Texas Supreme Court blocks direct lawsuits against United Development Fund IV advisors

The Texas Supreme Court has ruled that investors in large funds can’t sue advisors directly – claims must go through the company, not individual lawsuits.

On November 14, 2025, the state’s highest court ruled that shareholders in United Development Fund IV – a real estate investment trust with more than 12,000 shareholders – could not bring direct lawsuits against the fund’s advisors for alleged mismanagement. The court held that any claims of wrongdoing must be brought by the trust itself, or through a derivative action, not by individual shareholders acting on their own.

Here’s what happened. Nexpoint Diversified Real Estate Trust, a shareholder, and its subsidiary, Nexpoint Real Estate Opportunities, accused UMTH General Services, L.P. and its affiliates of mismanagement, including improper advancement of legal fees and refusal to disclose requested information. Nexpoint argued that the advisory agreement between the trust and UMTH created a fiduciary duty to each shareholder, giving them the right to sue the advisors directly in Texas. The agreement stated that the advisor “shall be deemed to be in a fiduciary relationship to the Trust and its Shareholders,” which Nexpoint claimed supported their position.

The Texas Supreme Court, however, concluded that the advisory agreement did not create a duty to individual shareholders distinct from the entity. The court found that the agreement’s reference to shareholders was collective, not individual, and that the trust’s governing documents made Maryland the exclusive forum for derivative actions. The court also noted that Texas law does not allow shareholders to bring individual claims for injuries suffered by the corporation as a whole.

The case traces a dispute that moved between states. Nexpoint first tried to bring a derivative suit in Maryland, as the trust’s bylaws required, but that case was dismissed for lack of standing and subject matter jurisdiction. Nexpoint then transferred its shares to its subsidiary and filed suit in Texas, this time arguing for a direct right to sue the advisors under the advisory agreement. The Texas courts, however, found that the shareholders’ claims were still derivative in nature and could not be pursued individually.

This ruling clarifies that, for large investment funds and trusts, shareholders must follow established procedures for raising concerns about management. Individual lawsuits against advisors, based on agreements with the entity, are not permitted unless the agreement expressly creates such rights. The court’s decision highlights the importance of understanding the difference between direct and derivative claims, and the procedural hurdles that come with each.

For fund managers and advisors, the decision reinforces the importance of clear contract language and proper governance. The court’s decision means that unless individual rights are specifically outlined in the agreement, shareholders cannot bring direct claims for alleged mismanagement. This outcome helps maintain predictability for those managing large investment vehicles and protects against the risk of multiple, potentially conflicting lawsuits from individual investors.

The Texas Supreme Court’s decision is final, subject to compliance by the trial court. For investors and professionals in the investment industry, the outcome provides clarity on the limits of shareholder litigation and the importance of following the correct legal channels when disputes arise. It’s a reminder that, in the world of large funds and REITs, the rules for investor lawsuits are set – and courts are sticking to them.