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When Do Fiduciary Duties Shift to Creditors in Texas?

Typically, a corporation's directors and officers only owe fiduciary duties to the corporation and its shareholders, but not to the corporation's creditors. However, Texas Courts have consistently held that fiduciary duties can shift from shareholders to creditors when the corporation begins to experience financial turmoil. Unfortunately, Texas Courts are split on what financial turmoil is enough to trigger this shift. This blog post will detail the split within the Texas Courts of when the shift of fiduciary duties is triggered.

There are three main approaches in Texas to determine when the shift of duties is triggered. Some Texas Courts have held that simply being "in the zone of insolvency" is enough for fiduciary duties to shift from shareholders to the creditors. In re I.G Services, Ltd., 2007 WL 2229650 at *5, (Bankr. W.D. Tex. 2007). However, most have adopted the Delaware approach that states the shift is triggered when the corporation becomes insolvent. Floyd v. Option Mortg. Corp. (In re Supplement Spot, LLC), 409 B.R. 187, 203 (Bankr. S.D. Tex. 2009). Recently this approach has come under fire; some courts have begun to hold that insolvency, while necessary, is not sufficient, but must also be accompanied by the corporation ceasing operations. Aurelius Capital Master, Ltd. v. Acosta, 2014 U.S. Dist. LEXIS 151201 (N.D. Tex. Jan. 28, 2014).

While Texas Courts have been unclear on what financial turmoil is required for the fiduciary duties to shift from shareholder to creditors, they have been clear on what type of suit a creditor can bring. Texas Courts have consistently held that even when the fiduciary duties shift, creditors can only bring derivative suits for breaches of fiduciary duty and not a direct action.

Because of the uncertainty when pursuing a breach of fiduciary duty as a creditor, it is crucial that you have the best on your side. At Taylor Dunham and Rodriguez LLP, we pride ourselves on our expertise in this area of the law and have successfully represented creditors in derivative suits alleging breach of fiduciary duties. If you are a creditor and believe you are owed fiduciary duties that have been breached, do not hesitate to contact Taylor Dunham and Rodriguez LLP for legal assistance.

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