Ross v. BernhardAnnotate this Case
396 U.S. 531 (1970)
U.S. Supreme Court
Ross v. Bernhard, 396 U.S. 531 (1970)
Ross v. Bernhard
Argued November 10, 1969
Decided February 2, 1970
396 U.S. 531
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
The right to trial by jury preserved by the Seventh Amendment extends to a stockholder's derivative suit with respect to those issue as to which the corporation, had it been suing in its own right, would have been entitled to a jury trial.
403 F.2d 909, reversed.
MR. JUSTICE WHITE delivered the opinion of the Court.
The Seventh Amendment to the Constitution provides that, in "[s]uits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved." Whether the Amendment guarantees the right to a jury trial in stockholders' derivative actions is the issue now before us.
Petitioners brought this derivative suit in federal court against the directors of their closed-end investment company, the Lehman Corporation, and the corporation's brokers, Lehman Brothers. They contended that Lehman Brothers controlled the corporation through an illegally large representation on the corporation's board of directors, in violation of the Investment Company Act of 1940, 54 Stat. 789, 15 U.S.C. § 80a-1 et seq., and used this control to extract excessive brokerage fees from the corporation. The directors of the corporation were accused of converting corporate assets and of "gross abuse
of trust, gross misconduct, willful misfeasance, bad faith, [and] gross negligence." Both the individual defendants and Lehman Brothers were accused of breaches of fiduciary duty. It was alleged that the payments to Lehman Brothers constituted waste and spoliation, and that the contract between the corporation and Lehman Brothers had been violated. Petitioners requested that the defendants "account for and pay to the Corporation for their profits and gains and its losses." Petitioners also demanded a jury trial on the corporation's claims.
On motion to strike petitioners' jury trial demand, the District Court held that a shareholder's right to a jury on his corporation's cause of action was to be judged as if the corporation were itself the plaintiff. Only the shareholder's initial claim to speak for the corporation had to be tried to the judge. 275 F.Supp. 569. Convinced that
"there are substantial grounds for difference of opinion as to this question, and . . . an immediate appeal would materially advance the ultimate termination of this litigation,"
the District Court permitted an interlocutory appeal. 28 U.S.C. § 1292(b). The Court of Appeals reversed, holding that a derivative action was entirely equitable in nature, and no jury was available to try any part of it. 403 F.2d 909. It specifically disagreed with DePinto v. Provident Security Life Ins. Co., 323 F.2d 826 (C.A. 9th Cir.1963), cert. denied, 376 U.S. 950 (1964), on which the District Court had relied. Because of this conflict, we granted certiorari. 394 U.S. 917 (1969).
We reverse the holding of the Court of Appeals that in no event does the right to a jury trial preserved by the Seventh Amendment extend to derivative actions brought by the stockholders of a corporation. We hold that the right to jury trial attaches to those issues in derivative actions as to which the corporation, if it had
been suing in its own right, would have been entitled to a jury.
The Seventh Amendment preserves to litigants the right to jury trial in suits at common law --
"not merely suits, which the common law recognized among its old and settled proceedings, but suits in which legal rights were to be ascertained and determined, in contradistinction to those where equitable rights alone were recognized, and equitable remedies were administered. . . . In a just sense, the amendment then may well be construed to embrace all suits which are not of equity and admiralty jurisdiction, whatever may be the peculiar form which they may assume to settle legal rights."
However difficult it may have been to define with precision the line between actions at law dealing with legal rights and suits in equity dealing with equitable matters, Whitehead v. Shattuck,138 U. S. 146, 138 U. S. 151 (1891), some proceedings were unmistakably actions at law triable to a jury. The Seventh Amendment, for example, entitled the parties to a jury trial in actions for damages to a person or property, for libel and slander, for recovery of land, and for conversion of personal property. [Footnote 1] Just as clearly, a corporation, although an artificial being, was commonly entitled to sue and be sued in the usual forms of action, at least in its own State. See Paul v. Virginia, 8 Wall. 168 (1869). Whether the corporation was viewed as an entity separate from its stockholders or as a device permitting its stockholders to carry on their business and to sue and be sued, a corporation's suit to enforce a legal right was an action
at common law carrying the right to jury trial at the time the Seventh Amendment was adopted. [Footnote 2]
The common law refused, however, to permit stockholders to call corporate managers to account in actions at law. The possibilities for abuse, thus presented, were not ignored by corporate officers and directors. Early in the 19th century, equity provided relief both in this country and in England. Without detailing these developments, [Footnote 3] it suffices to say that the remedy in this country, first dealt with by this Court in Dodge v. Woolsey, 18 How. 331 (1856), provided redress not only against faithless officers and directors, but also against third parties who had damaged or threatened the corporate properties and whom the corporation through its managers refused to pursue. The remedy made available in equity was the derivative suit, viewed in this country as a suit to enforce a corporate cause of action against officers, directors, and third parties. As elaborated in the cases, one precondition for the suit was a valid claim on which the corporation could have sued; another was that the corporation itself had refused to proceed after suitable demand, unless excused by extraordinary conditions. [Footnote 4] Thus the dual nature of the stockholder's action: first,
the plaintiff's right to sue on behalf of the corporation and, second, the merits of the corporation's claim itself. [Footnote 5]
Derivative suits posed no Seventh Amendment problems where the action against the directors and third parties would have been by a bill in equity had the corporation brought the suit. Our concern is with cases based upon a legal claim of the corporation against directors or third parties. Does the trial of such claims at the suit of a stockholder and without a jury violate the Seventh Amendment?
The question arose in this Court in the context of a derivative suit for treble damages under the antitrust laws. Fleitmann v. Welsbach Street Lighting Co.,240 U. S. 27 (1916). Noting that the bill in equity set up a claim of the corporation alone, Mr. Justice Holmes observed that, if the corporation were the plaintiff, "no one can doubt that its only remedy would be at law," and inquired
"why the defendants' right to a jury trial should be taken away because the present plaintiff cannot persuade the only party having a cause of action to sue how the liability, which is the principal matter, can be converted into an incident of the plaintiff's domestic difficulties with the company that has been wronged?"
Id. at 240 U. S. 28. His answer was that the bill did not state a good cause of action in equity. Agreeing that there were
"cases in which the nature of the right asserted for the company, or the failure of the defendants concerned to insist upon their rights, or a different state system, has
led to the whole matter being disposed of in equity,"
he concluded that, when the penalty of triple damages is sought, the antitrust statute plainly anticipated a jury trial, and should not be read as "attempting to authorize liability to be enforced otherwise than through the verdict of a jury in a court of common law." Id. at 240 U. S. 28-29. Although the decision had obvious Seventh Amendment overtones, its ultimate rationale was grounded in the antitrust laws. [Footnote 6]
Where penal damages were not involved, however, there was no authoritative parallel to Fleitmann in the federal system squarely passing on the applicability of the Seventh Amendment to the trial of a legal claim presented in a pre-merger derivative suit. What can be gleaned from this Court's opinions [Footnote 7] is not inconsistent
with the general understanding, reflected by the state court decisions and secondary sources, that equity could properly resolve corporate claim of any kind without a jury when properly pleaded in derivative suits complying with the equity rules. [Footnote 8]
Such was the prevailing opinion when the Federal Rules of Civil Procedure were adopted in 1938. It continued until 1963, when the Court of Appeals for the Ninth Circuit, relying on the Federal Rules as construed and applied in Beacon Theatres, Inc. v. Westover,359 U. S. 500 (195), and Dairy Queen, Inc. v. Wood,369 U. S. 469 (1962), required the legal issues in a derivative suit to be tried to a jury. [Footnote 9] DePinto v. Provident Security Life Ins. Co., 323 F.2d 826. It was this decision that the District Court followed in the case before us, and that the Court of Appeals rejected.
Beacon and Dairy Queen presaged DePinto. Under those cases, where equitable and legal claims are joined
in the same action, there is a right to jury trial on the legal claims which must not be infringed either by trying the legal issues as incidental to the equitable ones or by a court trial of a common issue existing between the claims. The Seventh Amendment question depends on the nature of the issue to be tried, rather than the character of the overall action. [Footnote 10] See Simler v. Conner,372 U. S. 221 (1963). The principle of these cases bears heavily on derivative actions.
We have noted that the derivative suit has dual aspects: first, the stockholder's right to sue on behalf of the corporation, historically an equitable matter; second, the claim of the corporation against directors or third parties on which, if the corporation had sued and the claim presented legal issues, the company could demand a jury trial. As implied by Mr. Justice Holmes in Fleitmann, legal claims are not magically converted into equitable issues by their presentation to a court of equity in a derivative suit. The claim pressed by the stockholder against directors or third parties "is not his own but the corporation's." Koster v. Lumbermens Mut. Cas. Co.,330 U. S. 518, 330 U. S. 522 (1947). The corporation is a necessary party to the action; without it, the case cannot proceed. Although named a defendant, it is the real party in interest, the stockholder being at best the nominal plaintiff. The proceeds of the action belong to the corporation and it is bound by the result of the suit. [Footnote 11]
The heart of the action is the corporate claim. If it presents a legal issue, one entitling the corporation to a jury trial under the Seventh Amendment, the right to a jury is not forfeited merely because the stockholder's right to sue must first be adjudicated as an equitable issue triable to the court. Beacon and Dairy Queen require no less.
If, under older procedures, now discarded, a court of equity could properly try the legal claims of the corporation presented in a derivative suit, it was because irreparable injury was threatened and no remedy at law existed as long as the stockholder was without standing to sue and the corporation itself refused to pursue its own remedies. Indeed, from 1789 until 1938, the judicial code expressly forbade courts of equity from entertaining any suit for which there was an adequate remedy at law. [Footnote 12] This provision served "to guard the right of trial by jury preserved by the Seventh Amendment and to that end it should be liberally construed." Schoenthal v. Irving Trust Co.,287 U. S. 92, 287 U. S. 94 (1932). If, before 1938, the law had borrowed from equity, as it borrowed other things, the idea that stockholders could litigate for their recalcitrant corporation, the corporate claim, if legal, would undoubtedly have been tried to a jury.
Of course, this did not occur, but the Federal Rules had a similar impact. Actions are no longer brought as actions at law or suits in equity. Under the Rules, there is only one action -- a "civil action" -- in which all claims may be joined and all remedies are available. Purely procedural impediments to the presentation of any issue by any party, based on the difference between law and
equity, were destroyed. In a civil action presenting a stockholder's derivative claim, the court, after passing upon the plaintiff's right to sue on behalf of the corporation, is now able to try the corporate claim for damages with the aid of a jury. [Footnote 13] Separable claims may be tried separately, Fed.Rule Civ.Proc. 42(b), or legal and equitable issues may be handled in the same trial. Fanchon & Marco, Inc. v. Paramount Pictures, Inc., 202 F.2d 731 (C.A.2d Cir.1953). The historical rule preventing a court of law from entertaining a shareholder's suit on behalf of the corporation is obsolete; it is no longer tenable for a district court, administering both law and equity in the same action, to deny legal remedies to a corporation merely because the corporation's spokesmen are its shareholders, rather than its directors. Under the rules, law and equity are procedurally combined; nothing turns now upon the form of the action or the procedural devices by which the parties happen to come before the court. The "expansion of adequate legal remedies provided by . . . the Federal Rules necessarily affects the scope of equity." Beacon Theatres, Inc. v. Westover, 359 U.S. at 359 U. S. 509.
Thus, for example, before-merger class actions were largely a device of equity, and there was no right to a jury even on issues that might, under other circumstances, have been tried to a jury. 5 J. Moore, Federal
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