Evangelist, In re, 85-1015

• Decision Date: 04 March 1985
• Docket Number: No. 85-1015,85-1015
• Citation: 760 F.2d 27
• Parties: , Fed. Sec. L. Rep. P 92,023, 1 Fed.R.Serv.3d 1419 In re Frank J. EVANGELIST, Jr., Petitioner. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 27

760 F.2d 27

53 USLW 2542, Fed. Sec. L. Rep. P 92,023,

1 Fed.R.Serv.3d 1419

In re Frank J. EVANGELIST, Jr., Petitioner.

No. 85-1015.

United States Court of Appeals First Circuit.

Heard March 4, 1985.

Decided April 25, 1985.

Richard M. Meyer, New York City, with whom Avram G. Hammer, Boston, Mass., and Milberg, Weiss, Bershad, Specthrie & Lerach, New York City, were on petition for writ of mandamus.

James S. Dittmar, Boston, Mass., with whom Gordon P. Katz, Leanne Berge and Widett, Slater & Goldman, P.C., Boston, Mass. (for Fidelity Management & Research Company), and Peter M. Saparoff and Gaston, Snow & Ely Bartlett, Boston, Mass. (for Fidelity Cash Reserves), were on brief in opposition for writ of mandamus.

Before CAMPBELL, Chief Judge, BREYER, Circuit Judge, and RE, ^* Judge.

BREYER, Circuit Judge.

The petitioner, Frank Evangelist, is a shareholder of Fidelity Cash Reserves. He sued Fidelity and its investment adviser under 15 U.S.C. Sec. 80a-35(b), claiming that Fidelity was paying the adviser too large a fee. The district court ruled that Evangelist's claim was basically "equitable," not "legal" in nature, and that Evangelist was therefore not entitled to a trial before a jury. Evangelist asks us to issue a writ of mandamus to compel a jury trial. Dairy Queen, Inc. v. Wood, 369 U.S. 469, 472, 82

                S.Ct. 894, 897, 8 L.Ed.2d 44 (1962);  Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 511, 79 S.Ct. 948, 957, 3 L.Ed.2d 988 (1959).  The district court asked the right question--whether the claim is one 'at law' or 'in equity'--for the Seventh Amendment's guarantee of a right to a jury trial in civil cases extends only to suits at "common law," U.S. Const., Amend. VII;  it does not include cases that courts would have considered as arising in equity prior to the merger of law and equity in 1938.   Pernell v. Southall Realty, 416 U.S. 363, 375, 94 S.Ct. 1723, 1729, 40 L.Ed.2d 198 (1974).  In our view, the district court also came up with the right answer.  Petitioner is not entitled to a trial by jury here, for petitioner's claim is basically 'equitable' in nature
                

I

The statute under which the petitioner pursues his claim says that, on behalf of an investment company like Fidelity, the Securities and Exchange Commission or a shareholder can sue the company's investment adviser "for breach of fiduciary duty in respect of" the investment adviser's "compensation." (See Appendix, infra.) Two opinions in the Second Circuit (one by a district court and one by the circuit court of appeals) have thoroughly discussed the arguments for and against the conclusion that Congress intended (and constitutionally could intend) that the typical claim arising under this statute would be tried before a judge alone, without a jury. Gartenberg v. Merrill Lynch Asset Management, Inc., 487 F.Supp. 999, 1005 (S.D.N.Y.), mandamus denied sub nom. In re Gartenberg, 636 F.2d 16 (2d Cir.1980), cert. denied, 451 U.S. 910, 101 S.Ct. 1979, 68 L.Ed.2d 298 (1981). Both courts concluded that Congress intended (and could intend) a judge-tried action, basically for the following reasons.

First, the statute creates a near classical 'breach of fiduciary duty' cause of action. The statute refers to the standard that it imposes as one of "fiduciary duty"; it says that the action need not involve tortious conduct, 15 U.S.C. Sec. 80a-35(b)(1) (no need to show "personal misconduct"); it does not require a showing of breach of contract, 15 U.S.C. Sec. 80a-35(b)(2) (any contract will be given "such consideration as is ... appropriate"). Actions for breach of fiduciary duty, historically speaking, are almost uniformly actions 'in equity'--carrying with them no right to trial by jury. Restatement of Restitution, introductory note at 9 (1937) ("[E]quity still retains jurisdiction of nearly all situations involving a breach of fiduciary duty.").

Second, the statute's legislative history makes clear that Congress thought it was creating an action 'in equity.' See S.Rep. No. 91-184, 91st Cong., 1st Sess. (1969), reprinted in [1970] U.S.Code Cong. & Admin.News, at 4897, 4911 (section authorizes "an equitable action involving a claim of fiduciary duty"); H.Rep. No. 91-1382, 91st Cong., 2d Sess. (1970) at 38 (same); H.R.Conf.Rep. No. 91-1631, 91st Cong., 2d Sess. (1970), reprinted in [1970] U.S.Code Cong. & Admin.News at 4943 (section defines relationship governed by "equitable standards"); cf. Hearings before the Subcomm. on Commerce and Finance of the House Comm. on Interstate and Foreign Commerce, Nov. 12--Dec. 11, 1969, Serial No. 91-33 at 796, (statement of Judge Henry J. Friendly, stating, in reference to different bills designed to deal with the same subject, that "actions to recover unreasonable fees are equitable in nature, [and] would be tried to judges and not to juries").

Third, the remedy Congress created--the payment of any excess fee to the company--is similar to the traditional equity remedy of an "accounting," see Baltimore Contractors, Inc. v. Bodinger, 348 U.S. 176, 176, 75 S.Ct. 249, 249, 99 L.Ed. 233 (1955); cf. Medtronic, Inc. v. Intermedics, Inc., 725 F.2d 440, 443-44 (7th Cir.1984) (discussing history and nature of equitable accounting); see also H. McClintock, Handbook of the Principles of Equity (2d ed. 1937) Sec. 200 at 537 n. 2 (only one case of account at law in New York before 1842 and not more than a dozen in two centuries in England). Like other remedies of restitution, that remedy requires one owing a On the other hand, we recognize that, against these three arguments, one can point to the appearance of the word "damages" in one of the statute's subsections. That subsection reads as follows:

                fiduciary duty to pay to the beneficiary of that obligation--to "disgorge"--money taken in derogation of the duty.   Curtis v. Loether, 415 U.S. 189, 197, 94 S.Ct. 1005, 1009, 39 L.Ed.2d 260 (1974).  See generally E. Re, Remedies 298, 683-755 (1982);  D. Dobbs, The Law of Remedies 222-78, 683-84 (1973)
                

... no damages or other relief shall be granted against any other person other than the recipient of such compensation or payments. No award of damages shall be recoverable for any period prior to one year before the action was instituted. Any award of damages against such recipient shall be limited to the actual damages resulting from the breach of fiduciary duty.

15 U.S.C. Sec. 80a-35(b)(3). This use of the word "damages," as well as the limitation on recovery contained in the last sentence, distinguishes this action to a degree from traditional equitable monetary remedies like an accounting or other forms of restitution, for those equitable monetary remedies often include recovery of profits on the money the unfaithful fiduciary has taken; here the statute not only uses a word, "damages," that is traditionally associated with 'legal' remedies but also limits liability to the amount taken from the company. See S.Rep. No. 91-184, 91st Cong., 1st Sess. (1969), reprinted in [1970] U.S.Code Cong. & Admin.News, at 4911 (damages "may not exceed the amount of the payments received" by the investment adviser).

This limitation of recovery, however, is in fact neutral in respect to the issue before us. It makes the action look neither more "equitable" nor more "legal." Granted, insofar as the limitation prevents recovery of profits generated by any excess payment, it makes the action look less like an equitable 'accounting' and hence more like a 'legal' remedy. But, as the legislative history makes clear, the limitation also prevents the company from recovering any special damages that the excess payments may have caused. Insofar as it prevents the recovery of special damages in excess of the payments made by the investment company, the limitation makes the action look less like a 'tort' or 'contract' remedy and more like 'restitution,' which is conventionally understood as an 'equitable' remedy. In re Seatrade Corporation, 345 F.2d 785, 787 (2d Cir.1965) (per curiam) ("restitutionary remedies are basically equitable in nature").

In respect to the fact that the statute uses the word "damages," the district court in Gartenberg, supra, stated the following:

[I]t seems likely from the context that Congress was using "damages" merely as a shorthand for "recovery of money," not as a legal term of art. Since ... not all claims for monetary relief are legal in nature, the use of the term "damages" is not persuasive in this instance. In particular, given the repeated statement in the legislative history that actions under Sec. 36(b) are equitable, to be administered on equitable standards, it would seem impossible to conclude from the use of the word "damages" that Congress thereby provided for a trial by jury.

Gartenberg v. Merrill Lynch Asset Management, Inc., 487 F.Supp. at 1006. We agree with the Gartenberg court. The simple use of the word "damages," in light of the other evidence of Congressional intent, is not sufficient to show that Congress intended to create an action 'at law' in the typical Sec. 80a-35 case. And, the similarities between this action and classical equity actions--the first and third considerations mentioned above--show sufficient resemblance to classical pre-1938 actions in equity for accounting or restitution to allow the statute to pass muster under the Seventh Amendment. Cf. Pernell v. Southall Realty, supra.

In sum, we agree with the Second Circuit, for reasons more fully set out in the two Gartenberg cases. The plaintiff in a

typical Sec. 80a-35 case--presenting a claim that rests solely upon breach of fiduciary duty--is not entitled to a jury trial.

II

The remaining question in this case is whether the action before us, for some reason, falls outside the Gartenberg rationale. Petitioner makes two arguments that it does. First, he points out that his complaint asks for "damages." In Gartenberg plaintiff brought a derivative action on behalf of the company seeking repayment to the company of excess...