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California Court Of Appeal Holds That A Corporation’s Direct Cause Of Action For Breach Of Fiduciary Duty Is Legal Rather Than Equitable, Requiring A Trial By Jury – Shareholders



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In ZF Micro Solutions, Inc. v. TAT Capital
Partners, Ltd.
, 2022 WL 4090879 (Cal. App. Aug. 8, 2022),
the Fourth Appellate District of the California Court of Appeal decided, as a matter
of first impression, that a non-derivative breach of fiduciary duty
cause of action seeking compensatory damages was legal rather than
equitable, and therefore required a jury trial as a matter of law.
The Court arrived at its conclusion by evaluating the right and
relief requested. In so doing, the Court concluded that because the
claim at hand exhibited all the characteristics of a cause of
action at law, it was legal, rather than equitable, and should have
been tried to a jury.

The appeal was limited to the issue of whether ZF Micro
Solutions’ (“ZF”) cross-complaint against TAT Capital
Partners, Ltd. (“TAT”) should have been tried to a jury.
ZF alleged that TAT “murdered its predecessor by inserting a
board member who poisoned it.” Specifically, ZF alleged that
its predecessor company was unable to secure investment funds due
to TAT’s board representatives’ disparaging the
company’s management. As a result, the predecessor company
defaulted on a secured loan and its assets were foreclosed upon. ZF
asserted that this conduct by the TAT board representative was a
breach of that individual’s fiduciary duty owed to the company.
The trial court considered the cause of action for breach of
fiduciary duty against a director equitable in nature rather than
legal, and held a bench trial on that basis. The trial court
entered judgment for TAT and ZF appealed, asserting this was
error.

The Court of Appeal agreed with ZF, and reversed. The Court
began by noting that although the California Constitution
guarantees the right to a trial by jury, this right is limited to
cases in which the “gist” of the action is legal, rather
than equitable. First, the Court observed that more traditional
breaches of directors’ and majority shareholders’ fiduciary
duties are viewed as equitable. The Court did not locate any
authority, however, addressing specifically whether the cause of
action for breach of a director’s duty brought directly by the
corporation, as alleged here, was legal or equitable. Thus, the
Court drew upon general law to assess the distinction. “[I]f
the legal remedy of compensatory damages is adequate to complete
justice between the parties,” the Court observed, “a
proper exercise of equitable justice will not give equitable
relief.” On that basis, the Court concluded that the
“gist” of ZF’s cause of action against TAT was a
request for compensatory damages for destroying its predecessor
corporation, a request that neither involved weighing equities nor
nonmonetary relief. As such, the cause of action against TAT was
legal in nature and required a jury trial. The Court’s holding
represents a meaningful distinction between direct actions for
breach of fiduciary duty brought by a corporation, such as the one
here, and derivative actions for breach of fiduciary duty brought
by shareholders, which are traditionally equitable in nature, and
thus not entitled to trial by jury.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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