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Is a Breach of Fiduciary Duty Action Triable by Jury? Gist depends.

Is a Breach of Fiduciary Duty Action Triable by Jury? Gist depends.
Photo by Colin Lloyd / Unsplash

The California constitution guarantees the right to a jury trial for litigants in civil proceedings. But it is limited to the right as it existed at common law in 1850, the year in which the California Constitution was adopted; it is not a guaranteed right that applies to all civil proceedings. It is limited to actions at law, and does not apply for claims brought in equity. Thus, understanding what claims are legal and which are equitable is an important issue in litigation and not always clear cut.

For example, breach of fiduciary duty claims can be both legal and equitable depending on the “gist of the action.” See Interactive Multimedia Artists v. Superior Court (1998) 62 Cal. App. 4th 1546, 1554 (“That classification depends on the ‘gist of the action.’”) (“IMA”). Although this language may seem nebulous at first glance, what it really signifies is that California courts will not apply a rigid or formalistic approach to answering this question but will instead turn to a fact-intensive analysis to assess the true nature of the claim. As the Court of Appeals wrote in Central Laborers’ Pension Fund v. McAfee, Inc. (2017) 17 Cal. App. 5th 292, “the court is not bound by the form of the action but rather by the nature of the rights involved and the facts of the particular case – the gist of the action.”

The plaintiff in IMA was a minority shareholder, who sued the majority shareholders and certain directors for breach of fiduciary duty. It alleged the defendants merged the company into a new company and gave it an amount less than the fair value of its original interest. The IMA Court determined that the fiduciary duty of a controlling shareholder or director to a minority shareholder is based on the powers of trust that are subject to equitable limitations, requiring various considerations to reach a just result. Therefore, it concluded the gist of the breach of fiduciary action there was equitable, and the plaintiff was not entitled to a jury trial.

However in August of this year, the Court, in ZF Micro Solutions, Inc. v. TAT Capital Partners, Ltd. (2022) 82 Cal.App.5th 992 (“ZF”), reversed a trial court’s decision that a breach of fiduciary duty claim was equitable and vacated the judgment the trial court entered in favor of the defendant.

There, ZF Micro, a corporation, sued TAT, one of the directors, for alleged disparagement of ZF Micro’s management team that undermined the company, causing it to lose an opportunity to obtain needed funding.

The ZF Court distinguished these facts from other breach of fiduciary duty cases, which implicated either the fiduciary duties owed by a corporate director to the company’s minority shareholders or the fiduciary duties owed by majority shareholders to minority shareholders. In those cases, the remedies were “unquestionably equitable.” And the ZF Court observed that “it’s equity’s special province to come to the aid of the vulnerable, such as shareholders without control over the workings of a corporation in which they have invested who are in danger of being victimized by those in control.”

But, in ZF, “the allegedly breached duty is the one that the director owes to the corporation itself.” And such a duty, even though formally codified in the state’s Corporations Code, “existed in the common law long before codification.” The gist of the action, the ZF Court concluded was one that would clearly have been tried by a court of law, because the essential facts of the case, namely that TAT “disparaged the corporation’s management and undermined them to such an extent and so widely that potential sources of funding were scared off” sounded fundamentally like the sort of tort claim (e.g., trade libel or tortious interference) that would have commonly been tried in a court of law, not equity. These type of tort claims are “unquestionably matters for decision by a jury.” Thus, the Court ruled in favor of ZF Micro’s right to trial by jury and reversed the trial court.

Here are three practical takeaways from ZF decision:

  1. The Court attached great significance to the fact that this was not a shareholder derivative suit, in which aggrieved shareholders sued a board member or director for some form of misconduct or misappropriation, but rather a claim brought directly by the corporation itself against one of its directors, for a breach of a duty owed directly by that director to the corporation.  In fact, in IMA and Central Laborers’ Pension Fund, the Court reasoned that there was no right to a trial by jury precisely because the claims at issue were shareholder derivative claims
  2. Even though the type of relief being requested will not be completely dispositive of the outcome, the remedy being sought is relevant and will be weighed as one of the factors in the court’s decision-making. As the court noted, “[i]n this case, there is but one cause of action – for breach of fiduciary duty – and the remedy requested is exclusively monetary damages. ZF Micro Solutions requests nothing in the way of equitable relief.” (emphasis added). Thus, litigants hoping for a jury trial certainly strengthen their hand if they seek solely monetary relief, but on the other hand, they should not presume that not seeking equitable relief will guarantee them a jury trial either. See, e.g., IMA (denying right to jury trial, even though plaintiff sought only money damages); Central Laborers’ Pension Fund above (“The fact that damages is one of a full range of possible remedies does not guarantee … the right to a jury.”)
  3. Although the ZF Court did not explicitly state this, litigants who wish to preserve their right to a jury trial should pay close attention to the types of theories or legal arguments upon which they base their claims. Certainly, the litigants in the shareholder derivative claims discussed above, who were denied a jury trial, presented claims that invoked equitable concepts such as constructive trust, recission, disgorgement of ill-gotten gains, and the “entire fairness” doctrine, among others, so it was natural that their claims would be viewed as equitable in nature. (To give an extreme example, even a seemingly run-of-the-mill breach of contract case that required the application of the doctrine of promissory estoppel was found to be an equitable claim for which the parties did not have the right to a jury trial. Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819). In short, when faced with the task of determining whether the claim in question is legal or equitable, the courts are instructed to dig deeply into the particular facts of the case and to apply a “substance over form” analysis. Accordingly, when drafting complaints beware that the specific legal theories and facts will determine the “gist of the action.”