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Palmer v. Reali

United States District Court, D. Delaware

September 28, 2017



          KEARNEY, J.

         A 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.

         I. Facts

         John 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.[1] The Trustee alleges Messrs. Reali's and Slattery's unreasonable projections caused Baxano to file bankruptcy;[2] 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.[3]

         The 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.[4] The Trustee demands a jury trial "for all questions of fact" under Fed.R.Civ.P. 38(b).

         II. Analysis

         Messrs. 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."[5]

         We "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 equitable claims."[6]

         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.[7] 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.[8] 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 law.[9]

         We 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.[10] 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.[11]

         A. Breach of fiduciary duty claims are historically brought in equity.

         The 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."[12] The Trustee's claim for breach of fiduciary duty is historically a claim in equity and weighs against his request for a jury trial.

         B. The Trustee seeks legal and equitable remedies.

         We then 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.

         The 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.[13] We must examine each claim.

         1. The Trustee's declaratory judgment claim seeks a legal remedy.

         The 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."[14] Our court of appeals found a "workable formula" to "preserve the distinction between law and equity in the declaratory judgment context."[15] We ask what kind of suit would exist without the declaratory judgment remedy.[16] "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."[17]

         Without 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.

         2. The Trustee's disgorgement claim seeks an equitable remedy.

         Trustee 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 wrongdoing."[18]

         3. The Trustee's money damages claim ...

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