May 15th, 2014

Liability For Aiding And Abetting Breach Of Fiduciary Duty Upheld On Appeal

Thinking about doing business with someone who may be breaching their fiduciary duty to a third person? You may want to think again. A recent California Court of Appeal decision underscores the fact that liability for aiding and abetting a breach of fiduciary, even when the defendant has no independent fiduciary duty to the plaintiff, is alive and well in California. American Master Lease LLC v. Idanta Partners, Ltd. et al. (Cal. App., 2d Dist., 05/05/2014).

In American Master Lease, Roberts formed plaintiff American Master Lease (“AML”) to implement his new business idea. Roberts invited Andrews, Runnels and Franklin to invest in and become members of AML, which they did. AML’s operating agreement contained a non-competition provision applicable to each member. Roberts served as AML’s managing member. Andrews, Runnels and Franklin agreed to act as AML’s operational management (Operating Group). Thereafter, the Operating Group entered into unsuccessful negotiations with defendant Idanta Partners, a venture capital firm, to invest in AML. Runnels then secretly formed a new company, FPI, to do business using AML’s proprietary business model. As part of this plan, the Operating Group, purporting to act on behalf of AML, but without obtaining the required consent from Roberts, granted FPI a non-exclusive license to use that model. Runnels and Franklin then left AML to join FPI. In response, Roberts e-mailed Runnels and Franklin reminding them of their obligations under the non-compete clause, and stating that they never had authority to grant licenses on behalf of AML. Runnels and Franklin forwarded Roberts’ e-mail to defendant David Dunn, Idanta’s principal. In addition, Roberts’ counsel sent a letter to Dunn’s son, defendant Steven Dunn, informing him of Runnels’ and Franklin’s lack of authority to make a license to FPI, their non-compete obligations, and their breach of their fiduciary duties to AML. David Dunn was aware that the Operating Group’s authority to make the license to FPI was questionable. Nevertheless, he and other defendants purchased an 85% ownership interest in FPI, and caused Idanta and others to provide financing to FPI to engage in several transactions using AML’s business model, without AML.

AML brought suit against the Operational Group for, among other things, breach of fiduciary duty. An arbitrator found that some of Runnels’ and Franklin’s conduct breached their fiduciary duties AML. AML’s claims against the Operational Group were then settled. AML also sued defendants for, among other things, aiding and abetting Runnels’ and Franklin’s breach of fiduciary duty. The jury found for AML on this cause of action and others. Defendants then appealed.

On appeal, defendants argued that they could not be liable for aiding and abetting because they did not owe any fiduciary duty to AML. The Court of Appeal rejected this argument and affirmed the liability finding. Distinguishing aiding and abetting from conspiracy, the court observed that unlike conspiracy, neither an agreement between the defendant and another to breach the latter’s fiduciary duty, nor a fiduciary duty running from the defendant to the plaintiff, is required to subject a defendant to liability for aiding and abetting a breach of fiduciary duty. Rather, such liability will attach where the defendant makes a conscious decision to participate in tortious activity for the purpose of assisting a person breach his/her fiduciary duty to another, and the assistance provided was a substantial factor in the harm suffered. The court found that AML had proved that defendants: (a) had actual knowledge of the Operating Group’s fiduciary duties to AML; (b) provided substantial assistance to those individuals to breach their fiduciary duties to AML; and (c) engaged in conduct resulting in unjust enrichment.

The decision in American Master Lease provides a cautionary tale for those who may be considering doing in business with someone owing a fiduciary duty to a third person. Even though you may have no fiduciary duty to that third person, assistance you provide to one having such a duty may nevertheless subject you to liability for aiding and abetting, should your business partner’s conduct breach of his/her fiduciary duties to the third party.

Mark T. Hansen
Senior Counsel

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