of a limited liability company sued its former manager for breach of fiduciary duty and another entity for conspiracy to breach fiduciary duty arising out of a sale of property owned by the company. No. 19-41579-MXM 26 LLC, ADVERSARY NO. 19-4043-MXM 7901, 2020 Bankr. LEXIS 3531 (N.D. Tex. Bankr. December 17, 2020).

The court first found that the manager owed fiduciary duties to the company:

The Texas Business Organizations Code does not directly address the duties a manager or member owes to an LLC, but duty-of-loyalty concerns appear to underlie statutory provisions addressing transactions with governing persons and renunciation of business opportunities. Provisions of the Business Organizations Code permitting governing persons (including managers and managing members of an LLC) to rely on various types of information in discharging a duty implicitly recognize that such persons are charged with a duty of care in their decision making. Finally, the Business Organizations Code provides that, to the extent managers or members are subject to duties and liabilities, including fiduciary duties, the company agreement may expand or restrict the duties and liabilities. Based on these statutory provisions, Morash’s status as an agent of 79

01, and the particular facts of this case, the Court finds and concludes that he owed fiduciary duties to the company.

Id. The court then discussed what those fiduciary duties entailed:

The duty of loyalty holds officers and directors to an “extreme measure of candor, unselfishness and good faith,” particularly where there is an interested transaction. Interested transactions include those in which officers or directors derive personal profit as well as those which deprive the corporation of an opportunity to profit. A transaction between a fiduciary’s company and another company in which the fiduciary has a significant financial interest is also an interested transaction. In such a situation, an officer or director must not allow his personal interests to prevail over the interests of the corporation. “A director who diverts profits from the corporation in violation of his fiduciary relationship is personally liable even though the profits are acquired by an agency controlled by the director.” The burden is on the officer or director to establish the fairness of the transaction.

Id. The court held that the manager breached his fiduciary duties by allowing a foreclosure to occur and a sale to a third party because the company had equity in the property and the sale was not for a fair value. The court also held that the buyer was liable for conspiring with the manager and was jointly liable for the damages. However, the court held that the manager did not owe fiduciary duties to the company’s creditors: “Officers and directors of [an operating corporate debtor] have fiduciary duties to the corporation – not the corporation’s creditors” under Texas law. The Court is aware of no reason the same rule would not apply to managers of LLCs in Texas. Even though 7901 faced financial difficulties, it was not yet a defunct company. Morash, therefore, owed duties to 7901 but not to 7901’s creditors.” Id.

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Photo of David Fowler Johnson David Fowler Johnson

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David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary…

[email protected]

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. Read More

David’s financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class action, RICO actions, usury, various tort causes of action, breach of fiduciary duty claims, and preference and other related claims raised by receivers.

David also has experience in estate and trust disputes including will contests, mental competency issues, undue influence, trust modification/clarification, breach of fiduciary duty and related claims, and accountings. David’s recent trial experience includes:

  • Representing a bank in federal class action suit where trust beneficiaries challenged whether the bank was the authorized trustee of over 220 trusts;
  • Representing a bank in state court regarding claims that it mismanaged oil and gas assets;
  • Representing a bank who filed suit in probate court to modify three trusts to remove a charitable beneficiary that had substantially changed operations;
  • Represented an individual executor of an estate against claims raised by a beneficiary for breach of fiduciary duty and an accounting; and
  • Represented an individual trustee against claims raised by a beneficiary for breach of fiduciary duty, mental competence of the settlor, and undue influence.

David is one of twenty attorneys in the state (of the 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Additionally, David is a member of the Civil Trial Law Commission of the Texas Board of Legal Specialization. This commission writes and grades the exam for new applicants for civil trial law certification.

David maintains an active appellate practice, which includes:

  • Appeals from final judgments after pre-trial orders such as summary judgments or after jury trials;
  • Interlocutory appeals dealing with temporary injunctions, arbitration, special appearances, sealing the record, and receiverships;
  • Original proceedings such as seeking and defending against mandamus relief; and
  • Seeking emergency relief staying trial court’s orders pending appeal or mandamus.

For example, David was the lead appellate lawyer in the Texas Supreme Court in In re Weekley Homes, LP, 295 S.W.3d 309 (Tex. 2009). The Court issued a ground-breaking opinion in favor of David’s client regarding the standards that a trial court should follow in ordering the production of computers in discovery.

David previously taught Appellate Advocacy at Texas Wesleyan University School of Law located in Fort Worth. David is licensed and has practiced in the U.S. Supreme Court; the Fifth, Seventh, and Eleventh Federal Circuits; the Federal District Courts for the Northern, Eastern, and Western Districts of Texas; the Texas Supreme Court and various Texas intermediate appellate courts. David also served as an adjunct professor at Baylor University Law School, where he taught products liability and portions of health law. He has authored many legal articles and spoken at numerous legal education courses on both trial and appellate issues. His articles have been cited as authority by the Texas Supreme Court (twice) and the Texas Courts of Appeals located in Waco, Texarkana, Beaumont, Tyler and Houston (Fourteenth District), and a federal district court in Pennsylvania. David’s articles also have been cited by McDonald and Carlson in their Texas Civil Practice treatise, William v. Dorsaneo in the Texas Litigation Guide, and various authors in the Baylor Law ReviewSt. Mary’s Law JournalSouth Texas Law Review and Tennessee Law Review.

Representative Experience

  • Civil Litigation and Appellate Law