Claims for Aiding and Abetting a Breach of Fiduciary Duty
Among the causes of action available to a plaintiff seeking compensation for misconduct that arose during the course of a business relationship is the tort of aiding and abetting breach of fiduciary duty. Claims are often brought against non-fiduciaries who, despite owing no duty to the plaintiff themselves, can be held liable if they knowingly participated in a breach of fiduciary duty. New York courts consistently require that three baseline elements must be alleged to state a claim: "(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damages as a result of the breach."1
The first element, an underlying breach of fiduciary duty, is manifest in the cause of action. Thus, courts quickly dispose of aiding and abetting claims upon finding that the underlying breach of fiduciary duty never occurred,2 was insufficiently pleaded,3 or was withdrawn in an amended complaint.4 The third element, damages, is also directly tethered to the pleading and adjudication of the underlying breach of fiduciary duty. The second element, however, whether a defendant "knowingly induced or participated in the breach," often requires pleading both the mental state and the actions of the alleged aider and abettor. The detail required to satisfy this element has been the subject of recent variations in Commercial Division decisions, making proper pleading standards difficult to ascertain.
With little precedent from the New York Court of Appeals, trial courts have looked to the Appellate Division and the federal bench for guidance on the knowing participation requirement. Among the most frequently cited cases is Kaufman v. Cohen, in which the First Department outlined in greater detail the requirements for a claim of aiding and abetting a breach of fiduciary duty.5 In that case, two partners in a partnership brought an action against a third partner, Irwin Cohen, asserting he breached his fiduciary duty when he undertook a disputed real estate transaction. Alleging that a business entity affiliated with Cohen, Falchi L.P., assisted in his breach, plaintiffs sought recovery from Falchi on a theory of aiding and abetting.
The court in Kaufman began its analysis by citing the three baseline elements of a claim for aiding and abetting a breach of fiduciary duty, relying on an earlier U.S. Court of Appeals for the Second Circuit decision.6 After concluding the trial court had improperly dismissed the underlying breach of fiduciary duty claim, the court turned to the second element, holding that the facts alleged were insufficient to support a finding that the defendant knowingly participated in the breach. The court reasoned that knowing participation requires both a mental component and an action component, specifically that defendants must have actual knowledge of the breach of fiduciary duty and render substantial assistance to the breaching party.
The actual knowledge prong requires a plaintiff to allege facts demonstrating that the defendant had actual knowledge of the breach of fiduciary duty that occurred.7 Although recognizing the pleading difficulties that the rule creates for plaintiffs because of the "inherent difficulty in pleading a defendant's state of mind," New York courts consistently hold that constructive knowledge is insufficient.8 The Appellate Division, Second Department, recently made clear that "an allegation that the defendant 'knew or should have known' about the breach of [fiduciary] duty" does not constitute actual knowledge.9
In addition, Kaufman made clear that the substantial assistance prong requires a plaintiff to allege facts demonstrating the defendant "affirmatively assist[ed], help[ed] conceal or fail[ed] to act when required to do so, thereby enabling the breach to occur."10 Mere inaction will not give rise to a claim for aiding and abetting unless "the defendant owes a fiduciary duty directly to the plaintiff."11
A review of recent Commercial Division decisions demonstrates the difficulty in applying the Kaufman requirements and illuminates standards for proper pleading.
Commercial Division courts have followed the Kaufman analysis in dismissing aiding and abetting breach of fiduciary duty claims. In Resource Finance & RFC I, v. Cynergy Data, Justice O. Peter Sherwood of the New York County Commercial Division dismissed an aiding and abetting claim because the alleged knowledge—based on the breaching party being a director of a company—was, at best, constructive knowledge of the breach.12 The plaintiff brought an action against his former business partner, Seymour Weissman alleging, inter alia, that Weissman breached his fiduciary duty by forming a rival company while employed as a director of plaintiff's company, New CPS. Subsequently, plaintiff brought an aiding and abetting claim against three additional defendants who allegedly helped Weissman solicit merchants and customers to compete with New CPS.
The court held plaintiff's complaint failed to allege actual knowledge of a breach of a fiduciary duty because it "contains only a conclusory statement" that defendants were aware that the person alleged to have breached a fiduciary duty was director of New CPS and did "not claim that the movants had actual knowledge of [Weissman's] duties" under the shareholders' agreement or other relevant contracts.13 The court also noted that the complaint failed to allege those defendants were aware they were providing substantial assistance to Weissman's breach by helping him solicit merchants and customers.
In Parklex v. Royal Capital, Justice Carolyn Demarest of the Kings County Commercial Division dismissed claims for aiding and abetting breach of fiduciary duty based on her finding that the complaint's allegations only established that defendants had constructive knowledge of the breach and failed to show they rendered substantial assistance.14 In that case, the proceeds from the sale of a partnership's sole asset allegedly were improperly diverted by Deutsch, the sole principal of the general partner. The partnership brought a claim against Royal Capital Markets Corporation (RBCCM), which provided banking and financial services to Deutsch, for aiding and abetting Deutsch's breaches of fiduciary duty. Demarest laid out the three base elements for an aiding and abetting claim and noted that "substantial assistance, knowing participation and proximate causation must be demonstrated" when analyzing the requirement of actual knowledge.15
The court found that RBCCM's alleged awareness of a lawsuit pending against Deutsch constituted only constructive knowledge of the alleged breach of fiduciary duty. Moreover, despite the allegation that "Deutsch was using the services of RBCCM to conceal from plaintiff the location of the proceeds of the sale of its building and thereby frustrate plaintiff's recovery," the complaint failed to allege that the defendants had rendered substantial assistance.16 Reasoning that "[t]he provision of routine financial services to a client does not constitute substantial assistance," the court found that RBCCM's employees at most inadvertently assisted in perpetuating Deustch's fraud.17
Properly Stating a Claim
Other Commercial Division decisions have refused to dismiss claims based on challenges to the adequacy of pleading the knowing participation requirement. In Sherbrooke Smithtown v. Merson, Justice Emily Pines of the Suffolk County Commercial Division denied a motion to dismiss aiding and abetting claims against defendants.18 The case arose from alleged defects to a piece of real estate converted into cooperative apartments. The owner of the converted apartments brought suit against the project's sponsor, its management company, the original board of directors that acted on behalf of the sponsor, and related entities, alleging, inter alia, that defendants aided and abetted breaches in fiduciary duty.
Citing Kaufman, Pines refused to dismiss the aiding and abetting claim because the complaint alleged the defendants "failed to hold meetings," "fail[ed] to provide a sufficient budget for operation of the cooperative," and contained "allegations of fraudulent misrepresentations in the Offering Plan and Subscription Agreements."19 Interestingly, the court also refused to dismiss the aiding and abetting claim against RuMaple, the corporate entity responsible for selling the real estate, on an alter-ego theory. The court's rationale stemmed from allegations that RuMaple was solely owned by the sponsor, signed an amendment to the misrepresented offering plan, and made payment to an engineer whose report allegedly concealed defects in the real estate at issue.