Background
Zhu formed VivaTech Electronics LLC in 2017 with three other parties: Steelman, Secora, and Blessed Land Investment LLC (owned by Zheng). Each of the four parties was designated as a 25% member and manager. The company operated a consumer electronics resale business and initially attempted to manufacture bubble wrap machines. In June 2018, Zhu resigned from active involvement in the company. The remaining members continued operations, borrowed money from Zheng personally, and sold inventory on consignment from Blessed Land.
In March 2020, after reviewing company records and discovering payments to Blessed Land and Zheng, Zhu transferred $25,000 from the company’s bank account to his personal account without consulting the other members, claiming he was owed reimbursement for expenses from years earlier. When the other members demanded return of the funds, Zhu returned $5,000 but retained $20,000. After Zhu was sued for conversion and theft, he made a second unauthorized transfer of $23,000.
Zhu filed counterclaims against the other members for breach of fiduciary duty and theft, alleging 21 separate breaches including self-dealing and asset diversion. The trial court granted summary judgment dismissing Zhu’s breach of fiduciary duty claims and a jury found Zhu liable for conversion and theft, awarding damages and attorney’s fees to the defendants.
The Court’s Holding
The court held that under Texas law, members of a limited liability company do not automatically owe fiduciary duties to each other simply by virtue of their co-membership status. The court rejected Zhu’s argument that VivaTech’s Company Agreement imposed such duties, finding that the agreement contained no express language imposing fiduciary duties among members. General provisions requiring directors to report quarterly and approve member loans do not, standing alone, create a fiduciary relationship among equal, co-managing members. The court therefore affirmed summary judgment on Zhu’s individual breach of fiduciary duty claims against all three appellees (Steelman, Blessed Land, and Zheng).
However, the court reversed the trial court’s dismissal of Zhu’s derivative breach of fiduciary duty claims—claims brought on behalf of the company itself rather than personally—against Steelman and Blessed Land. The court found Zhu presented sufficient evidence to raise a fact issue regarding whether these members breached duties owed to the company when they borrowed money from Zheng and arranged consignment sales from Blessed Land without consulting Zhu. The court did not disturb the jury’s verdict finding Zhu liable for conversion and theft, but reversed portions of the attorney’s fees awards and remanded for further proceedings on the derivative claims and a new hearing on fees.
Key Takeaways
- LLC members owning equal interests do not owe fiduciary duties to each other absent express contractual language stating otherwise, even when all members serve as managers.
- A company agreement’s general governance provisions (quarterly reports, director status, approval requirements) do not create fiduciary duties among members without explicit language to that effect.
- Non-members, such as representatives of member entities, cannot owe fiduciary duties to other members unless the company agreement specifically imposes such duties.
- Derivative claims—asserting breach of duties owed to the company itself—are analyzed differently from individual claims and may proceed even when individual fiduciary duty claims fail.
Why It Matters
This decision clarifies a critical principle of Texas LLC law: members who own equal stakes and exercise equal management authority do not stand in a fiduciary relationship with each other by default. This protects LLC members from personal liability claims based on co-membership alone and respects the freedom of contract—if members want fiduciary duties, they must bargain for them explicitly. The ruling also makes clear that boilerplate governance provisions do not implicitly create such duties.
However, the decision preserves the ability to bring derivative claims against members for breaches of duties owed to the LLC itself. Zhu’s derivative claims that other members improperly siphoned company assets—by taking consignment inventory and making personal loans without Zhu’s input—can proceed to trial. This distinction between individual and derivative claims is crucial for minority members seeking to challenge majority or co-equal member conduct that harms the company as a whole.