TCJL today filed an amicus brief with the Texas Supreme Court urging the Court to review the First District Court of Appeals’ (Houston) decision in Devon Energy Holdings, LLC f/k/a Chief Holdings, LLC, and Trevor D. Rees-Jones v. Allen.
The case involves an issue of first impression to the Supreme Court: whether a member of a limited liability company (LLC) who manages the operations of the company owes a fiduciary duty to individual members of the LLC. The Court of Appeals found the existence of such a duty at common law, although the Texas Limited Liability Company Act provides that the LLC operating agreement defines the scope of duties owed by LLC members.
The question is important to TCJL members because the Court of Appeals’ decision potentially exposes every LLC currently operating in the state (and those created in the future) to litigation by dissatisfied investors. LLCs are commonly formed to raise substantial amounts of investment capital in the energy industry and in other capital intensive businesses because they combine the tax benefits of flow-through entities such as partnerships with the limited liability of a corporation. When the Legislature enacted the Texas Limited Liability Act in 1991, it specifically declined to extend partnership or corporate fiduciary duties to the new entity, leaving these issues to the operating agreement between the parties. As we state in our brief, TCJL is concerned that applying common law duties to LLCs undermines the legislative intent of the LLC statute and largely negates the advantages of the LLC as a vehicle for raising the capital investment needed for natural resource and other economic development in Texas.