Internal Affairs Doctrine Leads To Dismissal Of An Aiding And Abetting A Breach Of Fiduciary Duty Claim By NC Business Court
A lot of North Carolina court decisions have questioned whether a claim for "aiding and abetting a breach of fiduciary duty" can be made in North Carolina (many of them are cited in ¶16 of the Islet Sciences Opinion referenced below). Most of those decisions have cast doubt on whether that claim is recognized at all in North Carolina, including several in the Business Court. But no Business Court Judge has been willing to dismiss an aiding and abetting breach of fiduciary duty claim on the basis that it is not a valid claim in North Carolina
So parties keep asserting that questionable claim. I wish they'd quit. It's a dead end.
Business Court Judge McGuire dismissed such a claim earlier this month in an Opinion in Islet Sciences, Inc. v. Brighthaven Ventures, LLC, 2017 NCBC 5. The individual Defendants, Green and Wilkinson, had been officers and directors of the Plaintiff and therefore owed it a fiduciary duty. They were also the owners of the Defendant Brighthaven, whose merger discussions with the Plaintiff had fallen through. The Plaintiff alleged in support of its claim that Brighthaven had provided "substantial assistance to Green and Wilkinson in breaching [their] fiduciary duties" and had therefore aided and abetted those breaches. Op. ¶15.
The Internal Affairs Doctrine
The Plaintiff, a Nevada corporation, argued that the law of Nevada -- which recognizes an aiding and abetting breach of fiduciary duty claim -- should control and that Defendant Brighthaven's Motion to Dismiss should be denied. The argument for the application of Nevada law was premised on the internal affairs doctrine.
Maybe you don't remember the internal affairs doctrine. The NC Court of Appeals has defined it as:
a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands.
Op. ¶18 (quoting Bluebird Corp. v. Aubin, 188 N.C. App. 671, 680, 657 S.E.2d 55, 63).
It wasn't difficult for Judge McGuire to shoot down the internal affairs argument, given that the corporate Defendant was an outsider to the Plaintiff, not one of its officers or directors. He held that:
While a standard of fiduciary responsibility expected of officers and directors of a corporation generally should be the subject of uniform regulation by the state of incorporation, the same concerns do not necessarily apply to the conduct of third-party corporate outsiders that may lead to tort liability for aiding and abetting. Such third party conduct does not implicate the standard to which a director or officer should be held; that standard is best left to determination by the state of incorporation.
Op.. ¶22 (emphasis added).
The Pleading Standard For A Non-Existent Claim
After determining that North Carolina law controlled the question of the validity of the aiding and abetting claim, Judge McGuire held the Plaintiff to a heightened pleading standard. He said that pleading such a claim (even if it doesn't exist) requires "facts supporting an allegation of “substantial assistance by the aider and abettor in the achievement of the primary violation.'” Conclusory facts like those alleged by the Plaintiff -- that the abettor “was aware of [the fiduciary's] . . . acts and rendered substantial assistance” -- didn't suffice. Op. ¶27. The claim was therefore dismissed.
The need for factual specificity in an aiding and abetting claim comes from an NC Court of Appeals decision cited by Judge McGuire (Op. ¶27): Bottom v. Bailey, 238 N.C. App. 202, 767 S.E.2d 883 (2014). The Bottom case, which relies on another appellate decision, says that:
the tort of aiding and abetting a breach of fiduciary duty, according to Blow [v. Shaughnessy, 88 N.C. App. 484, 364 S.E.2d 444 (1988)], requires “(1) the existence of a securities law violation by the primary party; (2) knowledge of the violation on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in the achievement of the primary violation.”
Despite its articulation of that standard, the Bottom decision was unsparing in its assessment that an aiding and abetting breach of fiduciary duty claim cannot be made in North Carolina. It said:
The court finds that no such cause of action exists in North Carolina. It is undisputed that the Supreme Court of North Carolina has never recognized such a cause of action. The only North Carolina Court of Appeals decision recognizing such a claim, Blow v. Shaughnessy, 88 N.C. App. 484, 489, 364 S.E.2d 444, 447–48 (1988), involved allegations of securities fraud, and its underlying rationale was eliminated by the United States Supreme Court in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994).
238 N.C. App. 202, 211.
The Business Court has often dismissed fiduciary duty/aiding and abetting claims. Like in Tong v. Dunn, 2012 NCBC 16, Regions Bank v. Regional Property Development Corp., 2008 NCBC 8, Battleground Veterinary Hospital, P.C. v. McGeough, 2007 NCBC 33; and Sompo Japan Insurance Inc. v. Deloitte & Touche, LLP, 2005 NCBC 2.
But the Business Court has never dismissed that type of claim on the basis that it is not recognized in North Carolina. It is inevitable that that is going to happen, but until then, the Court will find another way to dismiss those claims. Don't waste your time making that claim.