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.
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).