ZF Micro Solutions, Inc. v. TAT Capital Partners, Ltd., 82 Cal. App. 5th 992 (2022)

Dear constituency list members of the Insolvency Law Committee, the following is a case update written by Thomas Rupp of Keller Benvenutti Kim LLP analyzing a recent decision of interest, ZF Micro Solutions, Inc. v. TAT Capital Partners, Ltd., 82 Cal. App. 5th 992 (2022).

To read the full published decision, click here.

SUMMARY

In a matter of first impression, a California appellate court held that a party was entitled to a jury trial for a claim based on a board member’s alleged breach of fiduciary duty. Although the claim at issue required examination of the board member’s performance of its fiduciary duties, it was nonetheless an action at law because it was essentially a common law tort claim for money damages and did not call on the trial court to balance the equities regarding the board member’s actions.

FACTS

ZF Micro Devices designed microchips.  TAT, a Swiss company, controlled a seat on ZF Micro Devices’ board on account of its equity investment. In 2002, ZF Micro Devices shut down for lack of funding.

The successor to ZF Micro Devices, ZF Micro Solutions (“ZF Micro”), sued TAT, contending that it breached its fiduciary duty to ZF Micro Devices while serving on its board by disparaging the founder and other board members, thus scaring off other investment and leading to foreclosure by its secured lender.

The trial court held that ZF Micro had no right to a jury trial because its sole claim for breach of fiduciary duty was equitable in nature. The trial court ruled for TAT after a bench trial, and ZF Micro appealed.  

RULING

The Court of Appeal reversed the trial court, finding that ZF Micro indeed had a jury trial right because the nature of ZF Micro’s sole claim against TAT did not implicate the trial court’s equitable powers.

Whether an action sounds in law or equity determines the right to a jury trial. The right to a jury trial is guaranteed by the California Constitution. Cal. Const. Art. I, § 16. That right exists “as it existed at common law in 1850, when the Constitution was first adopted.” 82 Cal. App. 5th at 998. Generally, a jury trial “is a matter of right in a civil action at law, but not in equity.” Id. In determining whether a party has a right to a jury trial, courts look to the “gist” of the action—the “nature of the rights involved and the facts of the particular case.” Id.

Many actions involving a director’s duty to shareholders, or a majority shareholder’s duties to minority shareholders, are equitable in nature. “It 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.” Id. at 1000.

But in ZF Micro Solutions, “the allegedly breached duty is the one that a director owes to a corporation itself,” id., and this is a duty that was recognized at common law long before it was codified in California. See Cal. Corp. Code § 309.  Absent guidance from any published opinion on whether such a cause of action is legal or equitable, the court turned to “general law regarding distinguishing between legal and equitable claims.” Id.

While legal actions at common law involved suits for money damages to compensate the plaintiff for injury (e.g., damages for breach of contract), “[e]quity arose to make exceptions when rules of law would work injustice in particular cases or to deal with some novel situation not covered by rules of law,” such as an injunction or an order to “disgorge ill-gotten gains.” Id.

The Court of Appeal observed 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.” Id. at 1002. The Court of Appeal noted that:

“TAT, through its representative, allegedly destroyed the corporation by disparaging its management and working behind the scenes to undermine its efforts to obtain financing. . . . TAT would be liable to ZF Micro Devices for its destruction by these means even if it were not a board member. The cause of action would simply have had a different label – trade libel or interference with prospective economic advantage, for example. Both of those torts are unquestionably matters for decision by a jury.” Id. [Footnote omitted].

The Court of Appeal further noted that ZF Micro sought only money damages (not an injunction or the disgorgement of ill-gotten gains) and that action did not require the court “to weigh the fairness of the disputed transaction to each side or factor the business judgment rule into the analysis.” Id.

 AUTHOR’S COMMENTS

It is a common preconception that all breach of fiduciary duty claims against directors require examination of self-serving transactions and the balancing of equities to protect the rights of stakeholders. However, when the gist of a claim for breach of fiduciary duty against a corporate director is essentially a common law tort that does not require a court to use its equitable powers, it may be a legal claim that carries the right to a jury trial.

Practitioners should also note that California law and federal law concerning the right to a jury trial at common law are notidentical. See Nationwide Biweekly Admin., Inc. v. Superior Court, 9 Cal. 5th 279, 293 (2020) (“Seventh Amendment [of United States Constitution] applies only to federal court proceedings, not state court proceedings. The constitutional right to jury trial in state court civil proceedings is governed only by the civil jury trial provisions of each individual state’s own state constitution. In several important respects, California decisions have construed the civil jury trial provision of the California Constitution in a manner differently from how the federal high court has interpreted the federal civil jury trial provision.”) (emphasis in original).

These materials were written by Thomas Rupp of Keller Benvenutti Kim LLP (trupp@kbkllp.com) in San Francisco, California.  Editorial contributions were provided by Marc Lieberman of FLP Law Group in Los Angeles, California (marc.lieberman@flpllp.com).