Originally published by David Fowler Johnson.
In Hampton v. Equity Trust Co., an individual sold fraudulent investments to the plaintiff. No. 03-19-00401-CV, 2020 Tex. App. LEXIS 5674 (Tex. App.—Austin July 23, 2020, no pet.). The individual ran a Ponzi scheme and had recommended that the plaintiff open a retirement account with Equity Trust Company. Equity Trust Company was the custodian of the plaintiff’s self-directed IRA, from which the plaintiff made the investments. After the scheme came a halt, the plaintiff sued the individual for various claims and Equity Trust Company of aiding and abetting breach of fiduciary duty. After a jury trial, the trial court entered judgment for the plaintiff against Equity Trust Company for aiding and abetting breach of fiduciary duty.
The court of appeals reversed, holding that Texas does not have a claim for aiding and abetting breach of fiduciary duty. The court first noted that “Absent legislative or supreme court recognition of the existence of a cause of action, we, as an intermediate appellate court, will not be the first to do so.” Id. The plaintiff alleged that Texas should adopt Section 876 of the Restatement of Torts, which states that a person can be held liable for the conduct of another that causes harm if the defendant: (a) does a tortious act in concert with the other or pursuant to a common design with him, or (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, or (c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.” Id. (citing Restatement (Second) of Torts § 876 (1979)). However, the court of appeals noted that the Texas Supreme Court has not adopted this provision. Id. (citing Juhl v. Airington, 936 S.W.2d 640, 643 (Tex. 1996); First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214, 224 (Tex. 2017) (reiterating that “this Court has not expressly decided whether Texas recognizes a cause of action for aiding and abetting”)). The court concluded: “In the absence of recognition by the Supreme Court of Texas or the Legislature, we conclude that a common-law cause of action for aiding and abetting does not exist in Texas.” Id. The court reversed and rendered for the defendant Equity Trust Company.
Interesting Note: The court held that there is no aiding and abetting breach of fiduciary duty claim in Texas because the Texas Supreme Court has not used those words. But what is clear is that there is a claim for knowing participation in breach of fiduciary duty in Texas. Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942). The general elements for a knowing-participation claim are: 1) the existence of a fiduciary relationship; 2) the third party knew of the fiduciary relationship; and 3) the third party was aware it was participating in the breach of that fiduciary relationship. Meadows v. Harford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007).
Several courts have held that regarding knowing participation or aiding and abetting, that “A rose by any other name would smell as sweet.” William Shakespeare, Romeo and Juliet. For example, in Rhymes v. Filter Res., Inc., the defendant argued that knowing participation could not support the jury’s finding of tortious interference because there was no separate question on that issue. No. 09-14-00482-CV, 2016 Tex. App. LEXIS 10394 (Tex. App.—Beaumont September 22, 2016, no pet.). The court of appeals disagreed, and held: “Such findings are subsumed within the jury’s conclusion that Industrial knew that interference with Filter’s relationships was certain or substantially certain to occur as a result of Rhymes’s conduct. The trial court was not required to submit a separate question on knowing participation.” Id. Further, in OrchestrateHR, Inc. v. Trombetta, a former employer sued its prior employee for breach of fiduciary duty and other related claims arising from the former employee’s competition with the former employer. No. 3:13-CV-2110-KS-BH, 2016 U.S. Dist. LEXIS 117986 (N.D. Tex. September 1, 2016). The former employer also sued other defendants for aiding and abetting the former employee in that breach of fiduciary duty. The defendants filed a motion for summary judgment, arguing that Texas does not recognize an aiding-and-abetting breach-of-fiduciary-duty claim. The district court denied this aspect of the motion, stating: “it is well-established under Texas law that third parties may be liable as a joint tortfeasor where they ‘knowingly participate in the breach of the duty of a fiduciary.’” Id.
So, it is really hard to understand how the Austin Court of Appeals issued an opinion reversing and rendering that there is no aiding and abetting cause of action when there is a knowing participation cause of action. The plaintiff sued Equity Trust Company for assisting a Ponzi scheme criminal, presented evidence of same to a jury, and the jury returned a verdict that Equity Trust Company did assist in that breach of fiduciary duty. The court of appeals did not reverse the judgment because the evidence was insufficient or because there was some defense to the claim. Rather, it held that Texas does not have a claim specifically called “aiding and abetting.” Actually, the court completely disregarded the concept of knowing participation and did not discuss how it is different from aiding and abetting or why the factual findings by the jury could not support that recognized claim.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
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