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Court Expands Reach of Fiduciary Duty Law to Include Third Parties Aiding and Abetting

Court Expands Reach of Fiduciary Duty Law to Include Third Parties Aiding and Abetting – Jonathan Finke

 

In American Master Lease v. Idanta Partners, Roberts formed American Master Lease (“AML”) based on a proprietary business method he developed. To generate capital, Roberts invited Andrews, Runnels and Franklin to invest and become members of AML, with Roberts serving as the managing member, and Andrews, Runnels and Franklin serving as operational management. Each member was subject to a non-competition provision contained in AML’s operating agreement.

 

AML entered into negotiations with Idanta Partners to procure an investment in AML. After the negotiations were unsuccessful, Runnels, without the knowledge of Roberts, secretly formed a new company, FPI, using AML’s business method. Runnels brought Franklin in, and in their capacity as operational managers of AML, granted FPI a license to use AML’s business method. FPI then entered into negotiations with Idanta to obtain the same investment AML had sought.

 

When Roberts discovered the existence of FPI, he emailed Runnels and Franklin to remind them of their non-competition obligations. Runnels and Franklin forwarded the email to David Dunn, Idanta’s principal. Roberts also sent a letter to Dunn’s son, informing him of the non-competition agreement and the potential breach of fiduciary duty. Despite being provided such knowledge, Idanta purchased an 85% interest in FPI, allowing FPI to enter into several transactions using AML’s proprietary business method.

 

AML sued Runnels and Franklin in Los Angeles County Superior Court for breach of fiduciary duty, and also sued Idanta for aiding and abetting Runnels and Franklin’s breach of fiduciary duty to AML. Idanta argued it could not be liable under such theory because it did not owe a fiduciary duty to AML. The court rejected the argument, holding that liability exists if the defendant 1) knows the other person’s conduct constitutes a breach of fiduciary duty and 2) provides substantial assistance to that breach. Here, Idanta had been given notice of the potential breach by Runnels and Franklin, yet still provided them substantial assistance towards their breach. As a result, Idanta could be liable for aiding and abetting Runnels and Franklin’s breach of their fiduciary duty to AML.

 

This decision should serve as a warning to parties entering business relationships to be aware of their business partners’ fiduciary duties to others and be cautious about conduct that could be harmful to those interests.

 

American Master Lease, LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451