Case Name: ERA FRANCHISE SYSTEMS, INC. v. Vennit B. MATHIS, II
Court: Mississippi Supreme Court
Jurisdiction: Mississippi
Decision Date: 2006-06-22
Citations: 931 So. 2d 1278
Docket Number: No. 2005-IA-00350-SCT
Parties: ERA FRANCHISE SYSTEMS, INC. v. Vennit B. MATHIS, II.
Judges: SMITH, C.J., CARLSON AND DICKINSON, JJ., CONCUR. EASLEY, J., DISSENTS WITHOUT SEPARATE WRITTEN OPINION. GRAVES, J., DISSENTS WITH SEPARATE WRITTEN OPINION JOINED BY DIAZ, J. COBB, P.J., AND RANDOLPH, J., NOT PARTICIPATING.
Reporter: Southern Reporter, Second Series
Volume: 931
Pages: 1278–1289

Head Matter:
ERA FRANCHISE SYSTEMS, INC. v. Vennit B. MATHIS, II.
No. 2005-IA-00350-SCT.
Supreme Court of Mississippi.
June 22, 2006.
Christopher A. Shapley, Robert L. Gibbs, Jackson, Joseph Anthony Selafani, Steve J. Allen, attorneys for appellant.
Eddie J. Abdeen, Sam S. Thomas, attorneys for appellee.

Opinion:
WALLER, Presiding
Justice, for the Court.
¶ 1. Vennit B. Mathis, II, filed a "Complaint for Declaratory and Other Relief' in the Chancery Court of Covington County against a real estate franchising corporation, ERA Franchise Systems, Inc. ("ERA"), his former business partners, their newly-formed business entities, and his former partners' new partners in the newly-formed business entities. ERA filed a motion to have the action transferred to circuit court. The chancellor held a hearing and, ruling that he would bifurcate the trial between equitable and legal claims, denied the motion to transfer. ERA then filed a petition for interlocutory appeal which this Court granted. See M.R.A.P. 5.
FACTUAL AND PROCEDURAL HISTORY
¶ 2. Vennit B. Mathis, II, filed suit against ERA Franchise Systems, Inc., Jackie R. "Chip" Hill, Pamela Hill, H. Stuart Irby, Mark Warren, Real Estate Professionals of Central Mississippi, LLC (REP-Central), and Real Estate Professionals of the Pine Belt, LLC (REP-Pine Belt) in the Chancery Court of Covington County. Mathis's complaint alleged he had acquired a fifty percent equity interest in, and was a member of, Real Estate Professionals, LLC ("REP"), along with defendants Chip and Pamela Hill. Mathis also alleged he signed documents guaranteeing REP's obligations to ERA under the parties' Franchise Agreement and that he made periodic working capital loans to REP and/or Chip Hill related to REP's business operations. Mathis alleged Chip Hill induced him to lend additional funds and pledge personal assets as security for loans to Chip Hill and/or REP, based on Chip's representation that he would transfer his ownership interest in certain parcels of real estate (titled in Chip's name) to Mathis, in addition to paying back loaned funds.
¶3. Mathis alleged Chip and Pamela sold their equity interest in REP to Stuart Irby but remained REP employees, and that Chip Hill and/or Irby and/or others wilfully and intentionally diverted REP's corporate assets to new entities (REP-Central and REP-Pine Belt) in an attempt to convert REP's assets and intentionally exclude Mathis from REP's business. He contended such actions were taken with ERA's knowledge and/or active participation. Mathis also alleged Chip Hill signed various documents which transferred the hard assets and real estate list ings of REP to the new entities, and that Chip, along with Pamela Hill, Irby, and Warren, induced REP's real estate agents to terminate and/or not honor their agent contracts with REP by becoming agents of REP-Central and/or REP-Pine Belt. He claimed these actions left REP with no cash flow or way to generate business, resulting in Mathis' loss of his equity investment in REP, and the loss of REP's ability to pay its obligations (e.g., those owed to ERA under the Franchise Agreement).
¶ 4. Mathis also alleged REP-Central and REP-Pine Belt misappropriated REP's franchise rights and earned commissions that should have accrued to REP, while allowing money owed to ERA under the franchising agreement to accumulate as a debt of REP. He claimed the various defendants' actions were done knowingly, wilfully, and intentionally to cause REP to default on its Franchise Agreement so that REP-Central, REP-Pine Belt, and their principals could enter new franchising agreements with ERA. He also claimed that the defendants all engaged in a course of conduct to deliberately:
(1) appropriate the assets, rights and corporate opportunities of REP; (2) convert the legal and practical interests of Mathis in REP; (3) cause REP and Mathis so much harm and damage as to attempt to keep Mathis from redressing the wrongs done Mathis; (4) intentionally breach fiduciary and other legal duties owed Mathis; (5) intentionally take away rights and assets of REP; and (6) do other wrongs to Mathis to his substantial harm.
¶ 5. Mathis's complaint contained fourteen causes of action — first seeking the right to bring derivative claims on behalf of REP and including numerous breach of contract allegations, breach of fiduciary duties, violations of various duties of loyalty and care, tortious interference with contracts and business advantages, conspiracy, and other causes of action. Mathis requested relief in the form of a constructive trust, estoppel, specific performance, and actual and punitive damages.
¶ 6. ERA filed an answer to Mathis's complaint, adding counterclaims against Mathis and cross-claims against REP, the Hills, and Irby. ERA later filed a motion to transfer the case to circuit court, and the motion was heard before the chancellor on June 24, 2004. The chancellor ultimately ruled against transferring the case to circuit court, ruling instead to bifurcate the action. He decided he would try "all derivative claim issues as raised by the pleadings and any other strictly chancery matters," "all specific performance claims, if any," and "all claims for rescission asserted by Mathis." The chancellor stated that after ruling on those issues, he would consider any remaining issues and transfer any issues he deemed to be legal to circuit court. He also denied ERA'S motion to have the issue of subject matter jurisdiction certified for interlocutory appeal. We granted ERA's request for interlocutory appeal.
STANDARD OF REVIEW
¶ 7. "The standard of review for a ruling on a motion to transfer from chancery court to circuit court, or from circuit court to chancery court, is de novo.... Jurisdiction is a question of law, and the Court reviewfc] questions of law de novo." Union Nat'l Life Ins. Co. v. Crosby, 870 So.2d 1175, 1178 (Miss.2004) (citations omitted).
ISSUES
I. Whether the Chancery Court Erred in Failing to Transfer the Case to Circuit Court.
A. Derivative Claims
¶ 8. Mathis asserts that a number of the issues he raises are equitable be cause they are derivative in nature. He concedes that if REP were bringing a direct action against ERA for breach of contract and was seeking compensatory and punitive damages, rather than specific performance of the contract, REP's suit would be an action at law. He admits that the same would be true for his claims of breach of fiduciary and other duties and claims of tortious interference. However, he claims that because he is asserting REP's claims derivatively and seeks to have a court of equity fashion a remedy that prevents the other equity member of REP (Irby) from profiting from his wrongful conduct, jurisdiction is proper in chancery court.
¶ 9. As Mathis notes, we have previously addressed the propriety of a shareholder bringing a derivative action in the context of a closely-held corporation in Derouen v. Murray, 604 So.2d 1086 (Miss.1992). In Derouen, Leroy Derouen, a fifty-percent shareholder in a closely-held corporation ("H & D Seafood") brought suit against Hudson Murray, the other fifty-percent shareholder who was also the president and director of H & D Seafood, alleging that Murray, through a new business entity, sold and improperly disposed of assets belonging to H & D Seafood. Derouen, 604 So.2d at 1088-90. In the complaint, Derouen sought "an accounting of all assets and monies coming into [Murray's] hands in favor of H & D Seafood, Inc. and a declaration declaring and paying over to plaintiff a fifty percent interest in all said monies as dividends." Id. at 1089-90. On appeal, this Court noted that although Derouen did not call his action a shareholder's derivative action, he charged Murray with a breach of his fiduciary duty of fair dealing to the corporation, a violation of Murray's duties owed primarily to the corporation and only derivatively owed to Derouen. Id. at 1091. In Derouen, we acknowledged that "our law impresses upon derivative actions certain pre-trial procedural requisites over and above the norm," under Miss.Code Ann. § 79-4-7.40 (Rev.1989). Id. In a footnote, this Court noted that other jurisdictions have debated "whether an action such as this may be brought as well as a direct action" and decided that Mississippi would take the view that:
[i]n the case of a closely held corporation ., the [chancery] court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.
Id. at 1091, n. 2 (quoting American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 7.01 (1994)).
¶ 10. ERA challenges Mathis's assertion that this is a derivative action. ERA notes that Mathis has made no attempt to comply with prerequisites for bringing a derivative action in Mississippi; he has brought REP's derivative claims as a direct action; and he seeks an individual recovery on REP's claims. ERA argues that because Mathis is seeking only an individual recovery in this action, he is clearly not asserting these claims for the benefit of REP, the business entity. ERA further argues that even if Derouen can be read as allowing a shareholder to bring derivative claims in a direct action, it should not be read as allowing a shareholder in a closely-held corporation to bring a direct action, solely for his own benefit, and maintain the suit under the guise of being a shareholder's derivative suit. We note that in the Derouen case, Derouen was merely seeking to recover from Murray, as a dividend, his fifty-percent interest in proceeds that should have gone to the business rather than Murray himself, Id. at 1089-90, yet Mathis seeks to exclude Irby, the other equity member of REP, from sharing in any recovery.
¶ 11. We agree with Mathis's assertion that a true stockholder derivative action is a suit in equity which confers jurisdiction on the chancery court. However, unlike the plaintiff in Derouen, who merely sought his fair share of the proceeds owed to the corporation, Mathis is asserting his own personal claims, in addition to the derivative claims of REP, in a direct action that may benefit him alone, to the exclusion of the other equity owner in REP. Based on these facts, we must conclude that, as to the derivative claims through which Mathis seeks compensatory and punitive damages, he is pursuing a direct legal action rather than a true shareholder's derivative action.
B. Whether the Issues in Mathis's Complaint Required Transfer of the Case to Circuit Court.
¶ 12. ERA argues, based on a recent line of cases from this Court, that the chancellor was without jurisdiction to hear this matter, was required to transfer this case from chancery to circuit court, and committed reversible error in failing to grant a transfer. See, e.g., Copiah Med. Assocs. v. Mississippi Baptist Health Sys., 898 So.2d 656 (Miss.2005); Crosby, 870 So.2d 1175; Briggs & Stratton Corp. v. Smith, 854 So.2d 1045 (Miss.2003); Burnette v. Hartford Underwriters Ins. Co., 770 So.2d 948 (Miss.2000); Southern Leisure Homes, Inc. v. Hardin, 742 So.2d 1088 (Miss.1999). This argument is based in large part on the fact that in those cases, as here, punitive damages were sought, a strong indicator that the matter is a legal action rather than an equitable one. Crosby, 870 So.2d at 1179 (stating that where a complaint seeks both actual and punitive damages, the "remedy is clearly legal rather than equitable in nature."). ERA's position is also based on this Court's prior recognition that "if some doubt exists as to whether a complaint is legal or equitable in nature, that case is better tried in circuit court" since circuit courts have general, rather than limited, jurisdiction. Burnette, 770 So.2d at 952.
¶ 13. ERA claims that Crosby, a case in which we reversed a chancellor for failing to transfer to circuit court, is "substantially indistinguishable" from the instant case and should be considered as controlling law. In. Crosby, Jacqueline Crosby and more than 350 other plaintiffs filed suit in chancery court against various insurance companies and their agents for selling them insurance policies using allegedly fraudulent, deceptive, or otherwise improper sales practices. Crosby, 870 So.2d at 1178. The plaintiffs raised claims of "fraud, fraudulent inducement, breach of duty of good faith and fair dealing, tortious breach of contract, breach of fiduciary duty, assumpsit, unjust enrichment, negligence, gross negligence, [ ] and conversion" and requested relief in the form of a "constructive trust, accounting, injunctive relief, actual damages and punitive damages." Id. at 1178-79. In finding that the chancellor erred in refusing to transfer the action to circuit court, we stated that "[t]he record clearly shows that each and every one of Crosby's claims, even the equitable claims of unjust enrichment and constructive trust, arise from the sale and alleged breach of an insurance contract" and that her claims were tied to the existence of a contractual relationship. Id. at 1182. We also reasoned in Crosby that "it is more appropriate for a circuit court to hear equity claims than it is for a chancery court to hear actions at law since circuit courts have general jurisdiction but chancery courts enjoy only limited jurisdiction," especially in light of the fact that it is in circuit court that the constitutional right to a jury trial is preserved. Id. (Citations omitted). ERA also contends that Copiah, which was handed down after Crosby, affirmed the reasoning of Crosby in mandating a transfer from chancery to circuit court.
¶ 14. Mathis attempts to prevent the application of our holding in Crosby to the present case by arguing that his complaint is a mixture of equitable and legal issues, but we find that Mathis's causes of action are primarily issues stemming from contractual obligations he contends were not met by the defendants. Breach of contract issues are best heard in circuit court. See Union National Life Ins. Co. v. Crosby, 870 So.2d 1175, 1180 (Miss.2004) (citing Southern Leisure Homes, Inc. v. Hardin, 742 So.2d 1088, 1089 (Miss.1999)). While we have allowed a chancery court to retain jurisdiction over cases involving questions of both law and equity, our more recent cases have held that equitable claims are more appropriately brought before a circuit court when they are connected to a contractual relationship or other claims tied to questions of law. See Copiah Med. Assocs'n v. Mississippi Baptist Health Systems, 898 So.2d 656 (Miss.2005); Crosby, 870 So.2d at 1175; RE/Max Real Estate Partners v. Lindsley, 840 So.2d 709 (Miss.2003). In addition, ERA would also be denied the opportunity for a jury trial if Mathis's claims are adjudicated by a chancery court, and plaintiffs should not be allowed to deprive defendants of their constitutional right to a jury trial simply by a choice of forum. See Crosby, 870 So.2d at 1182. The combination of factors pointing to a circuit court as a better choice than a chancery court for the case to be heard convinces us that the chancellor erred by denying the defendants' motion to transfer the case.
CONCLUSION
¶ 15. Because Mathis's claims contain questions of law and equity, request punitive damages, and because having the claims adjudicated in chancery court would deprive ERA of the right to a jury trial, we find the chancellor erred in denying the defendants' motion to transfer the case to circuit court. We reverse the chancery court's denial of defendant's motion and remand with instructions to transfer the case to the Covington County Circuit Court.
¶ 16. REVERSED AND REMANDED.
SMITH, C.J., CARLSON AND DICKINSON, JJ., CONCUR. EASLEY, J., DISSENTS WITHOUT SEPARATE WRITTEN OPINION. GRAVES, J., DISSENTS WITH SEPARATE WRITTEN OPINION JOINED BY DIAZ, J. COBB, P.J., AND RANDOLPH, J., NOT PARTICIPATING.
. ERA is the only defendant who has appealed the chancellor's decision.
. Though jurisdiction was never challenged in Derouen, we note that the action was brought in chancery court.
. The prerequisites for bringing a derivative action under the Mississippi Limited Liability Company Act are found in Miss.Code Ann. § 79-29-1101 to-1104.
. In Copiah, Copiah Medical Associates ("CMA") filed a breach of contract claim against Mississippi Baptist Health Systems ("Baptist") in circuit court. Copiah, 898 So.2d at 658. Baptist later filed a complaint against CMA in chancery court, seeking specific performance of a lease agreement repudiated by CMA. Id. at 658-59. CMA then moved to amend its complaint in circuit court to add a declaratory action that the lease was void. Id. at 659. After both parties filed several motions in both courts, CMA filed an amended motion to transfer the action filed by Baptist in chancery court and requested that the chancellor either dismiss or stay such action pending the outcome of the circuit court action, which the chancellor denied. Id. On interlocutory appeal, this Court determined that because the contract breached was a lease agreement rather than a land sales contract, the breach of contract claim was proper in circuit court. Id. at 661. The Copiah Court also ruled that the claims raised by Baptist in its chancery court complaint "should have been submitted as a compulsory counterclaim in the circuit court action," the circuit court had priority jurisdiction over the complaint filed in chancery court, and transferred the case to circuit court. Id. at 663-64.