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March 18, 2015 Articles

Conspiracy Liability: If the Underlying Wrong Doesn't Fit, You Must Acquit

An examination of the genesis and expansion of the "legally capable" requirement.

By Ben Johnston – March 18, 2015

When I was in fifth grade, my friend Chas asked me if I wanted to play on the trampoline of his neighbor, whom I knew to have an open-door policy when it came to trampoline tomfoolery. I happily agreed. Unbeknownst to me, due to Chas’s insistence on performing the notorious and often dangerous double-bounce, the neighbor had outlawed Chas from the trampoline and decreed that, for each violation, Chas would be fined $5. When the neighbor spotted Chas and me on his trampoline, he immediately demanded the $5 fine from Chas. Well, Chas was dead-broke, so the neighbor turned to me, insisting that my conspiratorial conduct enabled him to recover the $5 from me. How could I be liable for Chas’s misconduct? There was no neighborly decree applicable to me. How could I be expected to know his conduct was unlawful? This was not even my neighborhood.

Civil conspiracy claims are a powerful tool for plaintiffs, particularly consumer plaintiffs. A successful civil conspiracy claim permits recovery from every participant in a wrongful act, regardless of whether or not that participant was a direct perpetrator of the act or the degree of its activity. Aside from the ominous tone of a conspiracy claim, the glamour of a conspiracy claim to plaintiffs is that it opens the door to total recovery from supplemental sources that may have deeper pockets or higher policy limits, or both, than the direct perpetrators of the wrongful act. To obtain the full gamut of damages from these peripheral sources, a plaintiff need only prove the amorphous elements of a conspiracy claim: (1) there was an agreement between two or more persons to commit a tortious or unlawful act (or lawful act by unlawful means); (2) an overt act in furtherance of the agreement by any conspirator; and (3) damages.

This is a precarious predicament for entities, like my fifth grade self, who unwittingly enter into an agreement to accomplish an act that is only unlawful if performed by the counterparty. Without limitations, these entities are exposed to conspiratorial liability for the breach of a duty owed solely by others, a duty they may not have even be aware of. Without limitations, the prospect of conspiratorial liability imposes an implicit obligation on contracting parties to ensure that the counterparty’s performance is within the bounds of alllaws and regulations that could serve as the basis for a civil lawsuit, including obscure consumer protection statutes from far-off jurisdictions.

The Genesis and Rationale of the Legally Capable Requirement 
While many jurisdictions have struggled to define the boundaries of conspiratorial liability, California endeavored to do just that in Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 869 P.2d 454 (Cal. 1994). It is black-letter law that conspiracy is not a distinct tort capable of sustaining an award of damages in the absence of the commission of a tort underlying the conspiracy. Stemming from this principle, the Applied Equipment Corp. court explained that “by its nature, tort liability arising from conspiracy presupposes that the coconspirator is legally capable of committing the [underlying] tort, i.e., that he or she owes a duty to plaintiff recognized by law and is potentially subject to liability for breach of that duty.” Id. at 457. Consequently, the court held that, if the alleged co-conspirator is not legally capable of committing the underlying tort alleged, conspiratorial liability does not attach.

As this proposition percolated through various jurisdictions, it was slowly adopted (Arizona, Georgia, Missouri, Maryland, New York, and Texas) and rejected (Delaware and New Mexico) by a number of states. Maryland’s adoption of the proposition in Shenker v. Laureate Education, Inc., 983 A.2d 408, 429 (Md. 2009), is illustrative of its application. The plaintiffs in Shenker were shareholders of a corporation who alleged that, during the course of the corporation’s sale to certain private investors, the corporation’s board of directors breached its fiduciary duty to the corporation’s shareholders. Under a civil conspiracy claim, the shareholders also sought recovery from the private investors for the board’s breach, despite the fact that Maryland did not recognize an independent fiduciary duty owed by the investors to the shareholders. The Shenker court held that “liability for civil conspiracy based on the underlying tort of breach of fiduciary duty would require proof that the defendant, although not committing personally the underlying tort, was legally capable of committing the underlying tort. Because [the private investors] owed no fiduciary duty to [the plaintiffs], they may not be held liable for civil conspiracy in this case.” Id. at 429.

The jurisdictions that have adopted the legally capable requirement, in effect, require the existence of an independent duty between the plaintiff and the alleged co-conspirator. Some have argued that this independent duty provides rational boundaries to what would otherwise be limitless liability against remote defendants, boundaries that allow defendants to see the fire before they step into the middle of it.

The Expansion of the Legally Capable Requirement 
Subsequent decisions in Maryland and California declared that the so-called “legally capable requirement” is a new “element” of civil conspiracy claims, meaning that a plaintiff must allege and prove that the defendant is legally capable of committing the wrongdoing underlying the conspiracy. As a result, the application of the legally capable requirement soon expanded beyond just civil conspiracy claims in which the underlying wrongdoing was a tort to civil conspiracy claims in which the underlying wrongdoing was a statutory violation.See generally Klistoff v. Superior Court, 157 Cal. App. 4th 469, 479 (2007); Paccar Inc. v. Elliot Wilson CapitolTrucks LLC, 905 F. Supp. 2d 675, 696 (D.Md. 2012).

Commonly, the expansion of the legally capable requirement occurred in cases where the underlying statute at issue was a consumer protection statute. Courts and scholars reasoned that, aside from articulating rational boundaries on the scope of conspiratorial liability, the application of the legally capable requirement to statutory conspiracy claims served the additional purpose of ensuring that the policies supporting the underlying legislation were maintained. For example, unless the scope of conspiracy liability tracks the scope of liability expressed in the consumer protection statute at issue, a plaintiff asserting a civil conspiracy claim might circumvent important restrictions on the scope of the statutory violation and upset the balance struck by the legislature. Plainly put, if the respective legislature wanted liability to extend to entities beyond those specifically acknowledged in the consumer protection statute, the legislature would have explicitly provided for it. But some plaintiffs questioned this reasoning, arguing that the expansion undermined the very nature of conspiracy claims as a means of imposing vicarious liability and effectively eviscerated conspiracy claims predicated on the violation of a statute.

The issue came to a head before the United States Court of Appeals for the Fourth Circuit inMarshall v. James B. Nutter & Co., 758 F.3d 537 (4th Cir. 2014). The defendant in Marshallwas a bank headquartered in Kansas City, Missouri, that had entered into agreements with several Maryland mortgage brokers whereby the mortgage brokers would originate and close loans with Maryland borrowers, and, in exchange for the bank advancing funds for the loans, the mortgage brokers would assign the loans to the bank after closing. The mortgage brokers were subject to the Maryland Finder’s Fee Act, a consumer protection statute that prohibits mortgage brokers from charging “finder’s fees” in mortgage transactions where it is both the lender and the mortgage broker and that sanctions a civil lawsuit to recover the “finder’s fee,” trebled.

Because many of the mortgage brokers were insolvent or recovery from them was otherwise limited, the plaintiff in Marshall brought a class-action claim for conspiracy to violate the Maryland Finder’s Fee Act solely against the bank. The district court granted the bank summary judgment on the basis that the bank was not legally capable of violating the statute. On appeal, the Fourth Circuit affirmed, holding that the statute “imposes a duty only on mortgage brokers, and therefore only mortgage brokers are capable of violating it.” Id. at 542. Because it was undisputed that the bank did not function as a mortgage broker in the subject transactions, it was not legally capable of violating the statute and therefore could not be held liable on the class-action conspiracy claim.

An overwhelming majority of jurisdictions have not addressed the legally capable requirement, let alone the appropriate scope of its application to civil conspiracy claims. As the legally capable requirement continues to percolate through jurisdictions, it should serve to highlight critical issues associated with the reach of a civil conspiracy liability and invite much needed debate on those issues. In those jurisdictions that have not expressly adopted the requirement, it would be prudent for contracting parties to consider potential conspiratorial liability arising from a counterparty’s performance and analyze, for example, any consumer protection statutes that the counterparty is subject to. But, at least in states like California and Maryland, kids are free to engage in tomfoolery on the trampoline of a friend’s neighbor, without the need to investigate duties owed solely by their playmates.

Keywords: consumer litigation, conspiracy, legally capable

Ben Johnston is with Shook Hardy & Bacon LLP in Kansas City, Missouri.

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