In Pennsylvania, can you be liable for someone else’s breach of their fiduciary duty to a co-owner of a closely held business if you knew about the breach, were somehow involved with it, and assisted or encouraged that person’s breach?
Section 876 of the Restatement (Second) of Torts addresses the civil tort (but not the criminal act) of “aiding and abetting.” The Pennsylvania Supreme Court has never expressly adopted the tort, but both the Pennsylvania Superior Court and Commonwealth Court have recognized it in various contexts, including encouraging drunk driving, marketing a defective product, and encouraging horseplay.
Historically, the tort of aiding and abetting has not been applied in Pennsylvania to cases involving a breach of fiduciary duties associated with closely held businesses.
But that changed in 2017.
In the unreported decision of Potok v. Rebh, 2017 WL 1372754 (Pa. Super. Ct. Apr. 13, 2017), a minority shareholder claimed that the majority owners breached their fiduciary obligations to him by, among other things, improperly allocating the proceeds of the sale of the company’s assets. Specifically, the plaintiff alleged that those in control of the company sold the company’s assets to a third party and improperly allocated a significant portion of the purchase price as compensation to the majority shareholders for their non-competes.
In addition to initiating litigation against the majority owners, the minority shareholder sued the third-party purchaser of the company’s assets under that theory that the purchaser aided and abetted the majority’s breach of fiduciary duty. The Superior Court recognized the cause of action, albeit while affirming the trial court’s finding that the plaintiff failed to prove the claim. Although the court referenced Section 876 of the Restatement, its formulation of the elements of a claim for aiding and abetting in this context deviated slightly from the Restatement version:
In order to establish … liability for aiding and abetting the … breach of fiduciary duty, [a plaintiff is] required to prove the following: (1) a breach of a fiduciary duty owed to another; (2) knowledge of the breach by the aider and abettor; and (3) substantial assistance or encouragement by the aider and abettor in effecting that breach.
Potok, 2017 WL 1372754, at *4.
The Superior Court further solidified the tort of aiding and abetting breaches of fiduciary duties in closely held businesses in its reported decision in Lind v. Lind, 220 A.3d 1119 (Pa. Super. Ct. 2019).
Lind involved a family business dispute where the majority owner froze out a minority sibling owner from the company. In addition to bringing claims against the majority owner, the minority owner asserted aiding and abetting claims against six key employees of the company that the majority owner had placed on the company’s board of directors. Although the six employees each owned a small percentage of the company, they did not collectively posses a majority interest. Thus, they could not owe the same kind of fiduciary duty to the minority sibling as the majority owner did.
The court evaluated the minority owner’s claim pursuant to the Section 876 framework:
For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he:
(a) does a tortious act in concert with the other or pursuant to a common design with him, or
(b) knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.
Linde v. Linde, 220 A.3d 1119, 1145 (Pa. Super. Ct. 2019) (quoting Restatement (Second) of Torts § 876). The Superior Court affirmed the trial court’s finding that the six key employees were liable for aiding and abetting a breach of fiduciary duty when they removed the minority shareholder from her corporate officer positions. This appears to be the first time that the Superior Court recognized the tort in a reported decision and affirmed liability against a party for violating it.
These developments are important for owners of closely held businesses in Pennsylvania. The existence of the tort of aiding and abetting breach of fiduciary duty, and its application to shareholder disputes, creates a panoply of issues that have yet to be addressed by Pennsylvania courts.
Most significantly, the availability of the tort allows minority owners the ability to reach a variety of deep-pocket parties that would otherwise be protected by multi-level corporate structures. As a result, majority owners will have to contend with an erosion of the protection that thoughtful corporate structuring might otherwise provide against breach of fiduciary claims.
(I recently scratched the surface of this issue here: https://www.pabusinessdivorceblog.com/2020/10/getting-your-hands-around-a-just-out-of-reach-structure/).
The application of the tort also impacts how in Pennsylvania—if at all—the business judgment rule applies to individuals alleged to have aided and abetted a breach of fiduciary duty. (The business judgment rule is the presumption that directors act in good faith when making business decisions that do not involve their self-interests or self-dealing.)
It is further unclear whether all corporate fiduciary duties can support an aiding and abetting claim. For example, the minority shareholders in Potok and Lind sought to hold their defendants responsible for the breach of the duty of loyalty and majority-minority duty of fair treatment. There does not yet appear to be any cases addressing whether the tort could be applied to a breach of the duty of care.
Assuming the tort of aiding and abetting a breach of fiduciary duty continues to be recognized by Pennsylvania courts, its mere existence is likely to make business divorce litigation in the Commonwealth much more interesting.