United States District Court, D. Delaware
JOHN L. PALMER
KENNETH REALI, et al.
liquidating trustee for a bankrupt entity requesting a jury
trial for breach of fiduciary duty claims against the
entity's former officers must demonstrate he seeks
predominantly legal, as opposed to equitable, remedies to
retain his requested jury. When the fiduciary duty recovery
is sought through a declaratory judgment confirming the
officers' breach, disgorgement of their illegal gains and
money damages for losses to the debtor entity recoverable by
the trustee, we must scrutinize the pleadings to find whether
the trustee for the debtor entity seeks recovery for future
harm or a judgment, and an award of damages, based on past
conduct which can be remedied by damages notwithstanding the
entity's funds retained by the former officers. After
scrutiny, we enter the accompanying Order denying the former
officers' motion to strike the trustee's jury demand
after finding the plead claims principally focus on past
misconduct resulting in a loss to the debtor entity. We
further find the trustee's legal remedies, if successful,
will augment the debtor entity's bankruptcy estate rather
than adjust the claims process in its bankruptcy and thus the
entity's bankruptcy filing does not waive the
trustee's right to a jury trial.
Palmer, Liquidation Trustee for Baxano Liquidation Trust,
sued Baxano's former officers Kenneth Reali and Joseph P.
Slattery for breaching fiduciary duties of loyalty and care
through unreasonable projections of Baxano's financial
growth with reckless indifference to their knowledge of
Baxano's actual financial condition. The Trustee
alleges Messrs. Reali's and Slattery's unreasonable
projections caused Baxano to file bankruptcy; caused Baxano to
pay "grossly excessive" "lucrative
compensation packages" compared to Baxano's actual
financial state and projected growth; and, caused Baxano to
pay excessive compensation increases when they were aware of
Baxano's true financial prospects.
Trustee asks for a judgment: (1) declaring Messrs. Reali and
Slattery breached their fiduciary duty to Baxano; (2)
awarding the Liquidation Trust "damages caused by"
their "conduct in an amount proven at trial"; (3)
disgorging their cash bonuses and retention payments earned
while serving as Baxano officers; (4) awarding costs and
reasonable attorneys' fees; and, (5) granting further
relief we deem appropriate. The Trustee demands a jury trial
"for all questions of fact" under Fed.R.Civ.P.
Reali and Slattery move to strike the Trustee's jury
demand because the breach of fiduciary duty claims are
equitable and do not carry a Seventh Amendment right to jury.
They also argue, even if we find the claims are legal, there
is still no right to a jury because Baxano's legal claims
converted to equitable claims as "related to the claims
allowance process in bankruptcy."
"scrutinize with the upmost care" this attempt to
strike the Trustee's jury demand. If the Trustee's
claims implicate both legal and equitable claims, "facts
common to the claims must be adjudicated by a jury, even if
the legal claims are characterized as incidental to the
Seventh Amendment protects the right to a jury trial
"[i]n Suits at common law." The Supreme Court held
the Seventh Amendment preserves an individual's right to
a jury trial in 1791. The Court interprets "Suits at common
law" to mean "suits in which legal rights
were to be ascertained and determined" unlike suits with
only equitable claims and remedies. We use federal law to
determine whether the Trustee's claims are legal or
equitable even though our subject matter jurisdiction is
based on diversity and we apply Delaware substantive
balance two inquiries in determining whether the
Trustee's breach of fiduciary duty claim is entitled to a
jury trial under the Seventh Amendment: (1) we compare his
claims to "18th-century actions brought in the courts of
England prior to the merger of the courts of law and
equity"; and (2) we examine the nature of his requested
remedies to determine whether they are legal or
equitable. The Supreme Court instructed our second
inquiry is more important than the first in deciding if there
is a Seventh Amendment right to a jury.
Breach of fiduciary duty claims are historically brought in
Trustee alleges Messrs. Reali and Slattery breached fiduciary
duties of loyalty and care. "Actions for breach of
fiduciary duty, historically speaking, are almost uniformly
actions 'in equity'-carrying with them no right to
trial by jury." The Trustee's claim for breach of
fiduciary duty is historically a claim in equity and weighs
against his request for a jury trial.
The Trustee seeks legal and equitable remedies.
determine the nature of the Trustee's remedies. He
principally seeks a declaratory judgment, money damages
caused by Messrs. Reali and Slattery's breach, and
disgorgement of Messrs. Reali's and Slattery's cash
bonuses and retention payments.
Trustee has a right to a jury where he brings legal
and equitable claims and requests money damages, but
he does not have a right to a jury for only equitable claims
which request legal and equitable remedies. We must
examine each claim.
The Trustee's declaratory judgment claim seeks a legal
Trustee seeks a judgment declaring Messrs. Reali and Slattery
breached their fiduciary duties. Whether the Trustee's
declaratory relief is legal or equitable is complicated
because "[declaratory judgments were created as a remedy
in the federal courts some four years before the merger of
law and equity took effect." Our court of appeals
found a "workable formula" to "preserve the
distinction between law and equity in the declaratory
judgment context." We ask what kind of suit would exist
without the declaratory judgment remedy. "If the
declaratory judgment action does not fit into one of the
existing equitable patterns but is essentially an inverted
law suit-an action brought by one who would have been a
defendant at common-then the parties have a right to a jury.
But if the action is the counterpart of a suit in equity,
there is no such right."
a declaratory judgment claim, the Trustee would be seeking
money damages based on Messrs. Reali and Slattery's
breach of their fiduciary duties. In essence, he is
requesting the factfinder decide his breach of fiduciary duty
claim in two steps. First, decide whether Messrs. Reali and
Slattery's past conduct breached their fiduciary duties.
If the answer is a yes, then ask the factfinder to decide the
amount their breach caused money damages to Baxano. The
Trustee is not asking to declare future rights or conduct
would breach, but rather, past conduct already breached. The
Trustee's declaratory judgment remedy is legal because
his claim would exist without his request because he asking
for a declaration of breach on past conduct and money damages
caused by the breach.
The Trustee's disgorgement claim seeks an equitable
Palmer's request for disgorgement seeks an equitable
remedy because "disgorgement primarily serves to prevent
unjust enrichment, [we] may exercise its equitable power only
over property that is causally related to the
The Trustee's money damages claim ...