Pennsylvania Supreme Court Recognizes New Common-Law Cause Of Action: Aiding And Abetting Fraud
By: Carl L. Engel
On January 19, 2023, the Pennsylvania Supreme Court, in the case Marion v. Bryn Mawr Trust Company, endorsed a new common-law cause of action for aiding and abetting fraud. Although appellate courts in the Commonwealth had recognized the action in several past cases, this is the first time that it has been recognized by the Commonwealth’s highest court. Under the new rule, a professional can be held liable for assisting a client with the perpetration of a fraud, as long as the professional has actual knowledge of the fraud. To avoid liability, professionals who discover that a client is engaged in fraudulent activity should terminate the relationship and report the fraud immediately.
In 1997, Robert Bentley opened deposit and wire-transfer accounts with the Bryn Mawr Trust Company. In 2001, the SEC commenced an enforcement action against Mr. Bentley because he was operating a Ponzi scheme, and the federal court appointed a receiver for the recovered funds. In 2004, the receiver filed a lawsuit in Pennsylvania state court against Bryn Mawr Trust, bringing several claims related to the Ponzi scheme, including a claim for aiding and abetting fraud.
In 2014, the trial court dismissed the claim for aiding and abetting fraud, noting that “Pennsylvania appellate courts have not expressly recognized aiding and abetting fraud as a cause of action under Pennsylvania law.” Bryn Mawr Trust won at trial on the remaining claims, and the receiver appealed.
On appeal, the Superior Court ruled that the trial court erred when it dismissed the claim for aiding and abetting fraud. The Superior Court acknowledged that the Pennsylvania Supreme Court had not expressly recognized this claim, but that the Superior Court has nevertheless allowed plaintiffs to bring it in the past. In those decisions, the Superior Court had relied on a body of law which found liability against defendants who, while not negligent themselves, had participated in another person’s negligent conduct. The Superior Court reasoned that there was no reason for a different rule in cases of fraud, and ruled that a defendant could be found liable for aiding and abetting fraud. Moreover, the Superior Court held that a defendant could be held liable where they actually knew about the fraud, but also in cases where they “exhibited intentional ignorance” of the wrongdoer’s misconduct or “should have known” about it. The Superior Court ordered a new trial on the claim for aiding and abetting fraud, and Bryn Mawr Trust appealed to the Pennsylvania Supreme Court.
On January 19, 2023, the Pennsylvania Supreme Court expressly recognized the tort of aiding and abetting fraud for the first time. The Supreme Court identified several reasons for its decision: (i) It had implied in prior opinions that it would recognize the cause of action once it was presented with a case that gave it the opportunity to do so; (ii) the Superior Court has recognized the cause of action in several cases; (iii) several federal courts have construed Pennsylvania law as recognizing a claim for aiding and abetting fraud; (iv) several other states, including New York and New Jersey, also recognize the cause of action; and, perhaps most importantly, (v) allowing the cause of action would dissuade third-party actors, such as bankers, lawyers, and accountants, from turning a blind eye to their clients’ fraudulent schemes, and would provide another source of compensation for the victims.
However, even though the Pennsylvania Supreme Court affirmed the Superior Court’s decision to recognize a cause of action for aiding and abetting fraud, it disagreed with its finding that a defendant is liable if they “should have known” about the underlying fraud, or were “intentionally ignorant” of it. Instead, the Supreme Court ruled that there is liability only if the defendant “actually knew” about the fraud. The Supreme Court then remanded the case for a new trial on the aiding and abetting fraud claim, with a rule that Bryn Mawr Trust can only be liable if it actually knew about Mr. Bentley’s Ponzi scheme.
The Supreme Court’s decision provides important guidance for professionals who regularly work with transactional clients that have the potential to be engaged in fraudulent activity. The court has confirmed that any such professional who assists in the fraud will be liable to the fraud victims just the same as the primary wrongdoer. However, there will only be liability if the professional actually knows about the fraud; there is not a requirement that the professional investigate to uncover all frauds that they “should know” about. Accordingly, a professional who discovers that a client is engaged in fraud would be wise to terminate the relationship and report the fraud immediately.