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ROSS v. BERNHARD, (S.D.N.Y. 1967)
Factual and Procedural Background
This is a stockholders' derivative action brought by stockholders of The Lehman Corporation against the corporation's directors and against Lehman Brothers, the corporation's broker. The complaint alleges that The Lehman Corporation paid brokerage commissions to Lehman Brothers that were excessive for various reasons, resulting in waste of corporate assets, in violation of the Investment Company Act of 1940 (15 U.S.C. § 80a-1 et seq.). Defendants Clark, Francis, Kircher, Puckett, Reavis, Thornton, and Wilde moved to strike plaintiffs' demand for a jury trial. Both sides agreed the action is purely derivative and the representative allegation does not affect the motion.
Legal Issues Presented
- Does the fact that this is a stockholders' derivative action, a creature of equity, in and of itself deprive plaintiffs of a trial by jury?
- If not, and if the question of a jury trial is to be viewed as though the corporation were suing, is the action a "suit at common law" within the meaning of the Seventh Amendment?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Richland v. Crandall, 259 F. Supp. 274 (S.D.N.Y. 1966) | Reached an opposite conclusion to DePinto on whether a stockholders' derivative action, as a creature of equity, deprives plaintiffs of a jury trial. | The court noted this decision but rejected its conclusion, adopting instead the view expressed in DePinto. |
| DePinto v. Provident Security Life Insurance Company, 323 F.2d 826 (9th Cir. 1963), cert. denied, 376 U.S. 950, 84 S.Ct. 969, 11 L.Ed.2d 970 (1964) | Holds that although equitable aid is needed to establish stockholders' right to sue derivatively, the claim is the corporation's and the right to a jury trial is to be judged as though the corporation were suing. | The court adopted and followed DePinto, treating the derivative claim as the corporation's claim for purposes of the jury-trial inquiry. |
| Fleitmann v. Welsbach Street Lighting Co., 240 U.S. 27, 60 L.Ed. 505 (1916) | Used as supporting authority for the principle that the derivative claim should be treated as the corporation's claim for jury-trial purposes. | The court accepted that DePinto gives effect to Fleitmann and relied on that lineage to justify treating the claim as the corporation's. |
| Fanchon Marco, Inc. v. Paramount Pictures, Inc., 202 F.2d 731, 36 A.L.R.2d 1336 (2d Cir. 1953) | Applied in analogous antitrust treble damage contexts to reach the result that the right to a jury is judged as though the corporation were suing. | The court cited Fanchon Marco as part of the chain of authorities supporting DePinto's rule and followed that reasoning. |
| Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962) | Establishes that the use of the term "accounting" or other equitable-language prayers is not determinative of the equitable nature of a claim. | The court relied on Dairy Queen to hold that seeking an accounting does not necessarily render the claim equitable and does not preclude a jury trial. |
| Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959) | Part of Supreme Court decisions that protect the right to a jury trial under the Seventh Amendment. | The court cited Beacon Theatres (along with other Supreme Court decisions) in concluding that the complaint states a claim fundamentally legal rather than equitable and thus entitled to a jury determination. |
Court's Reasoning and Analysis
The court analyzed the jury-trial issue in two steps. First, it considered whether the derivative nature of the suit, as an equity-derived cause of action, automatically bars a jury trial. The court compared contrary decisions and adopted the reasoning of DePinto: although equity is used to establish a stockholder's standing to sue derivatively, the substantive claim is that of the corporation and therefore the jury-trial right should be assessed as if the corporation were the plaintiff.
Second, treating the case as though the corporation were suing, the court examined the complaint's allegations to determine whether the action is a "suit at common law" under the Seventh Amendment. The complaint sought a money judgment requiring defendants to account for and pay corporate gains and losses and alleged that defendants caused the corporation to pay out money it should not have paid (a conversion of corporate assets). The court held that seeking an "accounting" or using equitable language is not dispositive, citing Dairy Queen. Because plaintiffs seek monetary relief and the amounts could be ascertained by a jury, and in light of Supreme Court decisions strengthening the right to jury trial, the court concluded the claim is fundamentally legal rather than equitable.
Based on these conclusions, the court found no basis to strike the jury demand.
Holding and Implications
The defendants' motion to strike the plaintiffs' demand for a jury trial is denied.
Direct effect: Plaintiffs' request for a jury trial remains in place and will not be stricken; the case will be treated for jury-trial purposes as though the corporation were the plaintiff. The opinion applies existing authorities (including Supreme Court decisions cited) to support this conclusion. The opinion does not purport to establish a novel precedent beyond applying and following the cited cases.
McLEAN, District Judge.
This is a stockholders' derivative action by stockholders of The Lehman Corporation against directors of that corporation and against Lehman Brothers, the corporation's broker. The complaint charges in substance that The Lehman Corporation has paid to Lehman Brothers brokerage commissions which are excessive for a variety of reasons and that the assets of The Lehman Corporation have thereby been wasted. This is said to be a violation of the Investment Company Act of 1940 ( 15 U.S.C. § 80a-1 et seq.). Defendants Clark, Francis, Kircher, Puckett, Reavis, Thornton, and Wilde move to strike plaintiffs' demand for a jury trial.
The complaint alleges that plaintiffs also sue representatively on behalf of themselves and of other stockholders of The Lehman Corporation similarly situated. Both sides agree, however, that this action is actually purely derivative, as the only relief sought is for the benefit of The Lehman Corporation. Consequently, the representative allegation has no bearing upon the issues raised by this motion.
Whether or not plaintiffs are entitled to a jury trial depends upon the answer to two questions:
(1) Does the fact that this is a stockholders' derivative action, a creature of equity, in and of itself deprive plaintiffs of a trial by jury?
(2) If not, and if the question of a jury trial is to be viewed as though the corporation were suing, is the action a "suit at common law" within the meaning of the Seventh Amendment?
As to the first question, opposite conclusions were reached in Richland v. Crandall, 259 F. Supp. 274 (S.D.N.Y. 1966), and DePinto v. Provident Security Life Insurance Company, 323 F.2d 826 (9th Cir. 1963), cert. denied, 376 U.S. 950, 84 S.Ct. 969, 11 L.Ed.2d 970 (1964). In my opinion the DePinto view is the correct one. The court there held that although the aid of equity is needed in order to establish the stockholders' right to sue on behalf of the corporation, the claim is that of the corporation and the right to a jury trial is to be judged as though the corporation were suing. This decision gives effect to Fleitmann v. Welsbach Street Lighting Co., 240 U.S. 27, 60 L.Ed. 505 (1916), and Fanchon Marco, Inc. v. Paramount Pictures, Inc., 202 F.2d 731, 36 A.L.R.2d 1336 (2d Cir. 1953), in which this result was reached in antitrust treble damage actions. I see no reason why this rule should be peculiar to antitrust litigation. I will follow it here.
As to the second question, the allegations of the complaint are controlling. The complaint uses a number of harsh words. It charges that defendants have been guilty of "gross abuse of trust, gross misconduct, willful misfeasance, bad faith, gross negligence and a reckless disregard of their fiduciary duties." The prayer is for a judgment "requiring the defendants jointly and severally to account for and pay to the Corporation for their profits and gains and its losses."
The fact that plaintiffs seek an accounting, a word which smacks of equity, is not determinative. Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962).
Plaintiffs are seeking a money judgment. They ask that defendants "pay" to the corporation defendants' gains and the corporation's loss. The issues are not so complicated as to make it impracticable for a jury to asceratin the amount, if any, to which plaintiffs may be entitled.
It is true that the complaint employs equitable language in alleging that defendant directors have abused their trust and have disregarded their fiduciary duties. But the alleged facts which underlie these conclusions are simply that defendants have caused the corporation to pay out money which the corporation should not have paid, and that in consequence, the corporation is entitled to judgment for those moneys. This diversion of funds is alleged to be a conversion by defendants of the corporate assets. Whatever the law may formerly have been, I am persuaded that recent decisions of the Supreme Court, which have gone far in protecting the right to a jury trial under the Seventh Amendment, require the conclusion that this complaint states on behalf of the corporation a claim which is fundamentally legal rather than equitable. Dairy Queen, Inc. v. Wood, supra; Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959); See also DePinto v. Provident Security Life Insurance Company, supra.
Defendants' motion is denied.
So ordered.
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