By Chris Bankler

Only six months into a complicated partnership dispute, the Business Court of Texas, 1st Division, issued a thorough summary judgment opinion and order in the case of Primexx Energy Opportunity Fund, LP v. Primexx Energy Corporation, et al., addressing the enforcement of drag-along rights and the fiduciary duties of loyalty and care among partners in a limited partnership.

The dispute involves minority partners who alleged that the controlling partner breached fiduciary duties and contractual duties during a forced sale of the partnership’s business.

Fiduciary Duties of Loyalty Cannot Be Entirely Waived

Judge Whitehill’s opinion meticulously examines the fiduciary duties of loyalty and care, emphasizing that while Texas law permits significant contractual freedom, these duties cannot be entirely waived. As a result, the Court underscored the standards it applied regarding the disclosure of information to partners:

• Partnership Agreement Terms: A partnership agreement may address the issue directly or indirectly by omission. In other words, the foundational principle is that “a partnership agreement governs the relations of the partners and between the partners and the partnership.”
• Material Information: Absent a partnership agreement standard, fiduciary partners must disclose material information affecting the partnership or other partners that would not ordinarily be expected to be covered by a partnership agreement. The court highlighted the example of a lawsuit, stating that partnership management should be expected to disclose if and when the partnership is sued.
• Misleading Information: A partner may not mislead the partnership or other partners where fraud by omission principles would apply.
• Self-Interest: That a partner is acting in its self-interest does not by itself create a duty to voluntarily disclose information regarding its conduct if the partnership agreement lawfully permits that conduct.
• Immaterial Facts: A partner need not disclose facts that would be immaterial under the circumstances, including circumstances contemplated by the partnership agreement.

In its analysis, the court referenced Egan on Entities, a leading treatise on Texas business law, to elucidate the statutory responsibilities of limited partnership managing partners. The court stated, “TBOC Chapter 153 governs limited partnerships. However, Ch. 152’s general partnership laws and other rules of law and equity compatible with Ch. 153 also apply to limited partnerships. TBOC § 153.003(a)–(b); Byron F. Egan, EGAN ON ENTITIES 467 (4th Ed. 2023).”

Freedom of Contract as a Sacred Right

The court emphasized the importance of freedom of contract, describing it as a “sacred right.” Judge Whitehill emphasized: “As a fundamental matter, Texas law recognizes and protects a broad freedom of contract.” The court further explained that “Freedom of contract principles require courts to recognize that ‘sophisticated parties have broad latitude in defining the terms of their business relationship,’ and courts are obliged to enforce the parties’ bargain according to its terms.”

Conclusion-Implications for Corporate Governance

This ruling has significant implications for corporate governance, particularly in the context of limited partnerships. It underscores the importance of carefully drafted partnership agreements and the limits of contractual freedom in modifying fiduciary duties. The decision serves as a critical reminder for partners in limited partnerships to ensure their agreements, and in turn their actions, comply with their contractual, statutory, and common law fiduciary duty requirements.

The case will proceed with further briefing on the remaining derivative liability theories, as directed by the court. This ruling serves as a critical reminder for partners in limited partnerships to ensure their agreements comply with fiduciary duty requirements.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For more information, please contact Chris Bankler or a member of the Trial & Appellate Litigation practice.

Meet Chris

Chris Bankler focuses on the resolution of disputes for businesses and financial institutions. He counsels clients through the process of complex business litigation, including general business disputes, fraud claims, breach of fiduciary duty cases, and complex business bankruptcy litigation. He has served as litigation counsel in more than 100 cases in state and federal courts, as well as FINRA and AAA arbitrations.