Continental Industries Group, Inc. v. Ustuntas: Revisiting Aiding and Abetting Breach of Fiduciary Duty Claims


Aiding and abetting breach of fiduciary duty claims are litigated frequently, and this blog has addressed them here and here.  The Appellate Division, First Department, recently opined on aiding-and-abetting liability in Cont. Indus. Group, Inc. v. Ustuntas, 211 A.D.3d 601 (1st Dep’t 2022).  As the court’s decision shows, aiding-and-abetting claims are readily susceptible to dismissal, so it is crucial for plaintiffs to allege every required element.   

An aiding-and-abetting claim has three elements:  (1) someone with fiduciary obligations to someone else breaches those obligations; (2) the defendant—i.e., the “aiding-and-abetting” party—knowingly induces or participates in the breach; and (3) the plaintiff suffers damages as a result of the breach.  See Kaufman v. Cohen, 307 A.D.2d 113, 125 (1st Dep’t 2003). 

But aiding-and-abetting claims present an additional trap for the unwary.  In pleading Element 2 above (knowing inducement or knowing participation), a plaintiff must allege that the defendant had actual knowledge of the fiduciary’s breach.  Simply alleging that the plaintiff knew or should have known about the breach will not suffice.  As the court in Kaufman v. Cohen opined: 

Although a plaintiff is not required to allege that the aider and abettor had an intent to harm, there must be an allegation that such defendant had actual knowledge of the breach of duty. Constructive knowledge of the breach of fiduciary duty by another is legally insufficient to impose aiding and abetting liability.

307 A.D.2d at 125 (emphasis added).

The First Department revisited this principle in the Ustuntas case, which this blog recently discussed in a different context here.  Continental Industries Group (“CIG”), the plaintiff in this dispute, was a New York-based company engaged in the international trade of commodities such as chemicals and resins.  Hakan Ustuntas, the defendant, worked for CIG.  While in CIG’s employ, Ustuntas became a shareholder of two additional entities:  Plasmar, one of CIG’s customers, and Marchem, Plasmar’s “sister company.”  Subsequently, Ustuntas retired from CIG.

Thereafter, CIG sued Ustuntas alleging breach of fiduciary duty.  CIG’s core allegations were that Ustuntas took CIG’s confidential and proprietary information, including CIG’s supplier and customer information, and used that information for his benefit and for the benefit of Plasmar and Marchem.  CIG argued that Plasmar and Marchem recruited Ustuntas for this very purpose, and to poach other CIG employees.

CIG also asserted an aiding-and-abetting claim against the two entities, Plasmar and Marchem.  CIG’s theory was superficially clever but ultimately unsuccessful.  CIG alleged that knowledge of Ustuntas’s breach of his fiduciary duties should be imputed to Plasmar and Marchem because Plasmar and Marchem were the alter egos of Ustuntas. 

The court rejected this theory, however, because CIG failed to plead enough facts to support it—including the crucial fact of actual as opposed to merely constructive knowledge of Ustuntas’s breach:

The court correctly dismissed plaintiff’s claim that Plasmar and Marchem aided and abetted Ustuntas’s breaches of fiduciary duty. The complaint fails to allege an essential element of the claim, namely, that Plasmar and Marchem had actual knowledge of Ustuntas’s breach. Plaintiff contends that knowledge should be imputed to Plasmar and Marchem because Plasmar is Ustuntas’s alter ego and Marchem is the alter ego of, among others, Ustuntas. However, the complaint contains no factual allegations to back up these conclusory legal assertions. Ustuntas’s beneficial interest in these entities establishes, at most, their constructive knowledge of his breach of fiduciary duty, which is insufficient to support an aiding and abetting claim.

Ustuntas, at 603-03.

In other words, just because Ustuntas owned shares of stock in Plasmar and Marchem did not suffice to impute actual knowledge of Ustuntas’s breaches to these entities.  Pleading actual knowledge of Ustuntas’s breach was necessary for CIG’s aiding-and-abetting claim against Plasmar and Marchem to survive dismissal.

This case reiterates the high pleading threshold that plaintiffs must overcome who seek to impose aiding-and-abetting fiduciary-duty liability on defendants.