The Expert Podcast

We've talked many times about third-party liability as a means to recover losses from a fraud or a judgment. What that means is that if you have a fraud, somebody scammed you out of money, there was a Ponzi scheme, or even if you have a lawsuit judgment, many times the collection of that recovery or debt is made difficult. This difficulty arises because the principal—the fraudster, the scammer, or the defendant—may have squandered or spent some of the money, or they may be hiding it.

Sometimes, the easier pathway is to use what's called third-party liability. A recent case from Pennsylvania provides a strong establishment of this concept. It has always been a legal theory and strategy that victims have used to recover money. From the Bernie Madoff case to the more recent FTX crypto fraud case, third parties have been targeted to recover debts owed by the principal. In this case, it not only confirms the validity of the legal theory but establishes it as case law. There is now official civil liability for aiding and abetting fraud.

This means businesses that are willfully blind could pay damages to victims, including punitive damages. "Willfully blind" doesn't mean they actively participated in the fraud. Many times, third parties weren't directly involved but did something accidental or negligent that allowed the fraud to happen. For example, a bank—such as Wells Fargo or Chase—might allow a fraudster to open an account and deposit stolen funds. If the bank was negligent in opening that account, like failing to get a copy of the ID, neglecting to file SAR (Suspicious Activity Reports), or not monitoring withdrawals properly, the bank can now be held liable.

It's important to note that we are not attorneys and are not providing legal advice. However, this legal theory has been used by many attorneys to recover losses for victims. The first step is identifying those third parties. This won't happen magically—it requires thorough investigation. Even if a third party genuinely didn’t know about the fraud but should have if they had asked the right questions, they could still be liable. These third parties often include accountants or sales companies that enable or extend the fraud. The key terms here are "enable the fraud" or "extend the fraud." If the loss was preventable through proper due diligence, the third party could be dragged into liability.

Many third parties have robust insurance, such as Errors and Omissions Insurance or Professional Liability Insurance. Once their insurance company learns of a potential claim, they may quickly offer a policy limit payout to resolve the matter. In the Pennsylvania case, the court concluded that turning a blind eye to fraudulent activity may support finding that a party aided and abetted the fraud. In some states, this is referred to as aiding and abetting, while others use terms like enabling or extending the fraud.

In one case, a newspaper ran advertisements for a Ponzi scheme, promoting it as an investment opportunity offering high returns. It was clear the scheme was fraudulent, and the newspaper was held liable for enabling the fraud to reach more people. Third parties could include employees, principals, or even other companies. This concept is also crucial for holding company principals accountable. If you sue a company and it goes out of business or dissolves without assets, the liability can extend to the principals if they were involved in or aware of the fraud.

Principals often don't leave money in the company—they use it to purchase cars, houses, boats, and other assets. Third-party liability can help trace and recover these funds. This legal strategy, while previously recommended, is now firmly established in case law, such as the recent Pennsylvania ruling. Other states are following suit.

The takeaway is this: if you have a loss, fraud, scam, embezzlement, or judgment, look for opportunities to involve third parties who may share liability. This can help you recover all or part of your judgment, especially if the principal is uncooperative, hiding money, or is judgment-proof. Even in the worst-case scenario, third parties might help you locate the principal’s assets, giving you another resource and opportunity to recover your money.