California limited liability company disputes | Courtroom war stories and lessons learned

Conspiracy and Aiding & Abetting: Non-Manager Liability for Breach of LLC Fiduciary Duties

LLC managers owe fiduciary duties of loyalty, care, and good faith and fair dealing to both the LLC and the LLC’s members.  (Corp Code §17704.09.)  One of the most common claims in LLC litigation is “breach of fiduciary duty” asserted by a member of the LLC against its manager.

But can other LLC members be held liable for “assisting” or otherwise participating in the manager’s breach of fiduciary duty?

Two common theories asserted in this realm are “conspiracy” and “aiding and abetting.”  A pair of recent opinions — Draz v. Newton (an unpublished opinion by California’s Second Appellate District) and Hammett v. Sherman (an order from the United States District Court in the Southern District of California) — illustrate how difficult these theories can be to prove.

Draz v. Newton

In the Draz case, one LLC member (Draz) sued the LLC’s manager for breach of fiduciary duty arising from the LLC’s financial troubles, which resulted in bankruptcy and the loss of the LLC’s hotel investment property through foreclosure.  Draz also asserted claims against the LLC’s other member (Newton) for conspiracy to breach fiduciary duty and aiding and abetting breach of fiduciary duty.

The trial sustained Newton’s demurrer and dismissed the claims against him, and Draz appealed.

The Court of Appeal affirmed the trial court’s judgment.

As to the conspiracy claim, the court recited the controlling rule: “A person who does not owe a fiduciary duty to a plaintiff cannot be held liable for conspiracy to breach that duty.”  Since Newton, as a mere member, never undertook the fiduciary duties that the manager was accused of breaching, the conspiracy claim against Newton failed.

As to the claim for aiding and abetting, the court held that it was possible for a member to be liable even without independently owing fiduciary duties.  However, in such a claim the plaintiff “must plead and prove: (1) a third party’s breach of fiduciary duties owed to plaintiff; (2) defendant’s actual knowledge of that breach; (3) substantial assistance or encouragement to the third party’s breach; and (4) substantial factor causation.”  Further, “specific intent to facilitate the wrongful act has been read into these elements.”  Draz’s complaint contained no specific allegations meeting these elements, so the claim for aiding and abetting was properly dismissed.

Hammett v. Sherman

In the Hammett case, one LLC member (Hammett) sued the LLC’s manager for breach of fiduciary duty arising from alleged “misappropriation and waste of assets” regarding the LLC’s multi-tenant shopping center.  Hammett also asserted claims against other members of the LLC (Kramer and Dennis) for aiding and abetting the manager’s breach of fiduciary duty.

The district court granted the defendants’ motions to dismiss, with leave to amend.

The court held that as to Defendant Kramer, the complaint merely alleged that Kramer helped the manager “over-pay management fees” and to hire attorneys who had conflicts of interest.  The court held these allegations failed to allege how Kramer provided “substantial assistance.”  “Mere knowledge that a tort is being committed and the failure to prevent it does not constitute aiding and abetting.”

As to Defendant Dennis, the court observed that the alleged breach of fiduciary duty by the manager occurred in 2017, but the complaint only alleged Dennis was aware of the breach in October 2019.  On their face, these allegations were insufficient to show that Dennis had “actual knowledge” of the breach at the time the breach actually occurred, and provided no factual basis showing what Dennis did to provide “substantial assistance” to the manager in breaching his duties.

Lesson

Imposing fiduciary duty liability on non-managers in a manager-managed LLC is not easy.  Claims for “conspiracy” and “aiding and abetting” are two commonly used tactics, but the elements are difficult to satisfy in most cases.