Partnership & Fiduciary Duty Attorney TX

Partnerships are a convenient way for people to come together in business for a common purpose. When a partnership is formed (with or without formal written agreements) each partner owes a fiduciary duty to his or her fellow partners, including that of good faith and honesty in transacting partnership business. This is a legal as well as ethical relationship of confidence and trust in the management of money or assets concerning the partnership.

What is a Partnership?

A partnership is a relationship between two or more people to carry on a trade or business. Each partner contributes money, property, their labor or their knowledge or skill. Each expects some return or share in the profits as well as the losses of the business.

Unlike a corporate entity, a partnership pays no income taxes but has its profits or losses pass through to the partners who have to include their share of the partnership's income or loss on their income tax return.

A limited partnership is one where the limited partners do not participate in managing the business and are not usually liable for partnership obligations.

Fiduciary Duties of the Partners

In a partnership, the general partners owe each other a duty of honesty, good faith, fairness and loyalty. A managing partner has a duty to carry out the partnership business solely for the benefit of the partnership. The duty of care and loyalty is a statutory one found in Tex. Bus. Org. Code Section 152.206.

These duties also include:

  • Full disclosure of all material facts or matters affecting the partnership.
  • Accounting for all partnership profits and property.
  • Not engaging in self-dealing to the detriment of the partnership or full personal gain in a manner adverse to the partnership.

A general partnership may limit the duties owed so long as the duties of loyalty and care are maintained and the limitations are not subject to a "manifestly unreasonable standard." A standard provision in a partnership agreement is one that permits partners to engage in competition and to take advantage of business opportunities.

There is also no prohibition on the extent a partnership agreement may eliminate a partner's liability to the partnership so long as the duties of loyalty and care are not extinguished.

What is the Duty of Care of a Partner?

A partner can be held liable for negligent handling of the partnership's business. This duty does not extend to activities in the formation of the partnership but to the conduct of the business and in its winding up. The standard of care is that which an ordinarily prudent person would do or exercise under similar circumstances. Errors in judgment do not constitute negligence.

Conflicts of Interest

No partner may engage in any business dealing on behalf of a third party with an adverse interest to that of the partnership, nor may the partner engage in matters on his or her own behalf that conflict with the partnership's interests.

A conflict of interest exists when a partner uses the advantage of his position to gain a benefit for himself at the expense of the other partners or from finding himself in a position where his self-interest may conflict with that partner's fiduciary obligations.

A partner may still deal in business matters to his or her own self-interest so long as that self-interest is not adverse to the partnership and the partner satisfies the duty of good faith. This might include disclosure of any self-dealings with the other partners and receiving their consent to preclude any future claim that he failed to fully disclose a matter that affected the partnership's interests. If the partner does not receive consent to self-dealing transactions, the partner must prove that the activities were not in conflict with the partnership's interests.

A partner has the burden of proof in any breach of fiduciary duty claim that he or she acted fairly and fully disclosed all material facts to the other partners if the partners challenge that partner's self-dealings.

Damages for Breach of Fiduciary Duty

If the partnership suffers financial damages from a partner's breach of his or her fiduciary duties, such as by adverse self-dealing activities, the partnership has certain remedies available to it:

  • Constructive trust

This is an equitable remedy that prevents the breaching partner from becoming unjustly enriched from gaining legal title to real or personal property by fraud, concealment or misrepresentation. Under such circumstances, the court has the power to form a constructive trust that effectively transfers legal title of the ill-gotten property to the partnership. It can also impose a constructive trust on the profits the partner received.

  • Rescission (cancellation of the contract)
  • Force an accounting for all profits derived from the activity
  • Exemplary or punitive damages

Punitive or exemplary damages are awarded where there is an intentional or willful breach of the partner's fiduciary duty. Some courts have held that it is not necessarily whether there was an intent to injure, but whether the partner intended to gain an additional benefit for himself through the partnership.

Partnership Attorneys - Byrd Davis Alden & Henrichson, LLP

If you are a partner facing a lawsuit for breach of fiduciary duty or are contemplating legal action concerning a partnership, call our law firm today at 512-593-7650 to arrange for a consultation.

Partnerships are a convenient way for people to come together in business for a common purpose. When a partnership is formed (with or without formal written agreements) each partner owes a fiduciary duty to his or her fellow partners. That duty requires a partner to use good faith in transacting partnership business and to make timely and candid disclosures of information that is important to the partnership. Further, a partner may not steer away potential partnership business for personal gain.

If you are faced with a lawsuit or are contemplating legal actions concerning a partnership, call our law firm at 512-593-7650 to arrange an appointment. Our Austin business litigation & defense attorneys want to help you.