Opinion ID: 1129339
Heading Depth: 2
Heading Rank: 1

Heading: Whether the Chancery Court Erred in Failing to Transfer the Case to Circuit Court.

Text: ¶ 8. Mathis asserts that a number of the issues he raises are equitable because 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). [2] 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; [3] 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.
¶ 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. [4] ¶ 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.