In Milligan v. Salamone, the Greenberg Taurig lawfirm represented the bankrupt company when it sued a president and board member. No. 1:18-CV-327-RP, 2019 U.S. Dist. LEXIS 41009 (W.D. Tex. March 14, 2019). Greenberg drafted an agreement that would cancel the president’s employment contract, release him from his non-competition and non-solicitation obligations, and promise to pay him any accrued obligations (the “Cancellation Agreement”). A bankruptcy trustee later asserted claims against Greenberg for (1) breach of fiduciary duty, (2) aiding and abetting breaches of fiduciary duty, and (3) malpractice and negligence arising from its preparation of the Cancellation Agreement. Greenberg filed a motion to dismiss, which the bankruptcy court granted, and the trustee appealed to the district court.
The district court affirmed the dismissal of the direct breach of fiduciary duty claims because, although the trustee alleged a conflict of interest, there were no allegations that Greenberg represented the company and the president in his individual capacity at the same time. The court affirmed the dismissal of the professional negligence claim because the trustee did not allege sufficient allegations of proximate cause.
The court then turned to the aiding and abetting breach of fiduciary duty allegations. The district court reversed the bankruptcy court’s dismissal of that claim. Regarding the legal basis for an aiding and abetting claim, the court stated:
The Texas Supreme Court “has not expressly decided whether Texas recognizes a cause of action for aiding and abetting.” However, Texas appellate courts have repeatedly held that “a party who knowingly participates in another’s breach of fiduciary duty may be liable for the breach as a joint tortfeasor.” “To establish a claim for knowing participation in a breach of fiduciary duty, a plaintiff must assert: (1) the existence of a fiduciary relationship; (2) that the third party knew of the fiduciary relationship; and (3) that the third party was aware that it was participating in the breach of that fiduciary relationship.” It is the final requirement—Greenberg’s knowledge that it was participating in a breach of fiduciary duty—that is before the Court now.
The trustee alleged that the president and the other board member created the Cancellation Agreement to allow them to compete with, and thereby destroy, the company. The court held that: “To have known that it was participating in Halder and Salamone’s breach of fiduciary duty, Greenberg would have to have known that their actions were fraudulent, taken in bad faith, or constituted self-dealing.” Id. The trustee alleged that Greenberg aligned with the president and board member during the board-control fight and drafted the agreement on its own initiative when it became clear that the company would not renew the president’s contract. The bankruptcy court determined from these allegations that Greenberg did not plausibly know enough to participate in the directors’ breaches of duty. The district court disagreed:
Milligan has still plausibly alleged Greenberg’s knowledge that the agreement was a violation of Salamone and Halder’s fiduciary duties. Taking Milligan’s other allegations as true, a factfinder could infer that Greenberg knew the Cancellation Agreement was not in Westech’s interest, and therefore that in drafting the agreement, Greenberg was helping Halder self-deal on his way out of the company. As the Bankruptcy Court found, Greenberg could plausibly have known that Westech was not in breach of its obligations to Halder under Halder’s employment contract, and that therefore the company would have owed Halder substantially less money if it had simply not renewed his contract. Greenberg would then have known that Westech was receiving nothing in exchange for releasing Halder from his restrictive covenants. Considered in context—the control battle, Salamone and Halder’s alignment on the board, Halder’s imminent contract expiration—a factfinder could infer that Greenberg knew that the Cancellation Agreement was a sweetheart deal for Halder. That Greenberg allegedly drafted the agreement on its own accord suggests that it was conscious of the reasons behind the agreement’s structure. Greenberg’s motion to dismiss Milligan’s aiding-and-abetting claim—perhaps better characterized as a knowing-participation claim under Texas law—is therefore denied. The Bankruptcy Court’s order is vacated as it pertains to that claim.