FRAUDULENT CONVEYANCES Nassau Academy of Law CLE Live ...

302 B.R. 760 Page 12302 B.R. 760(Cite as: 302 B.R. 760)district court concluded that the management'sembezzlement of surplus funds raisedthrough artificially inflated stock sales wasnot a "reasonably foreseeable" result of theoverstated financial statements:It is arguably foreseeable, as a result of financialstatements overstating the financialcondition of a corporation, that securities issuedand sold by that corporation will commanda price higher than their true value,that purchasers will be injured as a resultand that the corporation will receive excessivefunds in consideration for the securities.However, it is certainly not a direct or reasonablyforeseeable result of such financialstatements that inside management will embezzlesuch surplus funds for their personaluse.Id. at 540. Whatever the merits of that conclusionin the context of publicly-tradedcorporation, it is of limited relevance in thiscase.*774 That State Street actually suspected the Spitzes'embezzlement--even before the D & B Reports confirmedthat Sharp was overstating its accounts receivable--isnot a matter a speculation. The complaintspecifically alleges that on November 6, 1998, Benninger,the loan workout specialist assisting in theinvestigation of Sharp pulled copies of Sharp checksthat had passed through State Street's demand depositaccount for the purpose of determining, inter alia,whether Sharp had made substantial payments to theSpitzes. See Compl. 45. Benninger made anothersuch inquiry, approximately two weeks later. See id.These allegations undercut the notion that State Streetmight only have suspected that Sharp was a failingbusiness. Of course, as discussed above, suspicionsof the Spitzes' fraud, without more, would at bestsupport an inference of constructive knowledge.However, State Street is alleged to have acquiredsufficient evidence of the Spitzes' fraud to bring itbeyond the realm of mere suspicion and surmise.In sum, contrary to the Bankruptcy Court's conclusion,Sharp has plead sufficient facts which if provencould lead a reasonable jury to infer that State Street,a sophisticated commercial bank, actually knew--atleast as of mid-November 1998--of a unitary fraud atSharp, consisting of the fraudulent reporting of thecompany's accounts receivable in order to raisemoney to fund the looting of the corporation by corruptmanagement.Participation[10][11][12][13] The "knowing participation" elementof the aiding and abetting claim requires morethan a defendant's knowledge of the primary violation.To state a claim, a plaintiff must allege someform of participation by the alleged aider and abetterin the primary wrongdoing. Broadly speaking, thecase law identifies two forms of actionable "participation."First, aiding and abetting liability can attachwhere a defendant provides substantial assistance tothe primary wrongdoer. "One provides substantialassistance if he affirmatively assists, helps conceal, orby virtue of failing to act when required to do so enablesa [breach of fiduciary duty] to proceed."Kolbeck, 939 F.Supp. at 247. In general, inaction--e.g., a failure to investigate or to alert third partiesabout another's misconduct--does not constitute substantialassistance, unless the defendant owes a specialduty directly to the plaintiff. "It is well settledthat without an independent duty to disclose, mereinaction does not amount to substantial assistance forpurposes of determining aider and abettor liability."Calcutti v. SBU, Inc., 273 F.Supp.2d 488, 494(S.D.N.Y.2003) (citing National Westminster BankUSA v. Weksel, 124 A.D.2d 144, 511 N.Y.S.2d 626(1st Dep't 1987)). The existence of the primary violator'sduty is not sufficient to hold a non-fiduciarysecondary actor liable for inaction on an aiding andabetting theory.[14] Second, even without directly assisting in thecommission of the underlying *775 wrong, a defendantmay still be liable as an aider and abetter for"inducing" or "encouraging" a fiduciary to breach hisduties to another. See Kaufman, 760 N.Y.S.2d at 169(holding that a claim for aiding and abetting a breachof fiduciary duty requires, inter alia, allegations thatthe defendant knowingly induced or participated inthe breach) (emphasis added); Wight v. BankamericaCorp., 219 F.3d 79, 91 (2d Cir.2000) (same); S & KSales Co. v. Nike, 816 F.2d 843, 849 (2d Cir.1987).The Restatement (Second) of Torts explains that"[a]dvice or encouragement to act," in instanceswhere "the act encouraged is known to be tortious[,]... has the same effect upon the liability of the advisoras participation or physical assistance." Restatement(Second) of Torts § 876, comment "d"; see also© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.