Breach of Fiduciary Duty: When Partners, Officers, or Managers Violate Their Obligations

By Hank FasthoffJuly 6, 2026

A fiduciary duty is the highest obligation the law imposes on one person's conduct toward another. When a partner, corporate officer, LLC manager, or director owes fiduciary duties and violates them, the remedies go beyond what contract law provides. Courts can order disgorgement of every dollar the fiduciary earned from the breach, impose constructive trusts on property acquired through self-dealing, award exemplary damages for intentional misconduct, and remove the fiduciary from their position. Fiduciary duty claims produce the most severe consequences in Texas business litigation because they involve a betrayal of trust, not just a failure to perform.

Who Owes Fiduciary Duties

General partners owe fiduciary duties to each other and to the partnership. Texas law requires partners to account to the partnership for any property, profit, or benefit derived from partnership business and prohibits partners from competing with the partnership without the consent of the other partners.

Corporate officers and directors owe fiduciary duties to the corporation and its shareholders. In closely held corporations, majority shareholders owe fiduciary duties to minority shareholders, which prevents the majority from using its control to freeze out, oppress, or extract value at the minority's expense.

LLC managers and members present a more complex picture. Under Texas Business Organizations Code (TBOC) § 101.401, an LLC's company agreement may "expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company or to a member or manager of the company." In May 2025, the Texas Legislature amended the TBOC through Senate Bill 29 to permit LLCs and limited partnerships to eliminate the duties of loyalty, care, and good faith for managers, officers, and general partners. If the operating agreement eliminates fiduciary duties, a breach of fiduciary duty claim may be unavailable, and the dispute becomes a breach of contract claim governed by whatever obligations the operating agreement does impose.

In Tall v. Vanderhoef, 2025 Tex. Bus. 15 (Eighth Division, Fort Worth), the Texas Business Court dismissed a breach of fiduciary duty claim where the LLC's company agreement contained a broad waiver of fiduciary duties. The court held that the waiver was unambiguous and enforceable under § 101.401, reinforcing that the operating agreement controls.

For corporations, the analysis is different. TBOC § 21.418(f), also amended by SB 29 (effective May 14, 2025), provides that officers and directors aren't liable for engaging in interested transactions unless the cause of action involves fraud, intentional misconduct, or knowing violations of law. TBOC § 21.419 (applicable to publicly traded corporations and corporations that opt in through their governing documents) provides that directors and officers aren't liable for monetary damages except for fraud, intentional misconduct, ultra vires acts, or knowing violations of law. Corporations can't eliminate the duty of loyalty or the duty of good faith entirely.

Before asserting a breach of fiduciary duty claim against an LLC member, manager, or corporate officer, the first step is reading the operating agreement, bylaws, or certificate of formation to determine what duties exist and whether any have been modified or eliminated.

The Duties

Duty of loyalty requires the fiduciary to act in the best interests of the entity and its owners, not in the fiduciary's personal interest. Loyalty prohibits self-dealing (using the fiduciary's position to benefit personally at the entity's expense), usurpation of corporate or partnership opportunities (diverting a business opportunity that belongs to the entity for the fiduciary's personal benefit), competition (operating a competing business while serving as a fiduciary), receiving secret profits or kickbacks (accepting undisclosed compensation from third parties in connection with the entity's business), and diverting entity assets (using company funds, property, or personnel for personal purposes without authorization).

Unlike the duty of care, the business judgment rule doesn't shelter a fiduciary who benefits personally from their position without proper disclosure and authorization. Good faith and good outcomes don't excuse self-dealing.

Duty of care requires the fiduciary to act with the competence and diligence of a reasonable person in similar circumstances, considering all available information and potential risks. A breach of the duty of care occurs when the fiduciary acts negligently, fails to investigate material facts before making a decision, or disregards their responsibility to act in the entity's best interest.

Duty of good faith and fair dealing requires the fiduciary to act with integrity and not to undermine the rights of the entity or its owners through deceptive or obstructive conduct. Bad faith conduct (acting with the purpose of harming the entity or advancing the fiduciary's personal interests at the entity's expense) breaches this duty even when it doesn't involve self-dealing or negligence.

Duty of candor (or disclosure) requires the fiduciary to disclose all material information bearing on a transaction or decision in which the fiduciary has a personal interest. Failing to disclose a conflict of interest, concealing material facts from co-owners, or providing misleading information to the board or the members breaches the disclosure duty.

The Business Judgment Rule

Not every bad business decision is a breach of fiduciary duty. Under the business judgment rule, courts won't second-guess decisions that were made in good faith, with reasonable care, and in what the decision-maker believed was the entity's best interest, even if those decisions produced unfavorable outcomes.

In practice, the business judgment rule protects the duty of care. If a director investigates the relevant facts, considers the available information, acts without a conflict of interest, and makes a decision that turns out to be wrong, the business judgment rule shields the director from liability. If the director didn't investigate, had a conflict, or acted in bad faith, the rule doesn't apply.

TBOC § 21.419, codified by SB 29 in May 2025, formalizes the business judgment rule for publicly traded Texas corporations and for corporations and LLCs that opt into the section through their governing documents. Under § 21.419, directors and officers aren't liable for monetary damages unless their conduct involved fraud, intentional misconduct, ultra vires acts, or knowing violations of law. For entities that adopt § 21.419, the business judgment rule provides protection up to and including gross negligence.

Common Breach Scenarios

A managing partner who diverts a profitable contract to a company the partner personally owns has breached the duty of loyalty through self-dealing and usurpation of a partnership opportunity.

A corporate officer who learns through the officer's executive role that an acquisition target is available and personally invests in it without disclosing the opportunity to the board has usurped a corporate opportunity.

An LLC manager who hires the manager's spouse's company to provide services to the LLC at above-market rates without disclosing the relationship has engaged in an undisclosed related-party transaction that breaches the duty of loyalty and the duty of candor.

A majority shareholder in a closely held corporation who causes the corporation to stop paying dividends while increasing the majority shareholder's salary (effectively converting the minority's return on investment into the majority's compensation) has engaged in minority shareholder oppression.

Remedies

Disgorgement requires the fiduciary to surrender every dollar of profit earned from the breach, regardless of whether the entity suffered a corresponding loss. If a partner diverted a $500,000 contract and earned $200,000 in profit, the partner disgorges $200,000 even if the partnership could prove only $50,000 in direct damages. Disgorgement prevents the fiduciary from profiting from the breach.

Constructive trust is an equitable remedy that imposes a court-supervised trust on specific property the fiduciary obtained through the breach. If a director used inside information to purchase real estate that should have been presented to the corporation, the court can impose a constructive trust on the property and order it transferred to the corporation.

Compensatory damages cover the actual financial loss the entity or its owners suffered as a result of the breach, including lost profits, diminished entity value, and additional costs incurred because of the fiduciary's misconduct.

Exemplary damages under CPRC § 41.003 are available when the breach involved fraud, malice, or gross negligence, proven by the heightened evidentiary standard. Exemplary damages are capped under § 41.008(b) at the greater of $200,000 or twice the amount of economic damages plus up to $750,000 in non-economic damages.

Forfeiture of compensation allows the court to order the fiduciary to forfeit compensation received during the period of disloyalty, on the theory that a disloyal fiduciary hasn't earned the compensation the entity paid.

Removal of the fiduciary from their position (director, officer, manager, trustee) and appointment of a successor or receiver is available when the fiduciary's continued service threatens the entity's interests.

Practical Recommendations

Read the operating agreement, bylaws, or partnership agreement before asserting or defending a breach of fiduciary duty claim. If the governing document eliminates or modifies fiduciary duties under TBOC § 101.401 or provides exculpation under § 21.418 or § 21.419, the claim may be unavailable or limited to fraud, intentional misconduct, or knowing violations of law.

Document every conflict-of-interest disclosure, every board or member vote on a related-party transaction, and every instance of a fiduciary presenting an opportunity to the entity before pursuing it personally. If a dispute arises, the fiduciary's defense depends on proving that the process was fair and that the entity had full information before approving the transaction.

If you're a minority owner in a closely held corporation or LLC and believe the controlling owner is using their position to extract value at your expense, evaluate whether the conduct constitutes oppression, self-dealing, or a breach of the duty of loyalty. Remedies may include disgorgement, constructive trust, forced buyout, or judicial dissolution.

Don't assume the business judgment rule protects every decision. The rule protects good-faith decisions made with reasonable care and without a conflict of interest. It doesn't protect self-dealing, undisclosed conflicts, or decisions made without investigating the relevant facts.