Recently, District Four of the California Court of Appeal addressed the question of whether a claim against a corporate director for breach of fiduciary duty to the corporation itself sounds in law or equity. California Corporations Code §309(a) requires a director to perform his or her duty “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” But this statute did not create the cause of action in question; instead it merely codified a common law duty that predates it by decades.
Prior cases held that claims asserting that a director or majority shareholder had breached a fiduciary duty to minority shareholders are equitable in nature. But claims on behalf of minority shareholders are clearly equitable, as “[i]t is equity’s special province to come to the aid of the vulnerable, such as shareholders without control over the workings of a corporation in which they have invested who are in danger of being victimized by those in control.” Finding an absence of direct authority on the issue when the wronged party is the corporation itself, the court analyzed the question under general principles for distinguishing legal claims from equitable ones.
Traditional Legal Versus Equitable Analysis
First, looking at the relief sought, claims solely for compensatory damages indicate the suit is at law. While a court of equity can award damages, it generally does so in the course of resolving a case with both equitable and legal aspects, working with an array of available remedies. But where compensatory damages can afford complete relief, this indicates a legal claim.
Second, if the case does not require a balancing of the equities, the suit is legal. Here, the plaintiff accused the director defendants of destroying the corporation by disparaging its management. These defendants do not claim it was fair for them to do so, but instead assert they were not the cause of the corporation’s demise. Thus the court is not called upon to balance the equities of the parties’ various acts. In this regard, the defendants’ role as director is not of significance; the suit resembles one for trade libel or interference—claims which are unquestionably legal in nature.
Finding the claim legal, and not equitable, the court reversed the trial court’s order denying the plaintiff a trial by jury.
The Particular Allegations of Wrongdoing Matter
But the result may be otherwise in a case with different allegations. The court cautioned that “[t]his is not the typical breach of corporate fiduciary duty case, in which a director or directors have misappropriated corporate funds or have done something or have made the corporation do something to advantage themselves at the expense of some or all of the shareholders.” In such a case the court may need to “weigh the fairness of the disputed transaction to each side or factor the business judgment rule into the analysis.” That could render the claim equitable, with a jury trial thus unavailable.