Federal District Court Held That A Shareholder Of A Company Did Not Owe Fiduciary Duties To The Company Regarding A Transfer Of Stock Even Though He Was Also An Officer

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In Liberty Bankers Life Ins. Co. v. Lenhard, a company sued its former chief executive officer and shareholder for breaching fiduciary duties and fraudulent statements regarding an agreement to transfer his stock in the company. No. 3:16-CV-2417-N, 2019 U.S. Dist. LEXIS 19390 (N.D. Tex. February 6, 2019). The defendant filed a motion to dismiss the plaintiff’s claims. Regarding the breach-of-fiduciary-duty claim, the court held that under Texas law, the plaintiff had to first show that the defendant owed a fiduciary duty. The court held that the plaintiff did not establish that the defendant owed a fiduciary duty because he was only acting in his capacity as shareholder in the transaction and not as an officer:

Continental has not established a fiduciary duty existed at the time of sale. While it claims Lenhard owed a formal fiduciary duty because he was owner and CEO of Continental, he was not acting as CEO when he decided to sell the company. Rather, he was acting as a shareholder, and shareholders do not have the same special automatic fiduciary status corporate officers hold under Texas law. In re Harwood, 637 F.3d 615, 620 (5th Cir. 2011). In addition, there is no evidence that Continental relied on Lenhard for the sort of moral, financial, or personal support that is required to establish an informal fiduciary duty under Texas law. Assoc. Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 288 (Tex. 1998). Indeed, this was purely an arms-length transaction between Lenhard and Liberty for Lenhard’s shares in the company. That Continental representatives may have particularly trusted Lenhard’s representations because of their previous relationship does not in itself mean he owed a fiduciary duty upon the sale. See Meyer, 167 S.W.3d. at 331. Accordingly, the Court dismisses Continental’s breach of fiduciary duty claim.

Id. at 10-11. The court dismissed the breach-of-fiduciary-duty claim.

Interesting Note: This court correctly analyzed the fiduciary-duty issue in the complex scenario of a defendant wearing multiple hats. Often the same party acts in different capacities, one or more of those being a fiduciary relationship. A plaintiff may want all of the defendant’s actions considered in the context of the fiduciary relationship. However, the defendant is entitled to have his or her actions judged depending on the hat that he or she is wearing in relation to the actions. For example, it is common for a trustee to also have a position in a company that is owned in whole or in part by the trust. The trustee’s actions regarding the company are not necessarily judged by the trustee’s fiduciary duties as trustee. The trustee’s job as a stockholder is to attend stockholder meetings, vote as an owner, and if necessary, raise shareholder derivative actions. That is pretty much it, and only those actions are judged by a trustee’s fiduciary duty of loyalty, care, etc. The trustee’s job as an operator of the business is judged, like any other business executive, under the business judgment rule, and the beneficiary of the trust may not have standing to complain about those particular actions. So, in fiduciary litigation, it is very important to fully understand what capacities a defendant is acting in and judge his or her conduct by the correct capacity and standard related to same.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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