Aiding and Abetting Fraud Is Not Novel
The Marion court looked to the Restatement (Second) of Torts section 876(b) as the textual source for the cause of action. Citing other Pennsylvania Supreme Court cases, intermediate appellate court cases, and case law from other jurisdictions, the court observed that the cause of action is not novel. "We do not see today’s holding as a ‘change’ in the law so much as affirmation of existing jurisprudence,” the opinion stated. It also cited policy reasons favoring recognition of the cause of action.
The court rejected the defendant’s arguments that allowing the cause of action was unnecessary because it duplicated other causes of action such as fraud, civil conspiracy, negligence, breach of fiduciary duty, and other statutory remedies, and it would lead to confusion and abusive litigation. The court also reasoned that those other causes of action have elements distinct from aiding and abetting fraud.
Actual Knowledge Is Required
The court also held that actual knowledge, rather than a lesser standard of intentional ignorance (as urged by the plaintiff), is required, relying on the plain text of the Restatement, and other persuasive authority. Although the court rejected the plaintiff’s argument for a lesser standard, it noted that intentional ignorance might raise an inference of actual knowledge. The court concluded that actual knowledge as the standard “strikes the right balance between permitting redress for fraud victims on the one hand and protecting defendants from excessive costs and liability on the other.”
Keeping a Lid on Pandora’s Box
The court concluded that the judicial system’s familiarity with the tort and requiring actual knowledge would mitigate any “doctrinal confusion” and “mischie[vous]” or “abusive” litigation practices. “Actual knowledge is a tough standard and suffices to disincentivize weak or contrived claims,” states Fabrice N. Vincent, San Francisco, CA, cochair of the Litigation Section’s Business Torts & Unfair Competition Committee.
Section leaders echo the court’s view that its holding is not novel. “Courts around the country have recognized aiding and abetting causes of action in the context of fraud and lender liability over many years,” notes Mitchell R. Edwards, Providence, RI, cochair of the Banking and Lender Liability Litigation Subcommittee of the Section’s Commercial & Business Litigation Committee. The tort may “logically carry over to other intentional torts,” Vincent suggests. “I could imagine aiding and abetting claims with other intentional torts such as tortious interference with contract or prospective business advantage,” agrees Edwards.
A Wake-up Call for Unsuspecting Business Partners
This decision adds more incentive for parties to really know who they do business with. “While very thin claims can often be disposed of through early motion practice, even successful defendants are forced to incur meaningful fees, and plaintiffs may be able to allege sufficient facts to survive those motions and increase their ‘holdup’ leverage, including by causing ongoing litigation costs,” asserts Mark Cianci, Boston, MA cochair of the Fraud Subcommittee of the Section’s Business Torts and Unfair Competition Committee.
“The decision will likely push parties and their counsel to conduct further diligence in order to gain comfort that their business partners are not a potential source of aiding and abetting liability,” Cianci predicts. “Good compliance programs and training of employees, officers, and directors of financial institutions are among the best ways to avoid getting into this situation in the first place,” advises Edwards.