Pereira v. Farace June 30, 2005

Docket No. 03-5053

JON O. NEWMAN, Circuit Judge, concurring:

 Whether a jury is available for a claim against a fiduciary for

money damages for breach of fiduciary duties is, for me, a close

question. The Court is confident that a jury trial is available. I

find that proposition at odds with centuries of equitable proceedings

involving claims against trustees, estate executors, and other

fiduciaries, although I acknowledge that the proposition finds some

support in the two cases from the 1960s cited by the Court and, more

significantly, in the dictum recently stated by the Supreme Court in

Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204

(2002). Although that statement is dictum, I reluctantly agree that

we should follow it, and therefore concur. I think it useful,

however, to indicate that the issue is far closer than the Court

acknowledges.

It is literally black letter law, as set forth in the Restatement

(Second) of Trusts, that remedies against a fiduciary, such as a

trustee, are exclusively equitable, with an exception, inapplicable in

the pending case, for recovery of (1) a fixed sum of money that the

fiduciary is under a duty to pay immediately and unconditionally or

(2) a chattel that the fiduciary is under a duty to transfer

immediately and unconditionally:
§ 197 Nature of Remedies of Beneficiary

Except as stated in § 198, the remedies of the

beneficiary against the trustee are exclusively equitable.

§ 198 Legal Remedies of Beneficiary

(1) If the trustee is under a duty to pay money

immediately and unconditionally to the beneficiary, the

beneficiary can maintain an action at law against the

trustee to enforce payment.

(2) If the trustee of a chattel is under a duty to

transfer it immediately and unconditionally to the

beneficiary and in breach of trust fails to transfer it, the

beneficiary can maintain an action at law against him.

Restatement (Second) of Trusts §§ 197, 198 (1959) (emphasis added).

As the Restatement makes clear, the remedy at law for payment of

a sum of money immediately and unconditionally due the beneficiary

applies to money in the hands of the trustee that is being wrongfully

withheld. An example is money to be paid to a trust beneficiary upon

reaching a specified age. See Restatement (Second) Trusts, § 198,

illustration 1. Apart from this exception, it is black letter law

that the beneficiary has an equitable remedy to compel the trustee to

redress a breach of trust:

§ 199 Equitable Remedies of Beneficiary

The beneficiary of a trust can maintain a suit

. . .

(c) to compel the trustee to redress a breach of trust[.]

§ 205 Liability in Case of Breach of Trust

If the trustee commits a breach of trust, he is chargeable with

(a) any loss . . . in the value of the trust estate

resulting from the breach of trust[.]

Restatement (Second) Trusts §§ 199, 205.
A leading encyclopedia states the matter in similar language:

A trustee may be sued in equity, upon misapplication of

trust funds, for a breach of trust, and, indeed, the

remedies available to the beneficiaries of a testamentary

trust against the trustee for a breach of trust are

exclusively equitable. An action by beneficiaries for a

breach of trust is an equitable proceeding, even if money

damages are the only remedy sought.

76 Am. Jur. 2d § 598, at 627-28 (footnotes omitted) (emphases added).

A leading treatise echoes the point:

§ 199. Equitable Remedies of Beneficiary

A court of equity, having jurisdiction over the

administration of trusts, will give the beneficiaries of a

trust such remedies as are necessary for the protection of

their interests. . . . These remedies include . . . redress

for breach of trust.

III William F. Fratcher, Scott on Trusts § 199, at 203-04 (4th ed.

1988).

Abundant case law supports the ability of the victims of a breach

of fiduciary duties to obtain money damages in equity from a defendant

in breach of fiduciary duties. See, e.g., In re Interborough

Consolidated Corp., 288 F. 334 (2d Cir. 1923); Masters v. Bissett, 101

Or. App. 163, 790 P.2d 16, modified on other grounds, 102 Or. App.

289, 794 P.2d 445 (1990) Magill v. Dutchess Bank and Trust Co., 150

A.D.2d 531, 541 N.Y.S.2d 437 (2d Dep’t 1989); Estate of Rothko, 84

Misc. 2d 830, 887, 379 N.Y.S.2d 923, 978 (N.Y. Sur. 1975) (surrogate

required trustee to pay $6,464,880 in damages to trust beneficiaries),

mod. on other grounds, 56 A.D.2d 499, 392 N.Y.S.2d 870 (1st Dep’t),

aff’d, 43 N.Y.2d 305, 401 N.Y.S.2d 449 (1977).

Despite the sweep of the pronouncements in the Restatement, the

American Jurisprudence encyclopedia, and the Scott treatise, and the

decisions that have awarded money damages in equity against
fiduciaries in breach of their fiduciary duties, some decisions have

made a distinction between claims against a fiduciary in equity and

claims against a fiduciary at law. “Where . . . the beneficiaries of

a trust sue the trustee in order to restore funds to the trust, the

action is considered equitable in nature.” Allard v. Pacific National

Bank, 99 Wash. 2d 394, 400-401, 663 P.2d 104, 108 (1983) (citing

Baldus v. Bank of California, 12 Wash. App. 621, 530 P.2d 1350 (1975);

Spitznass v. First National Bank, 269 Or. 676, 525 P.2d 1318 (1974)). 

The restoration of funds to the trust is often referred to as a

“surcharge.” Allard, 99 Wash. at 401 (citing Lockwood v. OFB Corp.,

305 A.2d 636, 638 (Del. Ch. 1973)). On the other hand, “[w]here the

beneficiaries seek recovery for themselves personally, the action is

considered legal in nature.” Id. at 400 (citing Brys v. Pratt, 55

Wash. 2d 122, 104 P. 169 (1909)).

In the pending case, the Court cites two court of appeals

decisions from the 1960s in support of the proposition that a jury is

required in a suit involving a trust or a fiduciary where only “legal

issues,” Halladay v. Verschoor, 381 F.2d 100, 109 (8th Cir. 1967), or

a claim “actionable in a direct suit at common law,” DePinto v.

Provident Security Life Insurance Co., 323 F.2d 826, 837 (9th Cir.

1963), are involved. Halladay strikes me as rather weak authority for

a jury right in claims against a fiduciary because the Court noted

that the complaint against the defendant “failed to allege any

specific averments of fiduciary relationship between the parties.”

Halladay, 381 F.3d at 109. DePinto broadly states that “where a claim

of breach of fiduciary duty is predicated on underlying conduct, such

as negligence, which is actionable in a direct suit at common law, the
issue of whether there has been such a breach is . . . a jury

question.” 323 F.2d at 837. That statement, if followed literally,

would authorize jury trials for countless surcharge actions against

trustees and executors, normally litigated on the equity side, because

it is not uncommon for a claim of breach of fiduciary duties to

include an allegation that the breaching fiduciary was negligent.

More relevant, it seems to me, is the discussion in Ross v.

Barnhard, 396 U.S. 531 (1970), which upheld a right to jury trial for

a shareholder’s derivative suit. In ruling for a jury trial, the

Court said:

[T]he corporations claim is, at least in part, a legal

one. The relief sought is money damages. There are

allegations in the complaint of breach of fiduciary duty,

but there are also allegations of ordinary breach of

contract and gross negligence. The corporation, had it sued

on its own behalf, would have been entitled to a jury’s

determination, at a minimum, of its damages against its

broker under the brokerage contract and of its rights

against its own directors because of their negligence. 

Under these circumstances it is unnecessary to decide

whether the corporations’ other claims are also properly

triable to a jury.

Id. at 542-43. Although the Court does not decide whether the other

claims, i.e., the breach of fiduciary duty claims, are triable to a

jury, a reasonable inference from the introduction of the law claims

with the word “but,” in distinction to the breach of fiduciary claims

is that the latter, standing alone, would not require a jury.

Even if the isolated state court cases such as Spitznass and

Brys, cited above, are correct in requiring a jury for a claim against

a trustee for damages for the personal benefit of a plaintiff, as

distinguished from a claim to replenish a trust, I have difficulty

understanding why the issue of whether a fiduciary has breached his

duties requires a jury when the defaulting trustee must pay money to a
claimant but does not require a jury in a typical surcharge action

when the trustee must pay the same amount of money to the trust for

the same breach of duty.

Despite the sweep of the language from the Restatement supporting

actions in equity against fiduciaries for breach of their duties and

the rarity of decisions requiring a jury for such claims, I am

persuaded that the Supreme Court’s dictum in Great-West, sends a

signal that should not be ignored. The Court there stated: “[F]or

restitution to lie in equity, the action generally must seek not to

impose personal liability on the defendant, but to restore to the

plaintiff particular funds in the defendant’s possession.” Great-West.

534 U.S. at 214 (footnote omitted). The statement is dictum with

respect to an action against a fiduciary because the defendant in

Great-West was not a fiduciary. But the Court appears to be little

concerned with the nature of the defendant and critically concerned

with whether the defendant is being compelled to disgorge specific,

traceable funds in his possession, in which case the action is in

equity, or to pay money out of his pocket, i.e., damages, to a

claimant. Restitution of the latter type, the Court states, requires

a jury. In my view, this broad assertion of a jury right is at odds

with numerous traditional equity actions that have historically been

brought and currently are being brought in probate courts throughout

the country without juries. Nevertheless, the Supreme Court has

asserted that the availability of the jury turns on whether the funds

being sought are in the defendant’s possession, and I am obliged to

follow that guidance.

Since the funds being sought in the pending case are not in the
defendant’s possession, the claim appears to require a jury under

Great-West, notwithstanding that the basis of the claim is breach of

fiduciary duties. For these reasons, I concur in the Court’s opinion.