The greatest minds of American jurisprudence have recognized the high responsibility of a fiduciary, which Justice Cardozo characterized as “the punctilio of an honor the most sensitive.” (Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928)). The relationship involves more than protecting the vulnerable; it requires the fiduciary to act in the best interest of the beneficiary, rather than in the fiduciary’s self-interest. A fiduciary who fails so to act may find himself liable to the beneficiary, even in the absence of scienter or intent. By the same token, just as the fiduciary may be liable for breaching his duty, or the “primary duty,” to the beneficiary, the common law has long recognized that one who assists a fiduciary’s breach of duty may be liable to the beneficiary. (Mertens v. Hewitt Assoc., 508 U.S. 248, 255 (1993) (stating that non-fiduciaries have common-law duty to beneficiaries not to assist in fiduciary’s breach)).
Claims of “aiding and abetting the breach of fiduciary duty” are often brought against non-fiduciary individuals, including attorneys, who despite owing no duty to the plaintiff themselves can be held liable if they “knowingly participated” in the breach of fiduciary duties. In reviewing claims of aiding and abetting in civil actions, courts turn to the Restatement (Second) of Torts § 876 and pull three common elements out of subdivision (b), including: (1) a tortious act of a primary actor; (2) the secondary actor’s knowledge of the primary actor’s tortious act; and (3) the secondary actor’s substantial assistance or encouragement in the primary actor’s commission of the tortious act. As straightforward as this test appears, courts’ applications of the test vary immensely. The differences arise primarily in each jurisdiction’s interpretation of what constitutes knowledge and substantial assistance or encouragement. (Witzman v. Lehrman, Lehrman, & Flom, 601 N.W.2d 179, 186–87 (Minn. 1999) (acknowledging the differences among jurisdictions in interpreting knowledge and substantial assistance).
New York courts generally require three baseline elements to state a claim: “(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damages as a result of the breach.” (Kaufman v. Cohen, 307 A.D.2d 113, 125, 760 N.Y.S.2d 157, 169 (1st Dept. 2003)).
The first and third elements are directly connected to the pleading and judgment of the underlying breach of fiduciary duty. Generally, courts will dismiss aiding and abetting claims either because plaintiff failed to allege facts giving rise to a fiduciary duty owed to it (Oddo Asset Mgt. v. Barclays Bank, 19 N.Y.3d 584, 594, 973 N.E.2d 735, 742 (2012)), plaintiff failed to allege damages in the underlying claim for breach of fiduciary duty (Serota v. Sciome, No. 65117/2012, 2013 N.Y. Misc. LEXIS 523 (N.Y. Co. Jan. 10, 2013)), or the aiding and abetting claim is no longer valid (One William St. Capital Mgt. v. Educational Loan Trust IV, No. 652274/2012, 2013 N.Y. Misc. LEXIS 3789 (N.Y. Co. Aug. 14, 2013)). The second element, whether a defendant “knowingly induced or participated in the breach,” often requires pleading both the mental state and the actions of the alleged aider and abettor. The detail required to satisfy this element has been the subject of recent variations in New York Commercial Division decisions which have illuminated standards for proper pleading.
Kaufman Requirements
In Kaufman, the First Department provided greater insight on the requirements for a claim of aiding and abetting a breach of fiduciary duty (Kaufman, 307 A.D.2d 113). The case involved two partners in a partnership who brought action against Irwin Cohen, a third partner. The partners alleged that Cohen had breached his fiduciary duty when he undertook a disputed real estate transaction. The plaintiffs further asserted that a business entity affiliated with Cohen, Falchi L.P., had assisted in his breach. Plaintiffs sought recovery from Falchi on the theory of aiding and abetting.
The court in Kaufman relied on an earlier decision of the U.S. Court of Appeals for the Second Circuit (S&K Sales v. Nike, 816 F.2d 843, 847-48 (2d Cir. 1987)) and began its analysis by citing the three baseline elements of a claim for aiding and abetting a breach of fiduciary duty. The court concluded that the trial court had improperly dismissed the underlying breach of fiduciary duty claim, but when it turned to the second element, it held that the facts alleged were insufficient to support a finding that the defendant knowingly participated in the breach. The court reasoned that the knowing participation requires both a mental component and an action component, and that defendants must have actual knowledge of the breach of fiduciary duty and render substantial assistance to the breaching party.
Knowledge
In general, for a secondary actor to be liable for aiding and abetting, the secondary actor must have knowledge of the primary actor’s unlawful conduct. The standard that courts use vary from constructive knowledge to actual knowledge, however, actual knowledge is the prevailing standard set forth by most courts in analyzing aiding and abetting claims. Actual knowledge generally requires the secondary actor to be “pretty sure” that the primary actor’s conduct is unlawful and that the secondary actor’s own conduct assists or encourages the primary actor.
Kaufman requires a plaintiff to allege facts demonstrating that the defendant had actual knowledge of the breach of fiduciary duty that occurred (Kaufman, 307 A.D.2d at 125). Although the rule creates difficulties for plaintiffs because of the “inherent difficulty in pleading a defendant’s state of mind,” New York courts consistently hold that constructive knowledge is insufficient. (Id.) In addition, the Appellate Division, Second Department, recently made clear that “an allegation that the defendant ‘knew or should have known’ about the breach of [fiduciary] duty” does not constitute actual knowledge (Baron v. Galasso, 83 A.D.3d 626, 629, 921 N.Y.S.2d 100, 104 (2d Dept. 2011)).
Substantial Assistance
After the court finds that a secondary actor had knowledge of the primary actor’s breach of duty, the court must determine if the secondary actor substantially assisted or encouraged the primary actor in breaching the duty. Whether the secondary actor’s conduct amounts to substantial assistance is dependent on the jurisdictions’ various applications of the element. Even the terms courts use when referring to this third element are not uniform (Holmes v. Young, 885 P.2d. 305, 309 (Colo. Ct. App. 1994)). For instance, some courts have found that substantial assistance does not require physical acts; advice or encouragement may be sufficient to find a secondary actor liable for aiding and abetting (Halberstam v. Welch, 705 F.2d 472, 481 (D.C. Cir. 1983)) (Rael v. Cadena, 604 P.2d. 822 (N. M. Ct. App.1979)). In addition, although substantial assistance or encouragement typically takes the form of affirmative acts, some courts have found that silence or inaction constitutes substantial assistance (Schiller v. Strangis, 540 F. Supp. 605, 624 (D.Mass, 1982)). Nonfeasance may also result in substantial assistance where the secondary actor consciously intended his silence to assist the primary actor in a wrongful act (SEC v. Coffey, 493 F.2d 1304, 1317 (6th Cir. 1974)).
State courts seldom address causation in detail while analyzing a claim for aiding and abetting a breach of fiduciary duty, but Kaufman makes it clear that the substantial assistance prong requires proximate causation. A plaintiff must allege facts demonstrating that the defendant “affirmatively assist[ed], help[ed] conceal[ed] or fail[ed] to act when required to do so, thereby enabling the breach to occur.” (Kaufman, 307 A.D.2d at 126). Mere inaction will not give rise to a claim for aiding and abetting unless “the defendant owes a fiduciary duty directly to the plaintiff.” (Id.).
Commercial Division Decisions Apply Kaufman Requirements and Illuminate Standards for Proper Pleading
Some Commercial Division courts have followed the Kaufman analysis in dismissing claims for aiding and abetting the breach of fiduciary duty. In Resource Finance & RFC I v. Cynergy Data, for example, plaintiff brought action against Seymour Weissman, his former business partner, alleging, inter alia, that Weissman had breached his fiduciary duty by forming a rival company while still employed as a director at plaintiff’s company, New CPS. Plaintiff then brought an aiding and abetting claim against additional defendants who allegedly helped Weissman solicit merchants and customers to compete with New CPS. (Resource Finance & RFC I v. Cynergy Data, No. 650142/2011, 2013 N.Y. Misc. LEXIS 5385 (N.Y. Co. Nov. 19, 2013)).
The court dismissed the aiding and abetting claim because plaintiff had failed to demonstrate actual knowledge of a breach of a fiduciary duty. In its holding, the court noted that the complaint “contain[ed] only a conclusory statement” that defendants were aware that the person alleged to have breached a fiduciary duty was a director of New CPS and that plaintiff had failed to “claim that the movants had actual knowledge of [Weissman’s] duties” under the shareholders’ agreement or other relevant contracts (Id., at 7-8). In addition, the court held that the claim did not properly allege that defendants were aware they were providing substantial assistance to Weissman’s breach by helping him solicit merchants and customers.
Other Commercial Division decisions have refused to dismiss claims based on challenges to the knowing participation requirement. For instance, in Sherbrooke Smithtown v. Merson, the court denied a motion to dismiss aiding and abetting claims against defendants. (Sherbrooke Smithtown v. Merson, 37 Misc.3d 1205(A), 2012 N.Y. Misc. LEXIS 4696 (N.Y. Co. 2012)). The case arose from alleged defects to a piece of real estate converted into cooperative apartments. The owner of the converted apartments brought suit against the project’s sponsor, its management company, the original board of directors that acted on behalf of the sponsor, and related entities, alleging, inter alia, that defendants aided and abetted breaches in fiduciary duty.
Citing Kaufman, the court refused to dismiss the aiding and abetting claim because the complaint alleged the defendants “failed to hold meetings,” “fail[ed] to provide a sufficient budget for operation of the cooperative,” and contained “allegations of fraudulent misrepresentations in the Offering Plan and Subscription Agreements.” (Id., at 14). Based on an alter-ego theory, the court also refused to dismiss the aiding and abetting claim against RuMaple, the corporate entity responsible for selling the real estate, because it was solely owned by the sponsor, signed an amendment to the misrepresented offering plan, and made payment to an engineer whose report allegedly concealed defects in the real estate at issue.
Conclusion
Claims for aiding and abetting a breach of fiduciary duty require plaintiffs to be aware of the various interpretations of the knowing participation element. As noted above, recent New York Commercial Division cases have provided additional guidance on the application of Kaufman’s actual knowledge and substantial assistance requirements, however, until appellate courts further clarify these baseline elements, plaintiffs should pay careful consideration to both, particular fact scenarios and proper pleading standards as established in New York case law.