Aiding and Abetting Liability

CLAIMS FOR AIDING AND ABETTING IN ARIZONA

This article analyzes claims for aiding and abetting tortious conduct in Arizona.  Aiding and abetting liability is often used to reach secondary defendants in a securities fraud violation.

I. Arizona Recognizes Claims for Aiding and Abetting Tortious Conduct.

“Arizona recognizes aiding and abetting as embodied in Restatement § 876(b), that a person who aids and abets a tortfeasor is himself liable for the resulting harm to a third person.” Wells Fargo Bank v. Ariz. Laborers, Teamsters, 201 Ariz. 474, 485, 38 P.3d 12, 23 (2002) (citing Gemstar Ltd. v. Ernst & Young, 183 Ariz. 148, 159 n.7, 901 P.2d 1178, 1189 n.7 (Ct. App. 1995), vacated on other grounds, 185 Ariz. 483, 917 P.2d 222 (1996); Gomez v. Hensley, 145 Ariz. 176, 178, 700 P.2d 874, 876 (Ct. App. 1984)).

Restatement § 876 provides that: “For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he . . . (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 . . . .” Restatement (Second) of Torts § 876(b) (1979).

Notably, “[a]iding and abetting liability does not require the existence of, nor does it create, a pre-existing duty of care. . . . Rather, aiding and abetting liability is based on proof of a scienter . . . the defendants must know that the conduct they are aiding and abetting is a tort.” Wells Fargo, 201 Ariz. at 485, 38 P.3d at 23 (citations omitted) (emphasis in original).

The Arizona Supreme Court has defined aiding and abetting as follows:

Aid and abet means simply to encourage, counsel, advise or assist in the commission of an act. The words comprehend all assistance rendered by the acts or words of encouragement or support or presence actual or constructive, to render assistance should it become necessary. It means to assent to an act; to end to it countenance and approval, either by an active participation in it or by in some manner advising encouraging it. The word ‘abet’ includes the element of knowledge of the wrongful purpose of the perpetrator and counsel and encouragement in the illegal act while the word ‘aid’ means to assist, to support the efforts of another.

Ramirez v. Chavez, 71 Ariz. 239, 243, 226 P.2d 143, 146 (1951).

Accordingly, in Arizona, a claim for aiding and abetting tortious conduct requires proof that: (1) the primary tortfeasor engaged in conduct for which the primary tortfeasor is or would be liable to the plaintiff; (2) the defendant was aware that the primary tortfeasor was going to engage in such conduct; and (3) the defendant provided substantial assistance or encouragement to the primary tortfeasor with the intent of promoting the conduct. See RAJI (Civil) 4th Intentional Tort 23 – Aiding and Abetting Tortious Conduct (citing Ramirez, 71 Ariz. at 243, 226 P.2d at 146; Restatement § 876(b)).

The plaintiff must prove the forgoing three elements by a preponderance of the evidence. See Wells Fargo, 201 Ariz. at 490 n.16, 38 P.3d at 28 n.16 (holding standard of proof for aiding and abetting fraud claim is preponderance of evidence).

Each of the three elements for aiding and abetting liability—primary tort, actual knowledge and substantial assistance—are examined in turn below.

II. First Element of Aiding and Abetting Tortious Conduct: Existence of a Primary Tort.

The first aiding and abetting element is the existence of a primary tort or violation. See Grand v. Nacchio, 225 Ariz. 171, 177, 236 P.3d 398, 404 (2010) (“aiding and abetting liability is premised on the finding of a ‘primary violation.’”). If there is no tort or violation, there can be no aiding and abetting liability. See id. at 177, 236 P.3d at 404.

Such primary torts or violations may include fraud, breach of fiduciary duty, and intentional interference with a business relationship or expectancy. See, e.g., Wells Fargo, 201 Ariz. at 485-90, 38 P.3d 23-28 (aiding and abetting fraud); Xcentric Ventures, LLC v. Magedson, 2011 Ariz. App. Unpub. LEXIS 1584, at *5-14 (Ct. App. Dec. 22, 2011) (unpublished) (aiding and abetting intentional interference with business relationship); Chaplin v. Snyder, 220 Ariz. 413, 423-25, 207 P.3d 666, 676-78 (Ct. App. 2008) (aiding and abetting bad faith, intentional infliction of emotional distress, negligent infliction of emotional distress, fraud and false light); Sec. Title Agency, Inc. v. Pope, 219 Ariz. 480, 490-98, 200 P.3d 977, 987-94 (Ct. App. 2008) (aiding and abetting breach of fiduciary duty); Dube v. Likins, 216 Ariz. 406, 413, 167 P.3d 93, 100 (Ct. App. 2007) (aiding and abetting intentional interference with business expectancy); Dawson v. Withycombe, 216 Ariz. 84, 102-03, 163 P.3d 1034, 1052-53 (Ct. App. 2007) (aiding and abetting fraud); Grubaugh v. DeCosta, 1999 Ariz. App. LEXIS 35, at *28 n.8 & 30-39 (Ct. App. Mar. 16, 1999) (unpublished) (aiding and abetting breach of fiduciary duty); Gemstar Ltd., 183 Ariz. at 159 n.7, 901 P.2d at 1189 n.7 (aiding and abetting breach of fiduciary duty). However, there is no private cause of action for aiding and abetting securities fraud or a fraudulent transfer. See Sell v. Gama, 2012 Ariz. LEXIS 262 (Ariz. February 22, 2013); Warne Invs., Ltd. V. Higgins, 219 Ariz. 186, 197-98, 195 P.3d 645, 655-56 (Ct. App. 2008).

The plaintiff must plead and prove each element of the underlying tort or violation in order to sustain its claim for aiding and abetting liability. See, e.g., Xcentric Ventures, 2011 Ariz. App. Unpub. LEXIS 1584, at *14-17 (affirming summary judgment on aiding and abetting claim for failure to present evidence and develop sufficient legal basis to support tort of theft by extortion); Dube, 216 Ariz. at 413-15, 167 P.3d at 100-02 (affirming judgment of dismissal on aiding and abetting claim for failure to allege valid business expectancy for tort of intentional interference with business expectancy).

Further, for aiding and abetting fraud the plaintiff must plead the misrepresentation or omission with particularity. See Van Weelden v. Hillcrest Bank, 2011 U.S. Dist. LEXIS 20180, at *17 (D. Ariz. Feb. 28, 2011) (unpublished); Allstate Life Ins. Co. v. Robert W. Baird & Co., Inc., 756 F. Supp. 2d 1113, 1165 (D. Ariz. 2010); Ariz. R. Civ. P. 9(b).

The plaintiff does not, however, have to name the primary tortfeasor as a defendant in the lawsuit in order to maintain an aiding and abetting claim. See RAJI (Civil) 4th Intentional Tort 23 – Aiding and Abetting Tortious Conduct Use Note (“The individual who was the primary tortfeasor may or may not be an additional named defendant.”).

The statute of limitations for a plaintiff’s claim for aiding and abetting is the same as for the underlying tort. Therefore, for example, a plaintiff must bring a claim for aiding and abetting fraud within three years after the action accrues and a claim for aiding and abetting breach of fiduciary duty within two years after the cause of action accrues. YF Trust v. JP Morgan Chase Bank, 2008 U.S. Dist. LEXIS 102350, at *17 (D. Ariz. Mar. 26, 2008) (unpublished) (citing A.R.S. §§ 12-542 and 12-543). See also Smith v. Arthur Andersen LLP, 175 F. Supp. 2d 1180, 1196 (D. Ariz. 2001) (statute of limitations for aiding and abetting breach of fiduciary duty is two years); Serrano v. Serrano, 2012 Ariz. App. Unpub. LEXIS 31, at *11 (Ct. App. Jan. 10, 2012) (unpublished) (statute of limitations for aiding and abetting fraud is three years).

III. Second Element of Aiding and Abetting Tortious Conduct: Actual Knowledge or General Awareness of the Primary Tort.

The second aiding and abetting element is actual knowledge or general awareness of the primary tort, and knowledge or awareness may be inferred from the circumstantial evidence. “Because aiding and abetting is a theory of secondary liability, the party charged with the tort must have knowledge of the primary violation, and such knowledge may be inferred from the circumstances. Wells Fargo, 201 Ariz. at 485, 38 P.3d at 23 (citing In re Amer. Cont’l Corp./Lincoln Sav. and Loan Sec. Litig., 794 F. Supp. 1424, 1436 (D. Ariz. 1992)). Accord Dawson, 216 Ariz. at 102, 163 P.3d at 1052.

For example, if a “method or transaction is atypical or lacks business justification, it may be possible to infer the knowledge necessary for aiding and abetting liability.” Wells Fargo, 201 Ariz. at 489, 38 P.3d at 27 (quoting Woodward v. Metro Bank of Dallas, 522 F.2d 84, 97 (5th Cir. 1975); citing Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1012 (11th Cir. 1985)). Moreover, a “showing of actual and complete knowledge of the tort is not uniformly necessary to hold a secondary tortfeasor liable under an aiding and abetting theory. Id. at 488, 38 P.3d at 26. “‘The knowledge requirement’ can be met, ‘even though the [defendant] may not have known of all the details of the primary [tort].’” Id. at 488, 38 P.3d at 26 (quoting Aetna Cas. and Sur. Co. v. Leahey Constr. Co., Inc., 219 F.3d 519, 536) (6th Cir. 2000)).

Therefore, even a defendant’s “general awareness” of the primary tort, which “can be established through circumstantial evidence,” is sufficient for finding aiding and abetting liability. Id. at 488, 38 P.3d at 26 (quoting Fed. Deposit Ins. Corp. v. First Interstate Bank of Des Moines, N.A., 885 F.2d 423, 430-31 (8th Cir. 1989)). See also Dawson, 216 Ariz. at 102, 163 P.3d at 1052 (“Actual and complete knowledge of the details of the primary tort may not be necessary in all cases; the knowledge requirement may be satisfied by showing general awareness of the primary tortfeasor’s [tort].”). See, e.g., Wells Fargo, 201 Ariz. at 486-88, 38 P.3d at 24-26 (reversing summary judgment on aiding and abetting claim because there was sufficient accumulation of evidence from defendant’s actions and internal communications and primary tortfeasor’s financial statements to raise inference that defendant knew or had general awareness that primary tortfeasor was engaged in fraud); Sec. Title, 219 Ariz. at 495, 200 P.3d at 992 (affirming trial court’s denial of judgment as matter of law because jury could have reasonably concluded from evidence that defendant knew or had general awareness that primary tortfeasor owed duty to plaintiff and breached that duty).

“However, an inference of knowledge will not be made lightly,” and “the inferences made from th[e] facts must be reasonable.” Federico v. Maric, 224 Ariz. 34, 36-37, 226 P.3d 403, 405-06 (Ct. App. 2010). A court will not “pile inference upon inference, which stretches the evidence presented beyond the bounds of circumstantial evidence.” Dawson, 216 Ariz. at 103, 163 P.3d at 1053. Constructive knowledge is also not sufficient; there must be actual knowledge. Id. at 103 n.16, 163 P.3d at 1053 n.16. See e.g., Federico, 224 Ariz. at 37-38, 226 P.3d at 406-07 (affirming summary judgment on aiding and abetting claim after finding no allegations suggested or led to reasonable inference defendant had knowledge of primary tortfeasor insurance company’s intent or propensity to act in bad faith); Dube, 216 Ariz. at 413, 167 P.3d at 100 (affirming dismissal of aiding and abetting claim because neither alleged facts nor reasonable inference from those facts showed defendant had knowledge of primary tortfeasor’s intentional interference); Dawson, 216 Ariz. at 102-03, 163 P.3d at 1052-53 (reversing trial court’s denial of judgment as matter of law as there was no evidence in record to reasonably infer that defendants were aware of primary tortfeasor’s fraudulent scheme).

For example, red flags or “mere knowledge of suspicious activity,” such as the primary tortfeasor’s poor financial condition or dishonesty, “is not enough. The defendant must be aware of the fraud.” Stern v. Charles Schwab & Co., Inc., 2009 U.S. Dist. LEXIS 96697, at *20-21 (D. Ariz. Oct. 16, 2009) (unpublished) (citing Dawson, 216 Ariz. at 103, 163 P.3d at 1053), reaffirmed 2010 U.S. Dist. LEXIS 38395 (D. Ariz. Mar. 24, 2010). Accord Colson v. Maghami, 2010 U.S. Dist. LEXIS 68957, at *28-29 (D. Ariz. July 9, 2010 ) (unpublished) (declining to apply suspicious-activity inference).

Finally, a duty of inquiry may also be enough to satisfy the second element of aiding and abetting liability. See State v. Superior Court, 123 Ariz. 324, 331-32, 599 P.2d 777, 784-85 (1979) (“There are three prerequisites to a finding that one has aided and abetted a . . . violation: (1) a primary violation has occurred; (2) knowledge of or a duty of inquiry with regard to the primary violation by the person charged; and (3) a necessary contribution to the underlying scheme by the person charged.”) (emphasis added). But see Stern, 2010 U.S. Dist. LEXIS 38395, at *26-27 (declining to adopt reckless disregard standard for actual knowledge in connection with claim for aiding and abetting liability).

IV. Third Element of Aiding and Abetting Tortious Conduct: Substantially Assistance or Encouragement of the Primary Tort.

The third and final aiding and abetting element is substantial assistance or encouragement of the primary tort, which also may be inferred from the circumstances.

Substantial assistance “can take many forms, but means more than ‘a little aid.’” Wells Fargo, 201 Ariz. at 488, 38 P.3d at 26 (quoting In re Amer. Cont’l Corp., 794 F. Supp. at 1435). “The test is whether the assistance makes it ‘easier’ for the [primary tort] violation to occur, not whether the assistance was necessary [to commit the primary tort violation].” Id. at 489-90, 38 P.3d at 27-28 (quoting Aetna Cas., 219 F.3d at 537)). See also Sec. Title, 219 Ariz. at 491, 200 P.3d at 988 (“aiding-and-betting claim requires proof of a causal connection between the defendant’s assistance or encouragement and the primary tortfeasor’s commission of the tort, although ‘but for’ causation is not required.”); Restatement § 876 cmt. d (“If the encouragement or assistance is a substantial factor in causing the resulting tort, the one giving it is himself a tortfeasor and is responsible for the consequences of the other’s act. This is true both when the act done is [intentionally] and when it is merely [negligent]. The rule applies whether or not the other knows his act is tortious. It likewise applies to a person who knowingly gives substantial aid to another who, as he knows, intends to do a tortious act.”).

For example, substantial assistance may include executing transactions that are unremarkable alone but when viewed in conjunction with other evidence suggest an unusual pattern of extraordinary attempts to assist the primary tortfeasor, like prolonging the tortfeasor’s financial viability or life to the detriment of the plaintiff. Wells Fargo, 210 Ariz. at 488-39, 38 P.3d at 26-27 (citing Metge v. Baehler, 762 F.2d 621, 626 (8th Cir. 1985); K & S P’ship v. Cont’l Bank, N.A., 952 F.2d 971, 979 (8th Cir. 1991)).

Another example of substantial assistance is “executing transactions, even ordinary course transactions . . . under some circumstances, such as where there is an extraordinary economic motivation to aid in the [primary tort].”  Id. at 489, 38 P.3d at 27 (citing Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983); IIT v. Cornfeld, 619 F.2d 9090, 921-22 (2d Cir. 1980)). See, e.g., id. at 488-90, 38 P.3d at 26-28 (finding heightened economic motive was proof of substantial assistance to overcome summary judgment on aiding and abetting fraud); Sec. Title, 219 Ariz. at 495-96, 200 P.3d at 992-93 (holding certain ordinary transactions constituted proof of substantial assistance to defeat judgment as matter of law on aiding and abetting breach of fiduciary duty). But see Stern, 2009 U.S. Dist. LEXIS 96697, at *23 (“Processing day-to-day transactions does not constitute substantial assistance unless the bank has an ‘extraordinary economic motivation to aid in the fraud,’” and such extraordinary economic motivation does not include “ordinary account fees and credit interest.”) (emphasis added).

However, if the defendant’s assistance or participation is “so slight,” the defendant may not be liable for the act of the primary tortfeasor. Restatement § 876 cmt. d. See, e.g., Federico, 224 Ariz. at 38, 226 P.2d at 407 (finding plaintiff failed to provide any evidence to support even the inference that defendant provided necessary assistance to primary tortfeasor insurance company in its acting in bad faith). Moreover, inaction cannot satisfy the substantial assistance requirement of aiding and abetting liability without knowledge of the fraud. Stern, 2009 U.S. Dist. LEXIS 96697, at *24.

Encouragement also meets the third element of aiding and abetting liability. “Advice or encouragement to act operates as a moral support to a tortfeasor and if the act encouraged is known to be tortious it has the same effect upon the liability of the adviser as participation of physical assistance.” Restatement § 876, cmt. d. Encouragement means to “instigate; to incite into action; to embolden; to help.” Xcentric Ventures, 2011 Ariz. App. Unpub. LEXIS 1584, at *13 (citing Black’s Law Dictionary, 547 (7th ed. 1999)). However, a person who encourages another to commit a tortious act may not be responsible for other unforeseeable acts by the primary tortfeasor. See Restatement § 876 cmt. d (“although a person who encourages another to commit a tortious act may be responsible for other acts by the other, ordinarily he is not liable for other acts that, although done in connection with the intended tortious act, were not foreseeable by him.”).

In determining whether the amount of assistance or encouragement is “substantial” for aiding and abetting liability, the court will consider “the nature of the act encouraged, the amount of assistance given by the defendant, his presence or absence at the time of the tort, his relation to the other and his state of mind.” Restatement § 876 cmt. d.

V. Conclusion.

In sum, a plaintiff may bringing a claim against a defendant for aiding and abetting tortious conduct in Arizona, but must plead and prove by a preponderance of evidence the existence of a primary tort, the defendant’s actual knowledge or general awareness of the primary tort, or a duty of inquiry thereof, that can be reasonably inferred from the circumstances, and the defendant’s substantial assistance or encouragement of the primary tort that can be reasonably inferred from the circumstantial evidence.

If you would like to discuss bringing a possible aiding and abetting claim, we would be happy to discuss your potential case with you. To arrange for a consultation concerning your legal matter, please contact Robert Mitchell at robertmitchell@mitchell-attorneys.com, or at (602) 468-1411. With more than two decades of experience in handling securities litigation matters, Mr. Mitchell and Mitchell & Associates are the right Arizona securities lawyers to represent you in your investment case.

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