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I Am Not A Fiduciary, So Why Am I Being Held Liable As One?

| Caroline B. McLean Caroline B. McLean

In North Carolina, it is well settled that fiduciaries have certain duties and can be held liable for breaching those duties.  What is less settled is whether third party non-fiduciaries may also be held liable for "aiding and abetting" a breach of fiduciary duty.  Despite a lack of clarity in the law, claims for aiding and abetting a breach of fiduciary duty continue to rise, and North Carolina courts are grappling with the question of whether the claim exists as a viable cause of action.  While several courts have openly expressed doubt that it is recognized under state law, no court has yet to definitively rule as such.  Therefore, claims for aiding and abetting a breach of fiduciary duty remain a trap for the unwary investor, business partner, person, or entity acquiring property from a fiduciary.  While these parties do not have to worry about being a fiduciary, they should worry about opening themselves up to liability for a possible aiding and abetting claim as a result of doing business with a fiduciary. 

What Is the Claim?

The claim of aiding and abetting a breach of fiduciary duty was first recognized in a 1988 North Carolina Court of Appeals decision, Blow v. Shaughnessy.[1]  Blow involved allegations of securities fraud under North Carolina law, and the Court of Appeals relied on federal case law recognizing claims for aiding and abetting a breach of fiduciary duty in the context of federal regulation of securities to determine that similar claims were available under North Carolina law.  The Court of Appeals also cited Section 876 of the Restatement (Second) of Torts[2] which recognizes claims for substantially assisting another's breach of the latter's duty to a third party.

The Court of Appeals determined that the claim requires the following elements:

  • A violation of a fiduciary duty;
  • Knowledge by the alleged aider and abettor that the other person has a fiduciary duty; and,
  • Substantial assistance by the aider and abettor in the fiduciary's violation of that duty.

Subsequent cases have determined that "substantial assistance" requires a substantial causal connection between the culpable conduct of the alleged aider and abettor and the harm to the claimant, or a showing of encouragement or assistance that was a "substantial factor" in causing the resulting breach of duty.[3]   

However, in 1994, the United States Supreme Court ruled that federal securities law in fact did not impose aiding and abetting liability.  Therefore, the federal case law recognizing aiding and abetting liability in the securities fraud context relied upon by the Court of Appeals in Blow was no longer good law and, thus, the rationale underpinning the Blow decision was abrogated. 

Additionally, to the extent that Blow relied on the Restatement (Second) of Torts as further support for recognizing a claim for aiding and abetting a breach of fiduciary duty, the North Carolina Court of Appeals has undercut its own reasoning by refusing to adopt Section 876 of the Restatement to impose aiding and abetting liability in other contexts, such as holding the passenger in an automobile liable for the driver's improper operation of the vehicle.[4]  Furthermore, the Court of Appeals has been admonished by the North Carolina Supreme Court in at least two cases that the Restatement "is not North Carolina law."[5]

Nevertheless, a handful of North Carolina courts have continued to recognize the claim, or have opined in non-binding dicta that under Blow or the Restatement (Second) of Torts, the claim exists in North Carolina.  In Greensboro Rubber Stamp Co., Inc. v. Southeast Stamp & Sign, Inc.,[6] the defendant's company purchased the assets of Greensboro Rubber Stamp by issuing a promissory note to the company.  Southeast Stamp bought the note back at a later date at a steep discount from Greensboro Rubber Stamp's president who, as president, had a fiduciary affiliation to Greensboro Rubber Stamp and who then "left town" with Greensboro Rubber Stamp's money.  The issue went to the jury, who found that Southeast Stamp aided and abetted the breach of fiduciary duty by Greensboro Rubber Stamp's president.  In affirming the jury award, the Court of Appeals relied solely on Blow without addressing the weakness of that decision in light of subsequent precedent.    

Yet for every Court of Appeals case that has recognized and applied the claim, there appears to be a case in which the Court has seriously called into question the claim's continuing existence.  On numerous occasions, the Court of Appeals has openly questioned whether the claim exists in this state.  In 2011, in Ehrenhaus v. Baker,[7] the Court stated that "it is unclear whether [aiding and abetting a breach of fiduciary duty] exists in North Carolina," affirming the trial court's denial of the plaintiff's motion to amend his complaint to include the claim.  The Court made the same observation in a 2012 case, Land v. Land.[8] 

The federal courts in North Carolina have been more direct in holding that the claim is not recognized by North Carolina law.  In Laws v. Priority Tr. Servs. of N.C., L.L.C.,[9] the United States District Court for the Western District of North Carolina dismissed a claim for aiding and abetting a breach of fiduciary duty because "no such cause of action exists in North Carolina."  In similar fashion, the United States Bankruptcy Court for the Western District of North Carolina recently held in In re Newbold Corp.[10] that no cause of action for aiding and abetting a breach of fiduciary duty exists in North Carolina.  The Bankruptcy Court reasoned that in situations where the North Carolina Supreme Court has not spoken directly or indirectly on an issue of law, the Court of Appeals is the guiding precedent.  Citing Land, the Bankruptcy Court noted that the most recent precedent from the Court of Appeals acknowledges that it is unclear whether the claim exists in this state and, therefore, held that it is not recognized.

Despite all of the cases that have openly questioned whether aiding and abetting a breach of fiduciary duty is a viable claim in North Carolina, plaintiffs continue to bring them, citing Blow as authority.  Forced to tackle the issue in case after case, the trial courts are finding it impossible to ignore the fact that plaintiffs continue to rely on a claim with shaky legal foundation to impose something akin to fiduciary liability on non-fiduciaries.

It seems like no coincidence then, that a recurring trend has begun to develop in the North Carolina Business Court in which that Court dismisses claims for aiding and abetting a breach of fiduciary duty without determining whether or not the claim still exists in this state.  More and more, when faced with motions to dismiss or motions for summary judgment involving claims for aiding and abetting a breach of fiduciary duty, the Business Court calls into question the viability of the claim and then finds a different basis on which to dismiss it. 

Some examples of this practice include Phillips & Jordan, Inc. v. Bostic,[11] in which the Business Court dismissed an aiding and abetting claim because the complaint also alleged that the aider and abettor owed a fiduciary duty to the plaintiff.  In Tong v. Dunn,[12] the Court dismissed an aiding and abetting claim against a corporate director because the complaint alleged the director had acted on behalf of the corporation, and a corporation cannot aid and abet its directors' breach of fiduciary duty. 

The Business Court has also found a way to dismiss aiding and abetting claims by relying on North Carolina corporate law.  In Regions Bank v. Reg'l Prop. Dev. Corp.,[13] the Court dismissed a counterclaim by a member of a North Carolina limited liability company against the company's lender for aiding and abetting a breach of fiduciary duty because the claim was derivative, not direct, and the member did not have standing to bring a derivative claim on behalf of the limited liability company. 

Similarly, in Gusinsky v. Flanders Corp.,[14] the Business Court dismissed an aiding and abetting claim brought by shareholders against the entity with which the corporation merged.  After finding that the individual directors owed a fiduciary duty to the corporation, not the shareholders, and that the shareholders did not have standing to sue derivatively on behalf of the corporation, the Court disposed of the aiding and abetting claim based on the absence of any fiduciary duty by the directors to the individual shareholders.  Whether or not a claim for aiding and abetting a breach of fiduciary duty would have survived if the shareholders had successfully brought a derivative claim is unclear.

These cases are only a few examples of instances in which the Business Court has dismissed an aiding and abetting claim without tackling the difficult issue of whether it is a viable claim in North Carolina.  While the decisions have the effect of slowly weakening the viability of the claims by creating a body of case law that recognizes various ways to dismiss them, the ultimate result is the absence of a definitive holding by a North Carolina court that the claim does not exist.  Accordingly, more and more lawsuits continue to be filed alleging claims for aiding and abetting a breach of fiduciary duty.  These lawsuits clog court dockets and unnecessarily waste court time and resources as well as the time and resources of the parties who have to defend against the claims. 

As the United States Court of Appeals for the Eleventh Circuit noted when it determined that Georgia does not recognize aiding and abetting a breach of fiduciary duty claim, the implications of such claims "enlarge fiduciary obligations beyond the scope of a confidential or special relationship."[15]  North Carolina law defines the fiduciary relationship as one of trust and confidence,[16] and a cause of action that recognizes aiding and abetting a breach of this duty expands liability to parties who do not enjoy such a relationship with the potential claimant.  This de facto expansion of fiduciary liability promotes confusion in North Carolina law and in the marketplace, creating uncertainty for entities and individuals who engage and do business with fiduciaries. 

Conclusion

A claim of aiding and abetting a breach of fiduciary duty is not supported by North Carolina law.  To the extent Blow relied on federal case law recognizing the claim in the securities fraud context, that precedent is no longer good law.  North Carolina courts have also rejected the unbridled application of aiding and abetting liability based on principles set forth in the Restatement (Second) of Torts.  North Carolina courts should definitively rule that the claim is not viable in this state.  Such a ruling would be consistent with the law and would promote a sound policy of limiting fiduciary liability to actual fiduciaries. 

While courts continue to acknowledge that it is an "open question" whether a claim for aiding and abetting a breach of fiduciary duty exists in North Carolina, the time has come for the question to be answered once and for all.  The answer will provide much needed clarity in the law and certainty in the business community.



[1] 88 N.C. App. 484, 491, 364 S.E.2d 444, 448 (1988).

[2] Id. at 490, 364 S.E.2d at 447.

[3] Id. at 491, 364 S.E.2d at 448.

[4] See Hinson v. Jarvis, 190 N.C. App. 607, 612, 660 S.E.2d 604, 608 (2008).

[5] See Cassell v. Collins, 344 N.C. 160, 163, 472 S.E.2d 770, 772 (1996).  See also Mickles v. Duke Power Co., 342 N.C. 103, 110, 463 S.E.2d 206, 211  (1995).

[6] No. COA10-914, 2011 WL 2462933 (N.C. Ct. App. June 21, 2011).

[7] 717 S.E.2d 9, 29 (N.C. Ct. App. 2011), appeal dismissed, disc. review denied, 366 N.C. 420, 735 S.E.2d 332 (2012).

[8]  No. COA11-1027, 2012 WL 3192605, at *8 (N.C. Ct. App. Aug. 7, 2012), disc. review denied, 738 S.E.2d 366 (N.C. 2013).

[9] 610 F. Supp. 2d 528, 532 (W.D.N.C. 2009), aff'd, 375 Fed. Appx. 345 (4th Cir. 2010).

[10] No. 09-33421, 2012 WL 5880441, at *5 (Bankr. W.D.N.C. Nov. 20, 2012). 

[11] No. 11-CVS-53, 2012 NCBC 34 ¶56, 2012 WL 1970070, at *11 (N.C. Super. Ct. June 1, 2012).

[12] No. 11-CVS-1522, 2012 NCBC 16 ¶29, 2012 WL 944581, at *6 (N.C. Super. Ct. Mar. 19, 2012).

[13] No. 07-CVS-12469, 2008 NCBC 8 ¶57, #2008 WL 1836657, at *6 (N.C. Super. Ct. April 21, 2008).

[14] Nos. 12-CVS-337, 12-CVS-463, 2013 NCBC 46 ¶54, 2013 WL 5435788, at *11 (N.C. Super. Ct. Sept. 25, 2013).

[15] Munford v. Valuation Research Corp., 98 F.3d 604, 613 (11th Cir. 1996).

[16] Bogovich v. Embassy Club of Sedgefield, Inc., 211 N.C. App. 1, 8, 712 S.E.2d 257, 262 (2011).

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