Published on:

Aiding and abetting breach of fiduciary duty – the two ways the aider may become liable.

Parties such as corporate directors, partners and managers of LLC’s owe each other a fiduciary duty, which is a duty of loyalty and a duty of care. These are legal duties to act solely in another party’s interests, and not profit from their relationship with their principals unless they have the principals’ express informed consent. Violating this duty can result in liability. But, even if you do not owe someone a fiduciary duty, you can be found liable for aiding and abetting someone else in breaching such a duty, something to be aware of in any any transaction.. Under California Law, liability may be imposed on one who aids and abets the commission of an intentional tort if the person-

(a) knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act, or

(b) gives substantial assistance to the other in accomplishing a tortious result and the person’s own conduct, separately considered, constitutes a breach of duty to the third person.

Aiding-abetting focuses on whether a defendant knowingly gave ‘substantial assistance’ to someone who performed wrongful conduct, not on whether the defendant agreed to join the wrongful conduct. An aider and abettor does not ‘adopt as his or her own’ the tort of the primary violator. Rather, the act of aiding and abetting is distinct from the primary violation; liability attaches because the aider and abettor behaves in a manner that enables the primary violator to commit the underlying tort. In a recent California decision, just such an aider and abettor was found liable, which may result in millions in damages.

fiduciary duty sacramento attorney.jpgIn American Master Lease LL v. Idanta Partners Ltd. AML was an LLC formed to own real estate. (Hold on, the facts take some explaining) Roberts, the founder, designed it for people who did not want to individually manage their real estate investments. They could convey the property to AMC, and receive in return membership interests in the LLC. All members of the LLC would be “tenants in common,” in that they all owned interests in the same LLC, but no interest in the real estate. Roberts and his family were the majority owners of the LLC, and Roberts was the Manager. Several others also joined. Defendant Idanta Partners was a venture capital firm, 80% owned by the Bass family of Texas.

Roberts, the manager, and other members entered into a management agreement with AML. Roberts remained the managing member, but under the agreement the other members became the Operating Group. AML needed a new financing partner, and the Operating Group proposed Idanta. Roberts objected, and presented an amendment to the Operating Agreement which prohibited that no deals could be done without majority approval. Roberts wanted to make all the decisions. Roberts told the others that he controlled the company. The Operating Group said screw you, and formed a new company, FPI which would partner with Idanta. The Operating Group gave the new company a license to use AML’s business method. Roberts objected several times that the license agreement was not authorized. He claimed that the Operating Group was in breach of the operating agreement, which contains a non-compete, and any income from the new venture belonged to AML. The lawsuit began alleging a cause of action for aiding and abetting breach of fiduciary duty.

Sacramento real estate management attorney.jpgHere, the court found liability under test (b) above. Idanta gave substantial assistance to the other in accomplishing a tortious result and Idanta’s own conduct, separately considered, constitutes a breach of duty to the third person. AML proved that Idanta had actual knowledge of the fiduciary duties that the Operating Group owed to AML as managers of AML. Idanta made a conscious decision to aid the Operating Group in performing a wrongful act; here, it was improperly acquiring rights to the AML business methods, and hiring the Operating Group to execute those methods.