By Chris Bankler

The Texas Supreme Court issued a significant clarification on when shareholders may sue individually rather than derivatively for breach of fiduciary duty. In its opinion issued on November 14, 2025, in In re UMTH General Services, L.P., the Texas Supreme Court resoundingly rejected efforts by shareholders to transform fiduciary duties owed to the company into individual shareholder claims for breach of fiduciary duty.^[1]

United Development Fund IV is a Maryland real estate investment trust with more than 12,000 shareholders who hold only the limited rights granted in the declaration of trust. The board manages the Trust and, in 2014, delegated day-to-day operations to UMTH General Services, L.P., under an advisory agreement executed solely between the Trust and UMTH. That agreement described the advisor as occupying “a fiduciary relationship to the Trust and its Shareholders,” even though no shareholder was a party to it. After allegations of mismanagement arose—including improper advancement of fees and failures in oversight—certain shareholders attempted to sue UMTH and related individuals directly, claiming the agreement created duties owed to each investor.

The shareholders argued that UMTH, the Trust’s outside advisor, owed fiduciary duties directly to each investor because the advisory agreement stated that the advisor “shall be deemed to be in a fiduciary relationship to the Trust and its Shareholders.” They claimed this language created individual contractual duties enforceable by each shareholder in a direct suit.

Justice Bland, writing for the Court, emphasized that a shareholder “cannot recover damages personally for a wrong done solely to the corporation, even though he may be injured by that wrong.” Instead, “suits for injuries to a corporation—including claims for diminution in stock value—ordinarily must be brought by the corporation itself or derivatively on its behalf.”

Critically, the Court held that the phrase “the Trust and its Shareholders” refers to shareholders collectively, not individually. As the Court explained: “The Trust executed the agreement, acting on behalf of its shareholders. No shareholder separately signed the agreement, much less in an individual capacity.”  The Court aptly summarized Texas law:

“Absent an express undertaking to an individual shareholder, fiduciary duties generally flow to the corporation and its shareholders collectively, not to any particular shareholder.”

Ultimately, the Court made its position unmistakably clear: “The shareholder thus must suffer disparately from ‘injury to the property of a corporation, or the impairment or destruction of its business, [which] is vested in the corporation.’”  Without a separate fiduciary duty owed individually—and without a disparate personal injury—shareholders lack the capacity to sue for entity-level harm.

The Court also emphasized that recognizing individualized fiduciary duties owed to thousands of investors would be “incompatible” with the advisor’s duties to the Trust and would create “unworkable” conflicts. Unlike the LLC-member cases plaintiffs relied on, the Trust’s shareholders were not parties to the advisory contract and had expressly limited rights under the declaration of trust.

In the end, the advisory contract “benefits the Trust’s shareholders collectively,” and does not create personal causes of action. The claims sound solely in derivative duty—not direct duty—and therefore cannot proceed in Texas.

[1] The Court reaffirmed Pike v. Texas EMC Management, LLC, which draws a sharp distinction between standing and capacity in shareholder litigation. The Court again emphasized that while shareholders may have constitutional standing to allege harm to the value of their interests, they may still lack the capacity to pursue claims that legally belong to the entity: “A shareholder alleging an injury sufficient to confer constitutional standing, however, may nonetheless lack the capacity to pursue and recover for such a claim.”

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.