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GARTENBERG v. MERRILL LYNCH ASSET MGMT.

March 18, 1980

Gartenberg
v.
Merrill Lynch Asset Management, Inc.



The opinion of the court was delivered by: POLLACK

This is a derivative action by a shareholder of a money-market mutual fund, brought pursuant to § 36(b) of the Investment Company Act, 15 U.S.C. § 80a-35(b). Plaintiff has demanded a trial by jury as a matter of constitutional right. Plaintiff claims that the Fund's investment adviser, defendant Merrill Lynch Asset Management, Inc., breached the fiduciary duty it is deemed to have under § 36(b) by receiving excessive and unreasonable compensation under its contract with the Fund and consequently must respond in damages to the Fund. Plaintiff avers that it neither accepts nor attacks the contract pursuant to which the adviser was paid the stipulated compensation.

Defendants have moved to strike plaintiff's demand for a jury trial on the grounds that: (1) § 36(b) provides for an equitable action to be administered on equitable standards and is not triable by jury, and (2) the relief sought herein for alleged breach of fiduciary duty (accounting, restitution) is obtainable only in an equitable action. Plaintiff, on the other hand, contends that the language and intrinsic substance of § 36(b) demonstrate that the claim here is analogous to one traditionally enforced at common law, and therefore, is triable by a jury.

 The controlling question for determining whether the right to a jury trial exists in this case is whether "the action involves rights and remedies of the sort traditionally enforced at law, rather than in an action in equity or admiralty." Pernell v. Southall Realty, 416 U.S. 363, 375, 94 S. Ct. 1723, 1728, 40 L. Ed. 2d 198 (1974). Where, as here, a plaintiff brings a derivative suit on behalf of a corporation, the right to a jury trial depends on whether the underlying claim is analogous to a claim enforceable at common law. Ross v. Bernhard, 396 U.S. 531, 538-39, 90 S. Ct. 733, 738, 24 L. Ed. 2d 729 (1970). *fn1"

 For the reasons that appear hereafter, the motion to strike the jury demand herein will be granted.

 I.

 The Seventh Amendment was adopted in 1791 and the guarantee therein of a jury trial was linked with the common law of England as it existed in 1791. Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 446-47, 7 L. Ed. 732 (1830); Galloway v. United States, 319 U.S. 372, 390-92, 63 S. Ct. 1077, 1087-88, 87 L. Ed. 1458 (1943). Under English practice, separate courts administered cases at law and suits in equity. The former were triable to juries and the latter were heard at Bench trials by the chancellor.

 After 1791, whenever Congress created a claim for relief, unless otherwise intended by Congress the American Courts assigned to the trial thereof, if possible, the incidents applicable to the closest historical analogue in pre-1791 cases. The statutory creation received the constitutional guarantee of a jury trial if the corresponding historical analogue was assertable at common law. Whether the claim was analogous to one administered at common law or in equity was not always readily perceptible or capable of application. Whitehead v. Shattuck, 138 U.S. 146, 151, 11 S. Ct. 276, 277, 34 L. Ed. 873 (1891).

 In 1938, law and equity in the federal courts were merged and one form of action to be known as "civil action" was established by Rule 2 of the Federal Rules of Civil Procedure. However, it was not intended thereby to extend the Seventh Amendment guarantee of a jury trial to all civil cases; this remained available only in suits of common law character. Where a congressional statute created the right to be administered, the Rules did not modify the existence or absence of the right to a jury trial; and the Rules would not negate a demonstrable congressional purpose that a statutory claim should be administered at a Bench trial under equitable standards in an equitable action. *fn2" The Rules were adopted to govern the procedure in the federal district courts in all suits of a civil nature whether cognizable as cases at law or in equity or in admiralty, except as set forth in Rule 81 which is inapplicable here. Thus, the application of the Seventh Amendment to statutory causes of action turns on the nature of the action which Congress contemplated therefor.

 The Congress unquestionably has the power to entrust enforcement of statutory rights to an equitable action to be administered on equitable standards free from the strictures of the Seventh Amendment. NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 48-49, 57 S. Ct. 615, 629, 81 L. Ed. 893 (1937) and Katchen v. Landy, 382 U.S. 323, 339, 86 S. Ct. 467, 478, 15 L. Ed. 2d 391 (1966), Brotherhood of Railroad Trainmen v. Louisville and National Railroad Company, 211 F. Supp. 308, 310 (N.D.Ala.1962), aff'd 334 F.2d 79 (5th Cir.), cert. denied, 379 U.S. 934, 85 S. Ct. 328, 13 L. Ed. 2d 345 (1964). These cases are to be contrasted with a case for which Congress has contemplated enforcement of statutory rights in an ordinary civil action in the district courts, where there is no functional justification for denying the jury trial right. Curtis v. Loether, 415 U.S. 189, 94 S. Ct. 1005, 39 L. Ed. 2d 260 (1974).

 In Curtis, the Supreme Court significantly noted that every claim for or award of monetary relief is not necessarily legal in nature. Id. pp. 196-97, 94 S. Ct. p. 1009. The Court pointed out that Title VII of the Civil Rights Act, might not provide a jury trial in an action for reinstatement and back pay, since the monetary relief of back pay could be regarded as a form of restitution, a traditional equitable remedy. On the other hand, the monetary relief under Title VIII in Curtis was viewed as claimed in an ordinary civil action for damages.

 The congressional power to entrust enforcement of newly created statutory rights free from the strictures of the Seventh Amendment is also illustrated where Congress creates new statutory "public rights". Congress

 
may assign their adjudication to an administrative agency with which a jury trial would be incompatible, without violating the Seventh Amendment's injunction that jury trial is to be "preserved" in "suits at common law". Atlas Roofing Co. v. OSHA, 430 U.S. 442, 455, 97 S. Ct. 1261, 1269, 51 L. Ed. 2d 464 (1977).

 In a derivative stockholder's suit, the plaintiff asserts a claim belonging to his corporation. He is permitted, as an equitable concept, to enforce the corporate claim where the directors cannot or will not do so. The recovery in such a suit normally belongs to the corporation. Thus derivative suits sound in equity, but only to enable the stockholder to assert the corporation's claim. Ross v. Bernhard, cit. supra, rules that if such a claim, asserted directly by the corporation, would be cognizable in an action at common law, the aid of equitable principles to enable the stockholder to sue thereon nonetheless left the claim in the posture of one cognizable at common law and subject to jury trial; the right to jury trial was not dependent upon the vehicle enabling the plaintiff to sue. 398 U.S. at 538 & n.10, 542, 90 S. Ct. at 738 n.10, 740.

 A claim pursuant to § 36(b) of the Investment Company Act, 15 U.S.C. § 80a-35(b), may be asserted either by the Securities and Exchange Commission (SEC) or by a stockholder of the Fund on its behalf. Such a suit was of course not cognizable at common law, but this alone is not, as noted above, dispositive of the jury question. It still is necessary to examine the purpose and intent of Congress in respect to whether the claim is to be administered as one at common law or in an equitable action that was not triable to a jury prior to 1791.

 II.

 Section 36(b) of the Investment Company Act, 15 U.S.C. § 80a-35(b), provides in pertinent part:

 
(b) For the purposes of this subsection, the investment adviser of a registered company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser, or any affiliated person of such investment adviser, or any person enumerated in subsection (a) of this section who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person. With respect to any such action the following provisions shall apply:
 
(3) No such action shall be brought or maintained against any person other than the recipient of such compensation or payments, and no damages or other relief shall be granted against any 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 and shall in no event exceed the amount of compensation or payments received from such investment company, or the security holders thereof, by such recipient.

 In support of his contention that the suit here involved is of a kind that could have been brought at common law, the plaintiff analyzes the language, intrinsic substance and legislative history of § 36(b) as follows. Plaintiff points out that in the restrictions on such litigation and the relief to be accorded, the word "damages" is mentioned four times. Section 36(b)(3). He argues that a straight "damage" claim is one at law and ordinarily triable to a jury under the Seventh Amendment, citing Pernell v. Southall, 416 U.S. 363, 370, 94 S. Ct. 1723, 1727, 40 L. Ed. 2d 198 (1974). He argues further that the intention was to create a claim at law because § 36(b)(3) limits the recovery to actual damages thereby excluding punitive damages which are not recoverable. He puts the query, "If the claim is not one for damages then what is it for?" He responds to his question that it is not one for restitution because unjust enrichment or restitution is not co-extensive with and may be greater or less than actual damages and ...


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