Aiding and Abetting a Breach of Fiduciary Duty Does Not Require that the Aiders and Abettors Owe an Independent Duty
in Civil Litigation by Stephen RaucherIn a
case with important lessons for business litigators, a California Court of Appeal recently clarified the distinction between aiding and abetting a breach of fiduciary duty and conspiracy to breach fiduciary duty, finding that a defendant can be liable for aiding and abetting even where that defendant owed no independent duty to the plaintiff. American Master Lease LLC v. Idanta Partners, Ltd. 225 Cal.App.4th 1451 (2014).
Plaintiff American Master Lease (AML) developed a business method wherein real property owners would sell their real estate to a larger entity and then buy interests in the larger entity as tenants in common, which allowed them to avoid certain adverse tax consequences. AML called this method FORT. Three members and managers of AML knowingly acted against the firm’s interests and violated the non-compete clause of the Operating Agreement when they formed a new company called FORT Properties, Inc. (FPI) with Defendant Idanta Partners, Ltd. (Idanta) and agreed to issue FPI a non-exclusive license of the FORT business method. AML’s majority in interest holder sent several letters to the three members and managers putting them on notice that they were bound by the non-compete provisions and did not have authority to license the business method to FPI. Idanta’s manager and founder was also sent the letters and knew the authority of AML’s members to license the business method was “questionable.” He was subsequently directly informed by AML’s majority interest holder’s attorney that a majority in interest was required for the license and approval was not granted. FPI proceeded to use the business method anyway and AML brought suit against Idanta for aiding and abetting breach of fiduciary duty, among other things.
Idanta and its managing general partner unsuccessfully argued that they could not be liable for aiding and abetting a breach of fiduciary duty because they did not owe a fiduciary duty to AML. Rejecting prior cases which have suggested that the law should treat conspiracy and aiding and abetting similarly, the Court ruled that while liability for civil conspiracy requires an independent duty to the plaintiff, “a defendant need not owe an independent duty to the plaintiff in order to be liable for aiding and abetting a breach of that duty.” In affirming the trial court, the Court distinguished aiding and abetting from conspiracy, pointing out, “Despite some conceptual similarities, civil liability for aiding and abetting the commission of a tort, which has no overlaid requirement of an independent duty, differs fundamentally from liability based on conspiracy to commit a tort. . . . Aiding and abetting focuses on whether a defendant knowingly gave ‘substantial assistance’ to someone who performed wrongful conduct, not on whether the defendant agreed to join the wrongful conduct.” American Master Lease, 225 Cal.App.4th at 1475, citing Berg & Berg Enterprises, LLC v. Sherwood Partners, Inc., 131 Cal.App.4th 802 (2005).
The jury found that the three members and managers acted against AML’s interests, that Idanta knew they were going to breach their fiduciary duties to AML, and that Idanta gave substantial assistance to them, resulting in unjust enrichment. The Court of Appeal reversed the amount of unjust enrichment, but affirmed the jury’s finding that: “liability for aiding and abetting a breach of fiduciary duty, on a theory of committing an independent tort, did not require that the aiders and abettors owe an independent duty.”
Idanta also unsuccessfully argued that AML’s cause of action for aiding and abetting a breach of fiduciary duty was barred by the two-year statute of limitations for interference with a contract. The Court rejected this claim and explained (1) AML did not allege Idanta aided and abetted by interfering with a contract, (2) the statute of limitations for aiding and abetting a tort is generally the same as the underlying tort, Vaca v. Wachovia Mortgage Corp. 198 Cal.App.4th 737 (2011) and (3) the statute of limitations for aiding and abetting a breach of fiduciary duty is three years or four years depending on whether the breach is fraudulent or nonfraudulent. Here, the fiduciary duties of AML’s managers and members arose from Corporations Code section 17704.09, and therefore the four-year “catchall provision” of California Code of Civil Procedure section 343 applied.
The American Master Lease decision should be required reading in any business litigation case involving breach of fiduciary duty, especially where the breach involves concerted action by multiple defendants.