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 Appeals held, on its face, that a non-derivative breach of fiduciary duty cause of action seeking compensatory damages was legal rather than fair and therefore required a jury trial as a matter of law. The Court came to its conclusion by assessing the right and the remedy sought. In doing so, the Court concluded that because the claim in question had all the hallmarks of a cause of action at law, it was legal, rather than fair, and should have been tried by a jury.
The appeal was limited to whether ZF Micro Solutions’ (“ZF”) counterclaim against TAT Capital Partners, Ltd. (“TAT”) should have been brought before a jury. ZF alleged that TAT “murdered its predecessor by inserting a board member who poisoned him”. Specifically, ZF alleged that its predecessor company was unable to obtain investment funds due to the disparagement of the company’s management by TAT board representatives. As a result, the predecessor company defaulted on a secured loan and its assets were seized. ZF asserted that this conduct by the representative of the TAT Board of Directors constituted a breach of this individual’s fiduciary duty to the company. The trial court considered the cause of action for breach of fiduciary duty against a director to be equitable rather than legal in nature, and held a trial before the bench on that basis. The trial court ruled for TAT and ZF appealed, saying it was a mistake.
The Court of Appeal agreed with ZF and overturned it. The Court began by noting that although the California Constitution guarantees the right to a jury trial, that right is limited to cases in which the “substantiality” of the action is legal rather than fair. First, the Court observed that more traditional breaches of the fiduciary duties of directors and majority shareholders are considered fair. However, the Court found no case law dealing specifically with the issue of whether the cause of action for breach of duty of a director brought directly by the corporation, as alleged in this case, was legal or equitable. . Thus, the Court relied on common law to assess the distinction. “[I]While the statutory remedy for compensatory damages is sufficient to do justice between the parties,” the Court observed, “a proper exercise of equitable justice will not yield an equitable remedy.” On this basis, the Court found that the “core” of ZF’s cause of action against TAT was a claim for compensatory damages for the destruction of its predecessor company, a claim that did not involve or weigh actions nor non-monetary compensation. As such, the cause of action against TAT was legal in nature and required a jury trial. The Court’s decision draws a significant distinction between direct actions for breach of fiduciary duty brought by a corporation, such as the one in this case, and derivative actions for breach of fiduciary duty brought by shareholders, which are traditionally equitable nature and therefore not entitled to trial by jury.
