Lawyer liability for aiding and abetting clients' misconduct under state law.

• Author: Richmond, Douglas R.

THE DANGERS posed to lawyers and law firms by representing dishonest clients are clear. Since 1986, there have been at least forty-five publicly-reported settlements by, or verdicts against, law firms exceeding $20 million, thirty-four of which were attributable in whole or large part to the firm's representation of a dishonest client. In the last decade or so, there have been at least twenty-one publicly-reported settlements by or verdicts against law firms between $3-$20 million, and nine of those are attributable to the firm's representation of a dishonest client. The typical allegation in such cases is that the law firm aided and abetted the dishonest client's breach of fiduciary duty, fraud, or other misconduct, thus harming third parties. But for compliant lawyers, plaintiffs routinely claim, the principal wrongdoers' misconduct could never have been accomplished or would not have persisted long enough to cause material harm. The danger for lawyers is that this theme may resonate with jurors, who tend to exaggerate the extent to which known events could have been anticipated or detected. Indeed, many fine law firms have choked down unpalatable settlements in aiding and abetting cases in which they believed they did nothing wrong out of the concern that they would fall victim to jurors' hindsight bias.

Aiding and abetting liability is not limited to non-client situations. For example, a lawyer representing an organization, such as a corporation or partnership, might be accused of aiding and abetting an officer's or partner's (typically a non-client) breach of fiduciary duty to the entity (the lawyer's client). (2) Where the business has failed, it is commonly a bankruptcy trustee or receiver who is suing the lawyer.

Regardless of the context in which it is alleged, aiding and abetting liability is well-settled; indeed, secondary liability arising from concerted action traces back for centuries. Insofar as lawyers go, the theory gained serious traction during the savings and loan crisis of the mid- to late 1980's and early 1990's, when government regulators and private plaintiffs sued numerous law and accounting firms for their alleged roles in institutional failures principally attributable to corrupt directors and officers. And, contrary to some lawyers' belief, the theory did not die with the Supreme Court's landmark 1994 decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (3) In Central Bank, the Court simply held that private plaintiffs may not maintain aiding and abetting suits under [section] 10(b) of the Securities Exchange Act of 1934. (4) The Court did not address aiding and abetting liability in other contexts. Many states now recognize aiding and abetting liability in some form, (5) and the theory provides a difficult and dynamic battleground for even the finest and most cautious law firms. This article examines key contours of the terrain.

1. The Cause of Action and Its Elements

   Unlike traditional claims against lawyers, such as malpractice and breach of fiduciary duty, aiding and abetting liability does not require that a lawyer owe a duty of care to the plaintiff. (6) The theory does not require an attorney-client relationship between the plaintiff and the lawyer being sued. (7) Nor does aiding and abetting liability require that the plaintiff be an intended third party beneficiary of the lawyer's services. Under the majority approach derived from the Restatement (Second) of Torts, aiding and abetting liability rests on three elements: (1) the primary tortfeasor must commit a tort that injures the plaintiff; (2) the defendant must know that the primary tortfeasor's conduct breached a duty owed by the primary tortfeasor to the plaintiff; and (3) the defendant must substantially assist or encourage the primary tortfeasor's wrongful conduct. (8) There is no requirement that a defendant's conduct be animated by wrongful intent. (9) The gravamen of an aiding and abetting claim is the defendant's knowing participation in the primary violator's misconduct. (10)

   Aiding and abetting liability raises some difficult issues. On one hand, permitting the cause of action risks diminishing the quality of legal services by encouraging "'self protective reservations' in the attorney-client relationship.'" (11) Lawyers should be able to advise clients without fear of liability to third persons if their advice proves erroneous or a client twists it to suit an unfair aim. Absent contrary information, lawyers are entitled to assume that their clients are behaving or operating lawfully. Lawyers should not be required to constantly question clients' motives or to view their clients with distrust. On the other hand, courts generally recognize that lawyers should not be able to invoke their professional status to escape liability for knowingly and substantially assisting the tortious conduct of another. (12) Courts have attempted to reconcile this tension by narrowly and strictly interpreting the elements of aiding and abetting claims, and by requiring plaintiffs to plead with particularity the facts establishing each element. (13) The practical problem is that even when strictly interpreted and carefully pled, aiding and abetting claims remain factually complex and their outcome commonly depends on witnesses' credibility determinations. Accordingly, they often cannot be resolved by motions to dismiss and instead must wait for summary judgment or trial, making them expensive to defend. Although conspiracy and aiding and abetting are related through the requirement of concerted action, the causes of action are distinct. (14) Conspiracy liability requires an agreement between alleged co-conspirators to commit a tortious act. (15) Aiding and abetting liability, on the other hand, requires only that a defendant knowingly and substantially assist the principal wrongdoer. (16) Again, a defendant need not be motivated by evil intent to be held liable as an aider and abettor. (17) There is a significant difference between proving a defendant's agreement to participate in tortious conduct and proving that a defendant knowingly aided such conduct. (18)

   While conspiracy theory is premised on the commission of a single tort for which all co-conspirators are liable as joint tortfeasors, such that they all must be legally capable of committing the same wrong, that is not so with aiding and abetting claims. (19) As previously noted, a defendant need not owe the plaintiff a duty to be held liable for aiding and abetting the misconduct of another. Liability for aiding and abetting attaches where the defendant "behaves in a manner that enables the primary violator to commit the underlying tort." (20)

   Of course, aiding and abetting liability is derivative in the sense that the alleged primary tortfeasor must, in fact, commit a tort for a defendant to be held liable as an aider and abettor. (21) Absent primary liability, there can be no aiding and abetting liability. (22) The Colorado Supreme Court's recent decision in Alexander v. Anstine (23) illustrates this point.

   The client in Alexander, Builder's Home Warranty ("BHW"), sold new home warranties. BHW hired lawyer Hugh Alexander and his firm (collectively "Alexander") when it learned that it had purchased fraudulent insurance policies on warranties issued to its customers, effectively leaving its customers unprotected. Alexander advised BHW's president, Andrew Jelonkiewicz, that he had could either close the company and seek bankruptcy protection, or "warehouse" customers' premiums by placing them in an escrow account while searching for replacement insurance coverage. Alexander also advised Jelonkiewicz that the warehousing option would be illegal if BHW issued new warranties while seeking replacement insurance. Jelonkiewicz incautiously opted to issue new warranties while warehousing customers' premiums. Alexander assisted him in creating the necessary escrow account by drafting an escrow agreement. When a competitor learned of the warehousing scheme and successfully sought injunctive relief for unfair competition, BHW's business collapsed and it filed a Chapter 7 bankruptcy. (24)

   The bankruptcy trustee, Anstine, sued Jelonkiewicz for breaching his fiduciary duties to BHW and its creditors. Anstine also sued Alexander for aiding and abetting Jelonkiewicz's breach of fiduciary duty. The trustee prevailed against both Alexander and Jelonkiewicz at trial and in a lower appellate court. In the Colorado Supreme Court, the pivotal issue was whether Jelonkiewicz owed a common law fiduciary duty to BHW's creditors. (25) The court was willing to recognize only a limited duty in the situation presented, limiting creditors' claims to instances in which corporate officers or directors favor their interests over creditors' claims. Because Anstine did not argue that Jelonkiewicz's warehousing scheme involved favoring his interests to defeat creditors' claims, Anstine failed to allege that Jelonkiewicz breached his limited fiduciary duty to BHW's creditors. As a result, Anstine's claim against Alexander for aiding and abetting Jelonkiewicz's purported breach of fiduciary duty also failed. (26)

   Assuming the existence of tortious conduct by the client, a lawyer charged with aiding and abetting that misconduct faces liability only if she knows that the client's conduct is a breach of duty, and she substantially assists or encourages it. The failure of either element is fatal to a plaintiff's claim. (27) Courts typically consider a defendant's alleged knowledge and substantial assistance together...