What is “Knowing Participation” by South Carolina Professionals?
November 14, 2017
The South Carolina Supreme Court recently clarified liability for aiding and abetting a breach of fiduciary duty. In Bennett v. Carter, 2017 WL 5163467, the Supreme Court reversed summary judgment on a claim against lawyers and accountants for aiding and abetting breach of fiduciary duty involving two trusts. Briefly, Mother was the sole lifetime beneficiary of two trusts created by her deceased husband. The residual beneficiaries of the two trusts were her sons and her daughters. The sons were also co-trustees of the two trusts from 1999 to 2006. During that time, the sons allegedly violated their fiduciary duties by unlawfully taking $5 million from the trusts.
Mother’s accounting firm and lawyer met with the two sons after discovering improper withdrawals in 2001. At this meeting, the accounting firm and lawyer advised the two sons of the impropriety of these transactions, and advised them to tell the other beneficiaries about their actions. Neither Mother’s attorney nor accounting firm had any discussions with the other beneficiaries about the finances of the trusts. Despite being advised to inform the other beneficiaries, the two sons did not tell them about the transactions until 2006.
In fact, after the meeting in 2001, the two sons continued to withdraw money from the trusts. Thereafter, the accounting firm began performing the bookkeeping for Mother and the trusts. The accounting firm possessed the trust checkbooks and wrote checks from the trusts for the two sons to sign. Allegedly, the accounting firm knew the sons continued to improperly withdraw money from the trusts after the 2001 meeting.
When Plaintiffs learned of the improper withdrawals, they sued the two sons, settling with one and obtaining a judgment against the other. Plaintiffs then initiated an action against the accounting firm and lawyer. The circuit granted defendants’ summary judgment based on the statute of limitations. The circuit court also ruled Plaintiffs had not presented sufficient evidence to withstand summary judgment on their claim for aiding and abetting a breach of fiduciary duty. The court of appeals reversed the circuit court, and defendants sought review by the Supreme Court, presenting two issues: (1) did the court of appeals err in holding Petitioners presented sufficient evidence to allow the aiding and abetting claim to survive summary judgment, and (2) did the aiding and abetting claim abate upon Mother’s death.
The Supreme Court began its analysis by reciting the elements for aiding and abetting a breach of fiduciary duty: (1) a breach of a fiduciary duty owed to the plaintiff; (2) the defendant’s knowing participation in the breach; and (3) damages. “The gravamen of the claim is the defendant’s knowing participation in the fiduciary’s breach.” In reviewing the court of appeals opinion, the Supreme Court addressed whether the defendants’ non-disclosure of the breach was evidence of “knowing participation.” While the Supreme Court did not cite it, the court of appeals in Gordon v. Busbee, 397 S.C. 119, 723 S.E.2d 822 (Ct. App. 2012) held “knowing participation” required actual knowledge by the professional. Also, the court of appeals in Vortex Sports & Entm't, Inc. v. Ware, 378 S.C. 197, 662 S.E.2d 444 (Ct. App. 2008), found that encouraging the fiduciary to breach his duty satisfied the “knowing participation” element.
Under the specific facts of the case, the Supreme Court found a failure to disclose did not show “knowing participation” by the accounting firm; the accounting firm was prohibited by 26 U.S.C. § 7216 from disclosing the improper withdrawals to plaintiffs. The Supreme Court also held the “related taxpayer” exception under 26 C.F.R. § 301.7216-2(b)(1)-(2) inapplicable. The Supreme Court also found that disclosure to Mother’s personal lawyer was disclosure to Mother, such that the accounting firm was not also required to notify Mother’s attorney-in-fact. Interestingly, the Court did not hold that non-disclosure could never be evidence of “knowing participation,” but that it was not evidence under these circumstances. In addition, whether the failure of Mother’s lawyer to disclose the improper withdrawals was “knowing participation” was not before the Court.
Regarding abatement of the claim due to Mother’s death, the Supreme Court referenced §15-5-90 of the South Carolina Code, which provides for survivability of claims following death. The Court then noted that fraud claims do not survive death. Ruling the claims against the accounting firm survived Mother’s death, the Court found the claims did not arise out of the sons’ alleged fraud against Mother, but rather the sons’ fraud against the surviving daughters as residuary beneficiaries of the trusts. As such, Mother’s death did not abate the daughters’ claims.
In this holding, the South Carolina Supreme Court has indicated (1) aiding and abetting fiduciary breach remains a viable cause of action, and (2) under certain circumstances, knowing participation must be more than simple failure to disclose the breach, and (3) death of one beneficiary does not abate fraud claims brought by surviving beneficiaries in their individual capacities.
Bruce Wallace practices with Nexsen Pruet’s business and consumer litigation group in Charleston. He represents a variety of banking and financial institutions in real estate litigation, commercial litigation, and mortgage foreclosures. He also represents insurers and corporate clients in bad faith and coverage issues, professional liability, business litigation (including disputes involving partnerships, limited liability companies, and closely held companies), and probate litigation matters (including trusts and estates).