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.

Photo of David Fowler Johnson David Fowler Johnson

dfjohnson@winstead.com
817.420.8223

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary…

dfjohnson@winstead.com
817.420.8223

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. Read More

David’s financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class action, RICO actions, usury, various tort causes of action, breach of fiduciary duty claims, and preference and other related claims raised by receivers.

David also has experience in estate and trust disputes including will contests, mental competency issues, undue influence, trust modification/clarification, breach of fiduciary duty and related claims, and accountings. David’s recent trial experience includes:

  • Representing a bank in federal class action suit where trust beneficiaries challenged whether the bank was the authorized trustee of over 220 trusts;
  • Representing a bank in state court regarding claims that it mismanaged oil and gas assets;
  • Representing a bank who filed suit in probate court to modify three trusts to remove a charitable beneficiary that had substantially changed operations;
  • Represented an individual executor of an estate against claims raised by a beneficiary for breach of fiduciary duty and an accounting; and
  • Represented an individual trustee against claims raised by a beneficiary for breach of fiduciary duty, mental competence of the settlor, and undue influence.

David is one of twenty attorneys in the state (of the 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Additionally, David is a member of the Civil Trial Law Commission of the Texas Board of Legal Specialization. This commission writes and grades the exam for new applicants for civil trial law certification.

David maintains an active appellate practice, which includes:

  • Appeals from final judgments after pre-trial orders such as summary judgments or after jury trials;
  • Interlocutory appeals dealing with temporary injunctions, arbitration, special appearances, sealing the record, and receiverships;
  • Original proceedings such as seeking and defending against mandamus relief; and
  • Seeking emergency relief staying trial court’s orders pending appeal or mandamus.

For example, David was the lead appellate lawyer in the Texas Supreme Court in In re Weekley Homes, LP, 295 S.W.3d 309 (Tex. 2009). The Court issued a ground-breaking opinion in favor of David’s client regarding the standards that a trial court should follow in ordering the production of computers in discovery.

David previously taught Appellate Advocacy at Texas Wesleyan University School of Law located in Fort Worth. David is licensed and has practiced in the U.S. Supreme Court; the Fifth, Seventh, and Eleventh Federal Circuits; the Federal District Courts for the Northern, Eastern, and Western Districts of Texas; the Texas Supreme Court and various Texas intermediate appellate courts. David also served as an adjunct professor at Baylor University Law School, where he taught products liability and portions of health law. He has authored many legal articles and spoken at numerous legal education courses on both trial and appellate issues. His articles have been cited as authority by the Texas Supreme Court (twice) and the Texas Courts of Appeals located in Waco, Texarkana, Beaumont, Tyler and Houston (Fourteenth District), and a federal district court in Pennsylvania. David’s articles also have been cited by McDonald and Carlson in their Texas Civil Practice treatise, William v. Dorsaneo in the Texas Litigation Guide, and various authors in the Baylor Law ReviewSt. Mary’s Law JournalSouth Texas Law Review and Tennessee Law Review.

Representative Experience

  • Civil Litigation and Appellate Law