Lanman Lithotech, Inc. v. Gurwitz

• Decision Date: 07 November 1985
• Docket Number: No. 85-1243,85-1243
• Citation: 10 Fla. L. Weekly 2497,478 So.2d 425
• Parties: 10 Fla. L. Weekly 2497 LANMAN LITHOTECH, INC., etc., et al., Petitioners, v. Stanley GURWITZ, et al., Respondents.
• Court: Florida District Court of Appeals

Page 425

478 So.2d 425

10 Fla. L. Weekly 2497

LANMAN LITHOTECH, INC., etc., et al., Petitioners, v. Stanley GURWITZ, et al., Respondents.

No. 85-1243.

District Court of Appeal of Florida,

Fifth District.

Nov. 7, 1985.

Harlan Tuck of Giles, Hedrick & Robinson, P.A., Orlando, for petitioners.

Jeffrey Allen Tew and Robert B. Galt III, of Kirkpatrick & Lockhart, Miami, for respondents.

COWART, Judge.

Two main issues are presented in this petition for writ of common law certiorari. The first is whether the right to jury trial exists in a shareholder's derivative action. The second is whether punitive damages are recoverable in such actions.

Three shareholders of Lanman Lithotech, Inc. (Lanman) initiated a derivative action against three officers and directors of Lanman and their third person business organizations. Although Lanman was named a defendant in this action, Lanman is the real party in interest with the shareholders being at best the nominal plaintiffs. The first three counts of plaintiffs-shareholders' four count amended complaint demanded judgment for breach of fiduciary duty, fraud, and conversion. The fourth count requested the appointment of a receiver to liquidate the assets of Lanman. The plaintiffs sought punitive damages in each of the first three counts, and demanded a jury trial for all issues triable as of right by jury. The defendants filed a motion to strike certain matters from the amended complaint, including the demands for jury trial and punitive damages. The trial court denied the motion to strike. The defendants petition this court for a writ of common law certiorari.

Historically, a shareholder's derivative action could be brought only in equity. The federal constitutional right to a civil jury trial (U.S. Const. amend. VII) attached only to suits at common law that were tried to the jury in 1791 when the seventh amendment was adopted. Actions in equity, which were tried to the court, were unaffected by the seventh amendment. ¹ Shareholders' derivative actions, which were not recognized until the 19th century, ² were likewise unaffected by the seventh amendment until 1970. In that year, the U.S. Supreme Court in Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970), held that the right to a jury trial under the seventh amendment attaches to those issues in derivative actions as to which a corporation, if it sued in its own right, would be entitled to a jury. The Supreme Court stated that a shareholder's derivative action has a dual nature, namely, the plaintiff's right to sue on behalf of the corporation and the merits of the corporation's claim itself. If a shareholder's derivative action presents a legal issue, one entitling the corporation to jury trial under the seventh amendment, the right to a jury trial is preserved notwithstanding the fact that the shareholder's right to sue must first be adjudicated as an equitable issue triable to the court.

The seventh amendment is not incorporated in the fourteenth amendment and therefore is not applicable to state proceedings. See Florida East Coast R. Co. v. Hayes, 67 Fla. 101, 64 So. 504 (1914). The reasoning in Ross v. Bernhard has been adopted by some state courts and rejected by others in interpreting their own state's constitutional right to jury trial. Compare Finance, Inc. and Rediscount Co. v. Wells, 409 So.2d 1341 (Ala.1981), with Rankin v. Frebank Co., 47 Cal.App.3d 75, 121 Cal.Rptr. 348 (Cal.App.1975).

Although the U.S. Supreme Court in Ross v. Bernhard assumes a shareholder's derivative action has a dual nature, traditionally a derivative action in practice was always treated as a single cause tried exclusively in equity. Before Ross v. Bernhard, commentators agreed that there was no constitutional right to a jury trial in a shareholder's derivative action even where there might have been one had the corporation itself brought the action. See Ross v. Bernhard, supra (Stewart, J. dissenting).

The U.S. Supreme Court grounded its decision in Ross v. Bernhard partly on the change in the federal rules which procedurally merged actions at law and suits in equity. ³ The U.S. Supreme Court reasoned that the historical rule preventing a court of law from entertaining a shareholder's derivative suit had become obsolete and it was no longer reasonable for a court which administers both law and equity in the same action to deny legal remedies to a corporation merely because the corporate claim is presented by its shareholders rather than its directors. However, a shareholder's derivative action since its inception has been wholly a creature of equity, not because of procedural impediments later removed by the federal rules, but because the law refused to borrow from equity the idea that shareholders could litigate the claims of their corporation. Therefore, a shareholder's derivative action in equity was the only way to seek redress before a court when the corporation refused to pursue its own remedies.

Florida's constitutional right to jury trial guarantees a right to trial by jury in those cases in which such right was recognized when Florida's first constitution became effective in 1845. See Dudley v. Harrison, McCready and Co., 127 Fla. 687, 173 So. 820 (1937). As...