Self-Dealing by Director Is A Breach Of Fiduciary Duty (Case 2)

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Facts

Plaintiff, Ms. Carmichael, is on the board of directors of Commerce Towers Condominium (“Association”).  On the board with her is Mr. Frese and Mr. Vickers.  Mr. Vickers, Mr. Frese and Mr. Tarantino are the officers of the Association. (collectively “Officers”).  All three are also the officers of Tarantino Properties, Inc. (the “Management Company”). Carmichael and other unit owners (collectively “Owners”), individually and on behalf of the Association, sued the Officers and the Management company for breaches of fiduciary duties and for unjust enrichment because the Officers caused the Association to provide for the maintenance and preservation of property that was not part of the Association (the retail space of the buildings).  The Officers and Management Company asserted that the Owners did not have standing to sue on behalf of the Association (a derivative suit).

Issue

Did the Owners have standing to sue the Officers and Management Company on behalf of the Association?

Trial Court

The trial court dismissed all representative/derivative claims of the Owners.  The Owners appealed.

Texas Court of Appeals

The Texas statute expressly granted the Owners the ability to bring claims against the Officers for breach of fiduciary duty for their ultra vires acts.  The Officers argued that they did not act outside of their powers, but the court held that the purpose of the corporation clause is dominant over the powers clause for officers, and the articles of incorporation “do not authorize officers or directors to use power for the benefit of their affiliates, particularly at the expense of the Association’s members.”  Based on these findings the court held that “Texas [law] confers derivative standing on the [Owners] to assert the Association’s claims against its current or former officers or directors for acts or transfers that allegedly are (1) beyond the Association’s expressed purposes, or (2) inconsistent with an expressed limitation on the officer or director’s authority.”  The court then reversed that portion of the trial court’s decision and sent the case back to the trial for those items to be tried.

LESSONS LEARNED
  1. Directors and officers can’t self-deal or cause the Association to enter contracts that are contrary to its express purpose or inconsistent with the officers’ or directors’ authority; and
  2. Directors and officers who have loyalties to other organizations that are contracted with the Association would be wise to either resign or abstain from any decision or discussion, depending on the facts, relating to the entity with which they have a discussion.

Carmichael v. Tarantino Properties, Inc., ___ S.W.3d ___ (2020)

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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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