Business Divorce: Exiting Member of LLC May Still Owe Fiduciary Duties

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In Villareal v. Saenz, two co-owners of a limited liability company sued each other regarding conduct surrounding a business divorce. 5-20-CV-00571-OLG-RBF, 2021 U.S. Dist. LEXIS 94183 (W.D. Tex. May 18, 2021). After the parties asserted allegations against each other, they entered into a release agreement. The parties agreed that “Saenz would assign his entire interest to ZroBlack LLC to Villarreal.” After the release, Saenz refused to return certain property to the company. Villarreal sued for breach of fiduciary duty and other claims.

Saenz filed a motion to dismiss, and the district court magistrate judge recommended that the claims that arose before the release be dismissed, but recommended that the claims that arose after the release continue. Regarding Saenz’s fiduciary duties after the release agreement was executed, the court stated:

As discussed, any claim premised on Saenz’s conduct as ZroBlack’s CEO before the parties executed the Release is barred by the Release’s plain terms. But Plaintiffs also argue that Saenz violated his fiduciary duties by maintaining dominion and control over ZroBlack’s domain and email server to the company’s detriment after the parties executed the Release. Citing case law on partnerships, Saenz contends that his fiduciary duties to ZroBlack ceased once he assigned his interest in the LLC to Villarreal. See Dkt. No. 41 at 21. But under Texas  law, “[a] member of a limited liability company may not withdraw or be expelled from the company.” Tex. Bus. Org. Code § 101.107. Further, “an assignor member does not cease to be a member merely by assigning the member’s interest.” Miller & Ragazzo, 13 Tex. Prac., Texas Methods of Practice § 59:2 (3d ed. 2021) (citing id. § 101.111(a)). At the same time, the Operating Agreement refers to an assignor as an “exiting member” without defining that term or discussing its implications. See Dkt. No. 33-3 at 9. Ultimately, Saenz hasn’t addressed the interplay between Texas law on LLCs and the language in the Operating Agreement. Accordingly, on the present briefing, the Court can’t conclude as a matter of law that Saenz didn’t owe ZroBlack any fiduciary duties after he assigned his interest in the company to Villarreal.

Id.

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