May 23, 2017 Practice Points

Aiding and Abetting Breach of Fiduciary Duty: Lawyer Beware

Lawyers representing other professionals must contend not only with their clients’ fiduciary obligations but also with their own potential liability in connection with the underlying claims.

By Sarah Schiferl

Lawyers representing other professionals must contend not only with their clients’ fiduciary obligations but also with their own potential liability in connection with the underlying claims. In particular, lawyers representing clients who are sued for breach of fiduciary duty may find themselves caught in the dragnet, under the rapidly developing claim of aiding and abetting breach of fiduciary duty, which allows plaintiffs to bring suit against non-participants to the original fiduciary relationship.

The Elements
Aiding and abetting breach of fiduciary duty claims differ slightly from jurisdiction to jurisdiction, because the claim is a state-law claim. Before imposing liability on a professional alleged to have aided and abetted a breach of fiduciary duty, courts in most jurisdictions require plaintiffs to show four elements. First, the professional must know that a fiduciary relationship existed between a third person and the plaintiff bringing suit. Second, the third person must have breached a fiduciary duty to the plaintiff. Third, courts require the “knowing participation” of the professional in the fiduciary’s breach of duty. Finally, the plaintiff must have suffered actual damages because of the breach. Many states, including Delaware, adopt these four elements almost to the letter. See, e.g., Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001). Other states, such as New York, recite only three elements but leave intact the same basic requirements of breach by another, knowing participation by defendant, and damages to plaintiff. See, e.g., Whitney v. Citibank, 782 F.2d 1106, 1115 (2d Cir. 1986) (applying New York law).

What Lawyers and Clients Should Know
Recent Delaware and New York decisions illuminate key lessons lawyers should be equipped to share with clients and heed themselves.

First, lawyers need to know the importance of the “knowing participation” element. Often, a defendant contesting an aiding and abetting breach of fiduciary duty claim prevails after demonstrating that he/she/it did not knowingly participate in a breach. As commentators have noted, recent Delaware decisions found that professionals need not be ‘grossly negligent’ before aiding and abetting liability will attach. However, the Delaware Supreme Court, in a 2016 opinion, limited the definition of “knowing participation” in a breach of fiduciary duty to affirmative action with intent to aid in the breach. Singh v. Attenborough, 137 A.3d 151 (Mem.) (Del. 2016). New York courts also require an affirmative act by the aider and abettor to fulfill the “knowing participation” requirement. Kaufman v. Cohen, 307 A.D.2d 113, 126 (N.Y. App. Div. 2003).

Second, lawyers can reassure clients that the rise in popularity of this claim does not appear to require a change to professionals’ conduct on the job. For example, a Delaware lower court in 2014 stated that financial advisors were to act as “gatekeepers” during transactions, acting to prevent breaches of fiduciary duty. In its decision, the Chancery Court implied that advisors could be liable not only when they took affirmative steps to assist a breach of fiduciary duty, but also where they failed to prevent another’s breach. The Supreme Court of Delaware rejected this requirement, which it felt inappropriately broadened the claim. RBC Capital Markets, LLC v. Jervis, 129 A.3d 817 (Del. 2015).

Final Thoughts
Though the aiding and abetting breach of fiduciary duty claim continues to gain traction, the conduct underlying these alleged violations is conduct that could give rise to liability even absent the state common law aiding and abetting breach of fiduciary duty claim. Some scholars have questioned whether the claim is a necessary enforcement mechanism, given its overlap with other claims. For example, some statutes, like § 502(a)(3) and (5) of ERISA and § 307 of the Private Securities Litigation Reform Act, impose liability for aiding and abetting breaches of duty in specific instances. A person who is liable for aiding and abetting a breach of fiduciary duty has often committed fraud or other acts for which he or she could be liable even absent the aiding and abetting claim.

Finally, attorneys and many other professionals are already governed by rules of professional conduct. The aiding and abetting breach of fiduciary duty claim may expose professionals to civil liability, but the actions that are the basis for this claim would likely also be the basis for allegations that a professional had violated professional rules.

Sarah Schiferl is an associate in the Chicago, Illinois, office of Schiff Hardin LLP.

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Sarah Schiferl – May 23, 2017