Filed 1/6/99
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
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CITY OF ATASCADERO et al., Plaintiffs and Appellants, v. MERRILL LYNCH. PIERCE, FENNER & SMITH, INC., et al., Defendants and Respondents. |
A078340
(Contra Costa County Super. Ct. No. C96-00718) ORDER MODIFYING OPINION AND DENYING REHEARING; CERTIFIED FOR PUBLICATION (NO CHANGE IN JUDGMENT)
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THE COURT:
It is ordered that the opinion filed herein on December 7, 1998, be modified in the following particulars:
1. On page 2, line 1, the word "directly" is deleted and the word "direct" is to be inserted between the words "on" and "claims" so that the entire sentence is modified to read as follows:
Appellants opted not to waive or release their rights to proceed on direct claims against the County and third parties.
2. On page 16, the first full paragraph is deleted and the following paragraph is inserted in its place:
Respondents overlook the important exceptions to the general rule on which they rely. Thus, it is well established that where a trustee has committed a breach of trust, the trust beneficiaries may prosecute an action against third persons who, for their own financial gain or advantage, induced the trustee to commit the breach of trust; actively participated with, aided or abetted the trustee in that breach; or received and retained trust property from the trustee in knowing breach of trust. (Saks v. Damon Raike & Co., supra, 7 Cal.App.4th at pp. 427-428 ["The beneficiary may also sue third persons who directly participated with the trustee in breaches of trust"]; Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1101-1110; Rest.2d Trusts, §§ 291-295, 326, pp. 57-73, 124-125; 4 Scott on Trusts, supra, §§ 282, 291, 294.1, pp. 27-28, 77-87, 98-101; Bogert on Trusts, supra, §§ 868-869, 901, pp. 103-123, 304-320; 11 Witkin, Summary of Cal. Law, Trusts, supra, § 164, p. 1017.) Appellants allege causes of action in their second amended complaint against Merrill Lynch as beneficiaries of the trust Pool pursuing their own direct claims against a third party who actively participated in the breach of trust of the County and its former treasurer, Citron. There is ample appellate precedent and scholarly authority for such a suit by trust beneficiaries where the third party has reaped financial advantages by participating in a trustee’s breach of fiduciary duty, as Merrill Lynch is alleged to have done here.
3. On page 17, the first full paragraph is deleted and the following two paragraphs are inserted in its place:
At common law, the beneficiaries of a trust could also sue third parties who participated with a trustee in such a breach of the trustee’s duties. Thus, as set forth in the Restatement, a beneficiary could bring a direct action to compel a third party either to restore trust property that had been transferred by the trustee with notice to the third party of the breach of trust, or to pay the value of such trust property if the third party had disposed of it. (Rest.2d Trusts, §§ 291-295, pp. 57-73.) In addition, "[a] third person who, although not a transferee of trust property, has notice that the trustee is committing a breach of trust and participates therein is liable to the beneficiary for any loss caused by the breach of trust." (Rest.2d Trusts, § 326, p. 124.) Significantly, the comments to section 326 of the Restatement of Trusts apply this principle to the precise factual situation at issue in this case, in noting that where a trustee purchases speculative securities through a stockbroker who has knowledge that it is a breach of trust for the trustee to purchase such securities, "the broker is liable for participation in the breach of trust." (Rest.2d Trusts, § 326, com. a, p. 124.)
Under California law, the right to sue a third party for participating in a fiduciary’s breach of trust is limited to situations in which the third party was acting for personal gain or in furtherance of his or her own financial advantage. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106, citing Doctors’ Co. v. Superior Court (1989) 49 Cal.3d 39, 46-48 [Doctors’ Co.].) The basic principle remains the same in this State as under the common law, however. As long as the third parties were acting to further their own individual economic interests, they may be liable for actively participating in a fiduciary’s breach of his or her trust. By extension, therefore, trust beneficiaries may sue third parties who participated with a trustee in alleged breaches of trust, as long as the third parties’ participation was both active and for the purpose of advancing their own interests or financial advantage. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106 [trust beneficiaries may sue third parties who actively participated with trustee in breaches of trust for third parties’ own personal gain].)
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As a general rule, a cause of action for civil conspiracy will not arise if the alleged coconspirator, even though a participant in some agreement underlying the injury, was not personally bound by any duty violated by the wrongdoing. (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-514 [Applied Equipment]; Doctors’ Co, supra, 49 Cal.3d at p. 44.) Recently, a division of the Second District Court of Appeal held in Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571 (Kidron) that a party not in a fiduciary relationship with the plaintiff cannot be held liable for conspiracy to breach a duty owed only by a fiduciary. For this conclusion, Kidron specifically relied on the Supreme Court’s holding in Applied Equipment that because civil conspiracy is not an independent tort, it cannot create a duty or abrogate an immunity. (Applied Equipment, supra, 7 Cal.4th at pp. 510-514; Kidron, supra, 40 Cal.App.4th at pp. 1597-1598.)In our opinion, the cited opinions are not in conflict with the common law principle affirmed in Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106. Generally it is true, as Kidron states, that there is no cause of action for civil conspiracy against agents, employees or other persons not personally bound by the duty allegedly violated by the wrongdoing of the party which did have that duty. However, the Supreme Court made clear in Doctors’ Co. that there is an exception to this general principle applicable when the agents, employees or other third parties are acting for their own individual advantage in conspiring or participating in the tortious acts of the party with the principal duty. (Doctors’ Co., supra, 49 Cal.3d at pp. 44-47.) It was on this exception to the general rule that Pierce v. Lyman based its holding that third parties may be held liable for actively participating in a fiduciary’s breach of trust, if the third parties were acting in furtherance of their own individual advantage or financial gain. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1104-1105.) To the extent Kidron does not acknowledge this exception and purports to establish an absolute rule barring any cause of action against a nonfiduciary for aiding and abetting a breach of fiduciary duty even where the nonfiduciary was acting for his or her own individual advantage, we respectfully disagree with the opinion in that case. (Doctors’ Co, supra, 49 Cal.3d at pp. 46-47; Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1104-1106.)
Footnote 14 will require renumbering of all subsequent footnotes in the opinion.
4. On page 21, the first full paragraph is deleted and the following paragraph is inserted in its place:
In short, trust beneficiaries may bring suit on their direct claims against third persons who have actively participated with a trustee in a breach of trust for their own financial advantage, whether by inducing, aiding or abetting the trustee’s breach of duty, or by receiving trust property from the trustee in knowing breach of trust. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106.) Ordinarily, when a third party acts to further his or her own economic interests by participating with a trustee in such a breach of trust, the beneficiary will bring suit against both the trustee and the third party. However, it is not necessary to join the trustee in the suit, because "primarily it is the beneficiaries who are wronged and who are entitled to sue. . . ." (4 Scott on Trusts, supra, § 282, p. 28) The liability of the third party is to the beneficiaries, rather than to the trustee, "and the right of the beneficiaries against the [third party] is a direct right and not one that is derivative through the trustee." (Id. § 294.1, pp. 99-100, italics added.)
5. On page 28, on lines 6 and 7 of footnote 25, the words "To the contrary" are changed to the word "Instead" so that the entire sentence is modified to read as follows:
Instead, it underscores the fact that the County’s central allegation in its own complaint against Merrill Lynch was that it was suing Merrill Lynch as the assignee of the claims of the Option A Pool Participants.
6. On page 29, on the last line of footnote 25, the word "direct" is to be inserted between the words "their" and "claims" and the word "directly" at the end of the sentence is deleted so that the entire sentence is modified to read as follows:
To the contrary, the bankruptcy court has included in its orders and bankruptcy plan the agreements between the County and appellants recognizing appellants’ right to pursue their direct claims against third parties.
7. On page 39, the first full paragraph is deleted and the following paragraph is inserted in its place:
Each of the causes of action of appellants’ second amended complaint is based on factual allegations in the complaint to the effect that Merrill Lynch, with the purpose and intent of advancing its own financial interests, actively participated with the County in designing and implementing an investment strategy for the Pool, and then made a variety of misrepresentations through its affirmative public statements, actions and nondisclosures in order to induce appellants to deposit their funds in the Pool and keep them there despite growing concerns about the safety of the Pool’s investment policies. The misrepresentations alleged were to the effect that the investment strategies employed by the County and Merrill Lynch on behalf of the Pool were prudent, sound, and well calculated to minimize volatility, to protect principal, and to provide liquidity. These representations were in fact false, in that the investment strategy designed and promoted by Merrill Lynch for the County Pool actually placed appellants’ funds at a high degree of risk, failed to provide liquidity, and resulted in extremely volatile returns. Respondents made these misrepresentations in written prospectuses and reports, as well as in oral statements to appellants and to the general public. In addition, Merrill Lynch failed to disclose information to appellants that would have put them on notice of the extent of the risk they undertook by investing their funds in the Pool. Merrill Lynch made all these misrepresentations and failures to disclose in order to further its own economic interests. Based on these factual allegations, which we must treat as admitted for purposes of this appeal, we conclude that appellants have properly stated the alleged causes of action against respondents.
7. On page 41, commencing on line 24, the second full paragraph is deleted and the following paragraph is inserted in its place:
Next, the second amended complaint alleges causes of action against respondents both for breach of fiduciary duty, and for aiding and abetting a breach of fiduciary duty (fourth and fifth causes of action). As seen, beneficiaries of a trust may sue third parties who, in order to advance their own financial advantage, have actively participated with a trustee in breach of the trustee’s duty to the trust. (Saks v. Damon Raike & Co., supra, 7 Cal.App.4th at p. 428; Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106.) Specifically, securities brokers who have assisted a fiduciary or a trustee in speculating with trust funds and deceiving the beneficiaries of an investment trust as to the financial stability of the trust are directly liable to the beneficiaries themselves both for breach of the brokers’ fiduciary duties, and for aiding and abetting the trustee’s breach in order to further the brokers’ own economic interests. (Duffy v. Cavalier (1989) 215 Cal.App.3d 1517, 1533; Rest.2d Trusts, § 326, pp. 124-125; 4 Scott on Trusts, supra, § 326.2, pp. 296-298; Bogert on Trusts, supra, § 901, pp. 315-318; cf. Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106.)
8. On page 45, commencing on line 20, the second full paragraph is deleted and the following paragraph is inserted in its place:
We conclude that pursuant to their agreements and stipulations with the County, appellants retained their inherent rights as trust beneficiaries to litigate their direct claims against third parties, such as Merrill Lynch, accused of having actively participated with the trustee in breaches of trust and fiduciary duty. Because the County is proceeding against Merrill Lynch as a debtor in bankruptcy on behalf of itself and as the assignee of the Option A Pool Participants, the County’s claims against respondents do not conflict or overlap the direct claims of appellants in this action. The instant action is brought pursuant to the bankruptcy court’s own orders approving the CSA and the Stipulation, both of which specifically authorize appellants’ pursuit of their direct claims against Merrill Lynch such as those alleged here. Appellants have sufficiently alleged causes of action for breaches of duties and liability damages owed directly to them by respondents. The trial court therefore erred in sustaining respondents’ demurrer to the second amended complaint without leave to amend.
There is no change in the judgment.
Respondents’ joint petition for rehearing is denied.
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