By: Scott B. Riddle, Esq.
In a prior post, I noted that the Georgia Court of Appeals had recognized a cause of action for aiding and abetting breach of fiduciary duty. You can review that post for lengthy excerpts from the opinion in Insight Technology, Inc. v. Freightcheck, Inc., No. A06-0710, Ga. App. LEXIS 738, 2006 WL 1679391 (Ga. App. June 20, 2006), including the reasoning of the court in recognizing the claim. The Georgia Supreme Court has subsequently denied cert in the case.
In this post, I focus specifically on the actual elements of the claim identified by the Court of Appeals. These elements are —
In summary, regardless of whether denominated "aiding and abetting a breach of fiduciary duty," "procuring a breach of fiduciary duty," or "tortious interference with a fiduciary relationship," Georgia law authorizes a plaintiff to recover upon proof of the following elements: (1) through improper action or wrongful conduct and without privilege, the defendant acted to procure n12 a breach of the primary wrongdoer’s fiduciary duty to the plaintiff; (2) with knowledge that the primary wrongdoer owed the plaintiff a fiduciary duty, the defendant acted purposely and with malice and the intent to injure; n13 (3) the defendant’s wrongful conduct procured a breach of the primary wrongdoer’s fiduciary duty; and (4) the defendant’s tortious conduct proximately caused damage to the plaintiff.
Clearly, the Court equated aiding and abetting breach of fiduciary duty with tortious interference with fiduciary duty and in doing so included the requirement (or affirmative defense) that the offending party act without privilege. Does the inclusion of this element, brought over from tortious interference claims, make sense and is it workable?
In tortious interference cases, including interference with contract, business relationship, economic advantage, etc., a "privilege" is generally interpreted broadly to include any party that had an economic or business interest in the underlying contract or relationship, even if that party was not a party to the contract. Parties who do not have such an interest are normally called strangers to the contract or business relationship. Generally, if a party has "privilege" to interfere (a non-stranger) it is a complete defense to a tortious interference claim, even if their interference is wrongful or causes damage. Note, however, the party may be liable under other causes of action – just not for the interference.
However, as broadly as the privilege to interfere is interpreted, it is generally not extended to matters beyond the specific contract or business relationship at issue in the case. For example, a bank may have privilege to interfere in a contract or business relationship that involves its collateral, but the privilege does not extend to interference with its borrower’s business matters that are unrelated to its collateral. An employee under contract with an employer is a stranger to the contractual relationship between another employee and the employer. See, e.g., Wachovia Ins. Servs., Inc. v. Paddison, No. 406CV083, 2006 U.S. Dist. LEXIS 66463, *52 (S.D. Ga. July 18, 2006. In short, while privilege and non-stranger status may be broadly interpreted, the underlying matters in which the offending party may interfere are not so broadly interpreted.
Which takes us back to the elements in Insight Technology. A brief (non-exhaustive) review of the elements of aiding and abetting breach of fiduciary duty in other jurisdictions revealed no other cases that included an element of privilege or non-stranger —
See, e.g., Shamrock Holdings v. Arenson, Nos. 04-1339-SLR, 06-62-SLR, 2006 U.S. Dist. LEXIS 70999, *27 (Del. Sept. 29, 2006) (four elements of an aiding and abetting claim are (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, (3) knowing participation in that breach by the defendants, and (4) damages proximately caused by the breach); Official Comm. of Unsecured Creditors v. Credit Suisse First Boston (In re Exide Techs., Inc.), 299 B.R. 732, 749 (Bankr. D. Del. 2003) (same); Rosener v. Majestic Mgmt., Inc., 321 B.R. 128, 144 (Bankr. D. Del. 2005) (three elements are (1) fiduciary’s wrongful conduct, (2) defendant had knowledge conduct was wrongful, and (3) defendant gave substantial assistance or encouragement); Nisselson v. Ford Motor Co., 340 B.R. 1, 44 (Bankr. E.D.N.Y. 2006) (under New York law claimant must plead: (1) a breach by a fiduciary of obligations to another; (2) defendant knowingly induced or substantially assisted in the breach; and (3) plaintiff suffered damages as a result of the breach); Arwood v. Dunn, 288 B.R. 908 (S.D. Fla. 2002) (“The four elements for a claim of aiding and abetting a breach of fiduciary duty are: (1) a fiduciary duty on the part of the primary wrongdoer; (2) a breach of this fiduciary duty; (3) knowledge of the breach by the alleged aider and abettor; and (4) the aider and abettor’s substantial assistance or encouragement of the wrongdoing.”).
Importantly, in many cases the person accused of aiding and abetting the breach is obviously a person who would otherwise be deemed a non-stranger, or a person with some interest in the underlying business —
See, e.g., Rosener, 321 B.R. at 143-33 (Bank group involved in leveraged buy-out could be liable for aiding and abetting breach of fiduciary duty of selling companies’ officers and directors); Aluminum Mills Corp. v. CitiCorp N. Am., Inc., 132 B.R. 869 (Bankr. N.D. Ill. 1991) (creditors’ committee stated claim for inducement of breach of fiduciary duty against lender involved in leveraged buy-out); Exide Techs., 299 B.R. at 749-50 (lender’s motion to dismiss denied where complaint set forth several instances where lender participated in breaches); Arenson, 2006 U.S. Dist. LEXIS 70999, *27 (motion to dismiss aiding and abetting claim against consultant was denied); Nisselson, 340 B.R. at 44-45 (claim sufficiently pled by allegations that lender had knowledge of breaches, was present at meetings, and provided financing it knew the debtor company could not afford).
The potential questions that arise with the insertion and application of privilege to aiding and abetting breach of fiduciary duty theoretically would allow someone with privilege (or a non-stranger) to not only interefere with the contract or business relationship in which they have an interest, but also interfere with the internal governance of the company (ie, the fiduciary duties of the party breaching his duties to the company). Under what circumstances may a party claim such a privilege to aid and abet a breach of fiduciary duty? Can a secured lender with a security interest in a debtor’s real property claim a privilege to provide assistance to an officer or director’s breach of fiduciary duty to the debtor even if the breach is unrelated to the collateral? Will courts interpreting the new element have to engage in a process of applying the privilege to corporate governance matters that are related to the offending party’s relationship with the company? What if, for example, the secured lender and a corporate director conspire to transfer the collateral to another entity owned by the director for something other than valuable consideration, thus breaching the director’s duties of loyalty and good faith to the corporation? May the lender claim a privilege to aid and abet such a breach because it has an interest in the collateral and transaction? What if the aiding and abetting party had no prior business relationship with the corporation or the director, but was a partner with the director in the new entity to which the property was wrongfully tranferred? Does his interest in the contract or business relationship provide him with a privilege?
While these may appear to be exaggerated examples, they are questions which will come up in cases involving a claim of aiding and abetting breach of fiduciary duty. While at first glance it may seem reasonable for the Court of Appeals to compare aiding and abetting brech of fiduciary duty with tortious interference, they have expended the privilege defense from a narrowly defined transaction or series of transactions (ie, a contract or isolated business transaction) to an extremely broad area (ie, the internal governance of a company, and fiduciary duties to companies, shareholders, partners, etc.). This is in contrast to most (or all) other states that recognize the tort, and courts interpreting Georgia law will have to eventually answer these questions.
Note: While a little beyond the scope of this post, I will point out that many courts have limited the application of privilege to exclude instances where the defendant acted with an improper purpose, even where the defendant is not a stranger.
See, e.g., Boulevard Assocs. v. Sovereign Hotels, Inc., 72 F.3d 1029, 1037 (2d Cir. 1995) (privilege defense for tortious interference of contract action may be overcome by evidence of fraud, misrepresentation, intimidation or malice); Freemen Mgmt. Corp. v. Shurgard Storage Centers, Ltd., No. 3:06cv0736, 2006 U.S. Dist. LEXIS 82304, *30 n.5 (M.D. Tenn. Nov. 9, 2006) (privilege may be nullified by showing of wrongful or improper means or motives); Waste Conversion Sys., Inc. v. Greenstone Indus., Inc., 33 S.W. 3d 779, 784 (Tenn. 2000) (parent-subsidiary had no privilege because it used “wrongful means,” “fraud, misrepresentation, threats, violence, defamation, trespass, restraint of trade, intimidation, molestation, or any other wrongful act recognized by statute or common law”); Masefield AG v. Colonial Oil Indus., No. 05 Civ. 2231, 2006 U.S. Dist. LEXIS 5792, *15-17 (S.D.N.Y. Feb. 15, 2006) (where a defendant has an economic interest in the contract, showing of malicious, criminal or fraudulent conduct may provide basis for liability for tortious interference); Smithkline Beecham Corp. v. Alphapharm PTY, Ltd., 383 F. Supp. 2d 686, 704 (E.D. Penn. 2004) (competitors’ privilege to interfere not protected by conduct that is otherwise wrongful and independently actionable); Ocean Atl. Chicago Corp. v. Konicek, No. 00 C 5677, 2001 U.S. Dist. LEXIS 4698, *15-16 (N.D. Ill. Mar. 7, 2006) (competition privilege to interfere inapplicable where conduct is wrongful or fraudulent); The Bradbury Co., Inc v. Teissier-duCros, 387 F. Supp. 2d 1167, 1175 (D. Kan. 2005) (in a case decided under Georgia law, court declined to dismiss tortious interference claims on privilege issue, noting that to make the defense of privilege complete, defendant’s statement must be in good faith and limited in scope); Burger King Corp. v. Ashland Equities, Inc., 217 F. Supp. 2d 1266, 1279-80 (S.D. Fla. 2002) (privilege to interfere with a contract is limited and a valid defense only when not done for an improper purpose).