Court Held That Manager Owed Limited Liability Company Fiduciary Duties And That A Derivative Action Could Still Be Pursued After The Company Dissolved

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In Katz v. Intel Pharma, LLC, a minority member of a limited liability company sued a former manager for breach of fiduciary duty in a derivative action. No. H-18-1347, 2020 U.S. Dist. LEXIS 120389 (S.D. Tex. July 9, 2020). The defendant filed a motion for summary judgment, alleging that he did not owe any fiduciary duties, and even if he did, the minority member could not raise them after the company was no longer in existence. The federal district court denied the motion.

The court stated: “A derivative action provides ‘a procedural pathway for a minority shareholder to sue on behalf of the company for wrongs committed against the company.’” Id. (citing In re Murrin Bros. 1885, Ltd., No. 18-0737, 2019 Tex. LEXIS 1266, 2019 WL 6971663, at *4 (Tex. Dec. 20, 2019)). The court stated that it had not found a case expressly stating that under Texas law, an LLC’s managing member owes the company fiduciary duties as a matter of law. “The Texas Business Organization Code is silent as to an LLC member’s fiduciary duties, except to state that ‘[t]he company agreement of a limited liability company 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.’” Id. (citing Tex. Bus. Org. Code Ann. § 101.401)). The court noted, however, that the cases support finding that “Suggs owed Intel Pharma fiduciary duties based on agency-law principles.” Id. Further, the court noted:

Intel Pharma’s operating agreement also supports finding that Suggs, as its managing member, acted as the company’s agent. The agreement provides that “[t]he Members, within the authority granted by the Act and the terms of this Agreement shall have the complete power and authority to manage and operate the Company and make all decisions affecting its business and [affairs].” The agreement does not “expand or restrict” fiduciary duties that Suggs owed to Intel Pharma.

Id. The court found, therefore, that the defendant did owe fiduciary duties as a manager to the company.

Regarding the defendant’s argument that the plaintiff could not bring a derivative action where the company no longer existed, the court held:

The record does not provide details of why Intel Pharma no longer exists. Katz’s Second Amended Complaint alleges that in January 2017, the Texas Secretary of State revoked Intel Pharma’s certificate of formation. Assuming that to be true, and that it caused a dissolution, Katz could still bring a derivative claim on the company’s behalf. Under the Texas Business Organizations Code, a domestic business entity continues in existence for three years after termination or dissolution, for limited purposes. Tex. Bus. Org. Code Ann. § 11.356 (West 2006). One purpose is for “prosecuting or defending in the terminated filing entity’s name an action or proceeding brought by or against the terminated entity.” Id. § 11.356(a)(1). If the Texas Secretary of State revoked Intel Pharma’s certificate and caused a dissolution, the company would continue to exist for three years for the purpose of having a derivative claim filed on its behalf. See Gill v. Grewal, No. 4:14-cv-2502, 2020 U.S. Dist. LEXIS 104461, 2020 WL 3171360, at *7 (S.D. Tex. June 15, 2020) (an LLC continued to exist for three years after dissolution for the purpose of a derivative suit). Katz sued in April 2018, less than three years from when the State allegedly revoked Intel Pharma’s certificate of formation. (Docket Entry No. 1).

Id. Accordingly, the court denied the motion for summary judgment.

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