Texas Business Court Upholds Fiduciary Duty Waiver in LLC Dispute

A recent decision from one of Texas’s newly established business courts has sent a clear message to the state’s business community: when it comes to limited liability companies (LLCs), the company agreement is king, especially concerning the waiver of fiduciary duties.

In Tall v. Vanderhoef, 2025 Tex. Bus. 15, the Eighth Division of the Texas Business Court in Fort Worth dismissed a member’s claim for breach of fiduciary duty, reaffirming the broad contractual freedom granted to LLCs under the Texas Business Organizations Code (TBOC).

The ruling provides crucial insights for entrepreneurs, investors, and business attorneys, highlighting the power of a well-drafted LLC agreement and clarifying the high bar for claiming a breach of duties that have been contractually disclaimed.

The dispute in Tall v. Vanderhoef arose between the members of Direct Care Source, LLC. The plaintiff, a minority member, alleged that the managing member breached his fiduciary duties. However, the LLC’s company agreement contained a broad provision that explicitly disclaimed such duties. This waiver stated that no member or manager would have any fiduciary or other duty to any other member, except as expressly laid out in the agreement. The agreement did, however, carve out liability for “gross negligence, fraud or intentional misconduct.”

Relying on this contractual waiver, the defendant, Vanderhoef, moved to dismiss the breach of fiduciary duty claim. The plaintiff countered by arguing that an “informal fiduciary duty” existed due to a special relationship of trust and confidence that existed apart from the LLC agreement.

The Texas Business Court sided squarely with the defendant, dismissing the breach of fiduciary duty claim. The court’s reasoning was grounded in the principle of freedom of contract, a cornerstone of Texas business law, and the specific provisions of the TBOC that govern LLCs.

Under Section 101.401 of the TBOC, the company agreement of an LLC 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.” This statutory provision grants LLC members significant leeway to define the scope of their obligations to one another.

In Tall, the court found the language in the company agreement to be unambiguous. By agreeing to the broad waiver, the members had contractually eliminated traditional fiduciary duties of loyalty and care that might otherwise be implied by law. Because the plaintiff did not allege actions that would fall under the exceptions for gross negligence, fraud, or intentional misconduct, the waiver was dispositive.

The court also rejected the plaintiff’s “informal fiduciary duty” argument. To establish such a duty, a party must demonstrate a special relationship of trust and confidence that existed prior to and independent of the agreement at the heart of the dispute. The court found no evidence of such a pre-existing relationship, concluding that the parties’ obligations were defined by the “arms-length business transaction” memorialized in the LLC agreement.

The decision in Tall v. Vanderhoef underscores a critical aspect of Texas law: while many fiduciary duties can be waived, there are limits.

Duties That Can Be Waived:

• Duty of Loyalty: This duty generally requires a member or manager to act in the best interest of the LLC and to avoid self-dealing or usurping company opportunities. As seen in Tall, a clear and unambiguous provision in the company agreement can eliminate this duty. This allows members to engage in other business ventures that might otherwise be seen as competitive, provided the agreement allows for it.
• Duty of Care: This duty typically requires a manager to act with the care that an ordinarily prudent person would exercise in a similar position. The TBOC allows for this duty to be restricted or eliminated, though it is common to retain a standard that prohibits “gross negligence,” as was the case in the Tall agreement.

Duties and Liabilities That Generally Cannot Be Waived:

• Liability for Gross Negligence, Fraud, and Intentional Misconduct: The carve-out in the Tall LLC agreement is telling. Texas public policy generally frowns upon allowing parties to contractually absolve themselves of liability for their own gross negligence, fraudulent acts, or intentional harm. While traditional fiduciary duties may be waived, the basic obligation to not act in a willfully harmful or reckless manner remains.
• The Implied Covenant of Good Faith and Fair Dealing: While not a fiduciary duty in the traditional sense, Texas law implies a covenant of good faith and fair dealing in all contracts. This covenant cannot be waived. However, it is important to note that this duty does not create new obligations but rather ensures that parties do not act in a way that would deprive others of the benefits of their agreement.

The ruling in Tall v. Vanderhoef serves as a powerful reminder of the following for those operating or investing in Texas LLCs:

• The Company Agreement is Paramount: Courts will enforce the terms of a well-drafted company agreement. It is essential to carefully negotiate and draft provisions related to fiduciary duties to accurately reflect the understanding and intent of all members.
• Clarity is Crucial: Ambiguity is the enemy of a strong contractual waiver. To be enforceable, language disclaiming fiduciary duties should be clear, conspicuous, and unequivocal.
• Default Rules are a Backstop, Not a Guarantee: In the absence of a company agreement or if the agreement is silent on fiduciary duties, Texas law will imply certain duties. However, relying on these default rules can lead to uncertainty and disputes down the road.
• Sophistication of the Parties Matters: The court in Tall noted that the agreement was the result of an “arms-length business transaction between sophisticated businesspeople.” While the principles apply broadly, courts are more likely to strictly enforce waivers between experienced business professionals.

Ultimately, Tall v. Vanderhoef does not plow new legal ground but rather decisively reaffirms the established principles of Texas law. For businesses operating as LLCs in the Lone Star State, the message is clear: the power to define the rights and obligations between members lies firmly within the four corners of the company agreement.