Pereira v. Farace - concurrence

(аnd “hands”) sculpted perhaps “heads” PEREIRA, is, John S. conceptually separable.

are That As Trustee of Trace Cho- Holdings, Inc., International may they sun be able to show that & Trace invoke Sub, Inc., Plaintiff-Appellee, Foam concept the viewer a separate from that function, “clothing” the costume’s that their addition to the costume FARACE, Marcus, Andrea Frederick motivated a desire to enhance the cos Philip Smith, Winters, & Karl is, functionality qua clothing. tume’s It Defendants-Appellants, course, possible any that at of several later failed, stages Chosun will have as a matter Cogan, Nelson, Marshall Robert S. law, prove separability that such ex Sherman, Saul S. & Tambra possibility justify ists. But cannot King, Defendants. complaint dismissal of Chosun’s now on a 03-5055(CON). 03-5053(L), Docket Nos. 12(b)(6) Rule motion.

United Appeals, States Court Second Circuit. III. CONCLUSION Argued: Nov. 2004. judgment of the district court is Decided: June Vacated, and the case for fur- Remanded proceedings ther not inconsistent with this

opinion. Indus., Inc., (3d Cir.1990) 912 F.2d (separate such a apart "function” (holding that masks non-useful are articles clothing) concomitant function as can Act). protected by Copyright costume, mask, make a or a "useful” under fundamentally, More Chrisha’s broad un § Taxidermy 101. See Hart v. Sup Dan Chase derstanding masquerading "useful” Co., (2d Cir.1996) (hold ply 86 F.3d Copyright function is at odds with the Act's ing mannequin that the function of a fish "is all, very definition of "useful articles.” After portray appearance” give its own form the Act states that a article” "useful is one it, to the fish skin which covers and therefore "having an intrinsic utilitarian function that concluding mannequins fish are not merely portray is not appearance Act); "useful Copyright articles” under the convey article or to information.” U.S.C. Superior Form Builders v. Dan Chase Taxider added). (emphasis The function aof my (4th Supply Cir. is, precisely, portray appear costume 1996) (holding taxidermy that mammal man (like lion, something ladybug, ance of or nequins are not "useful articles” under the orangutan), doing, and in so to cause the Copyright "merely Act because function with, as, appear

wearer to be associated portray animal). appearance” of an portrayed. the item It is difficult to see how Fischkin, LeBoeuf, Lamb,

Theodore J. MacRae, L.L.P., York, Greene & New (John N.Y. P. Campo Kinzey, & John S. on brief), Plaintiff-Appellee. for Levander, LLP, Andrew J. Dechert York, (Guy Petrillo, New NY Yun G. Lee brief), & Robert Topp, W. on the for De- fendant-Appellant Andrea Farace. Maas, E. Frankfurt Kurnit Klein breached their duties allowing Brian Selz, PC, York, (Wendy a of improper & New NY. number transactions to take brief), Defendant-Ap- for Stryker, place on the Judg- exhausted Trace funds. Frederick Marcus. pellant granted ment was to the Trustee defendants, all jointly who were found Meister, Piper A. DLA Rudnick Robert severally liable. LLP, York, Gray Cary New N.Y. US (John Sohn, Clarke, Jr. & J. Joshua S. аppeal, challenge On defendants the de- brief), Defendants-Appellants Phil- trial, request nial of their as well Karl ip Smith and Winters. finding as the breached their Smith, Martin S. Kaufman & Briscoe R. fiduciary duties. York, Foundation, Legal Atlantic New agree Because we that the district court N.Y., Corporate Amicus for Curiae trial, denying erred in defendants a County L.A. Department’s Section of the judgment we vacate the below and remand Association, support Bar in of Defendant- (1) for trial. We also find that: Philip Appellant Smith. right Trustee did not waive his to seek NEWMAN, McLAUGHLIN, Before: (2) remand; compensatory damages on POOLER, Judges. and Circuit bring Trustee does not standing have claims; due care and the district court in Judge JON 0. NEWMAN concurs in applying Capi- erred the Cash Flow and in a majority opinion separate insolvency. tal test to determine Adequacy opinion. McLAUGHLIN, Judge: Circuit BACKGROUND Farace, Defendants Andrea Frederick Marcus, Philip (collectively, “de- Smith I. The Facts fendants”) are former officers and di- exhaustively by Holdings, rectors of Trace International facts are set forth (“Trace”), bankruptcy. Cogan, Inc. in the district court. is now See Pereira J.) (S.D.N.Y.2003) (Sweet, Plaintiff 294 B.R. John Pereira is the trustee ”). (“Trustee” (“Pereira III “plaintiff’) acting on behalf We therefore summarize Trace; background only he was to the extent relevant appointed bank- ruptcy appeal appeal. court. Defendants now to this judgment from a entered them privately-held Trace was a Until in Judge Robert Sweet the United States in corporation headquartered Delaware District Court for the Southern District of holding Trace as a Manhattan. served York. New company, primary assets of which July In the Trustee filed an International, Inc. were stock Foamex complaint suing amended defendants and (“Foamex”), Inc., ‍‌​​‌​​‌​‌‌‌‌‌‌‌‌‌‌‌​‌‌‌​​​​‌​​​‌​‌‌​‌‌​​​‌​‌​‌‌‌‍Group, United Auto for, Trace officers and in- other directors Industries. CHF alia, fiduciary duty arising ter Cogan helped from their roles in Trace’s financial de- Marshall to form Trace time, In he has been Trace’s having mise. November denied 1974. Since trial, shareholder, request majority defendants’ chairman (“Board”), twelve-day and the com district court conducted a board directors (“CEO”). opinion May pany’s trial. In chief executive officer bench dated Although Cogan’s court conduct lies at the heart held defendants case, party Cogan’s compensation of this he is not this ment set at $2.4 appeal.1 per year, million which could be increased only with Board authorization. The Em- Defendant Andrea Farace was a mem- ployment Agreement approved by ber of the Trace Board from December Board. During until 1997. December period, Farace also served as Trace’s exec- unilaterally Cogan increased his vice-prеsident. utive Farace became salary annual million without Board $3.6 1994, po- in December Trace’s President later, however, years approval. upon Five until Al- sition he held December 1997. Compensation the recommendation of the though Farace was of Foa- named CEO counsel, Committee and outside the Board employment mex in April his retroactively Cogan’s compensa- ratified did not end until Trace two months later period tion for the between 1988 and 1994. position. when he Foamex assumed the In August ten-year when the Em- Farace left Foamex ployment Agreement expire, was about to Defendant Frederick Marcus served on Cogan unilaterally renewed second Trace’s Board from 1975 until and on ten-year Despite having right term. Compensation Trace Committee reject renewal, the Board was not 1997, 1997 and 1998. Between 1984 and even involved. Marcus was vice-chairman of the Board through Cogan From 1995 managing and Trace’s senior director/ unilat- erally borrowed over million from $13 Smith, Philip lawyer, Defendant held any input Trace. Without from Trace’s positions numerous as an officer at Trace. directors, other officers or Cogan’s person- He served as General Counsel Janu- al lawyer drafted notes evidencing the ary until December 1999. He also Cogan loans. also caused Trace Inc. to corporate secretary served as as one gifts make million in loans and to his $1.7 vice-presidents. of Trace’s employees wife and other without —all Winters, pub- Defendant Karl a certified approval. Board accountant, lic was also a Trace officer. spite Winters Between 1995 and September worked Trace from its precarious condition, 1993 to He financial paid December 1999. became a Trace such, viсe-president in June 1994'. million in As he dividends to its sharehold- $5.1 reported Nearly chief financial officer ers. million of the dividend $2 (“CFO”). payments were made without ap- Board proval.

At appeal the core of this are several effectively transactions which exhausted (“Dow”) Company Dow Chemical owned capital, Trace’s driving Trace into bank- million of Trace A Series Preferred $10 ruptcy. In Stock. Dow asked buy Trace to Cogan’s original back the stock. employment agreement Complying with Dow’s Trace, drafted, (“Employment Agreement”) request, Cogan signed, with Smith Cogan agreement whereby entered into called for buy Trace would ten-year serve as chairman and CEO Dow’s or pur- back stock cause it to be “initial term.” Employment Agree- by May The chased 1998. Cogan was found liable the district court Trustee. $44.4 million. He then settled with the fiduciary was almost mil- ed their duties to Trace under

By May Traсe $2 (Count (2) IV); cumulative dividends due Delaware common law lion in arrears on stock that all the directors had violated Delaware preferred a convertible §§ Corporation A General 160 and pari passu ranked with Dow’s Series 174(a), prohibit payment a Delaware which of divi- was advised Stock. Smith buy corporation back or firm that Trace could not dends while is insolvent law insolvent, paying without first all the which will render see EBS Dow’s stock Investors, N.A., arrearages. Litig. Barclays To save Trace Global dividend $2 (3d Cir.2002), million, Cogan purchase had Dow’s 304 F.3d Smith redemption corporation’s million secured loan from of stock when a stock with a $3 impaired or which will preferred question capital impair Trace. The stock (Count V). corporate capital the collateral. See Del. served as 174(a) (2005). §§ Ann. tit. Code. 1997, Cogan spent In million of June $1 According complaint, to the Trace had tо throw himself a 60th Trace’s funds 1995; been insolvent since therefore the birthday party at the Museum of Modern directors and officers owed duties Art in New York. The funds were used to Trace’s creditors as well as to its stock- in- party Board approval. without sought damages holders. The Trustee for: screening of a film entitled cluded the (1) Cogan’s borrowing unauthorized cost Cogan,” “The Life of Marshall (2) Trace; million from Cogan’s over $108,000 produce. $13 gifts unauthorized loans and to other insid- ers; History Cogan’s compensation; II. excessive Procedural (4) Cogan’s unilateral renewal of his em- July reorganiza- Trace filed for (5) ployment agreement; payment of divi- Chapter Bankruptcy under 11 of the tion approval dends without Board and at a Bankruptcy in the Code United States capital impaired; time when Trace’s was for the Southern District of New Court (6) redemption pre- a million of Trace $3 time, York. At the Traсe’s liabilities ex- capital impaired; ferred stock when was its assets million. ceeded $121 (7) corporate and use of over million $1 In of the August the Office United Cogan’s birthday party. funds for appointed Trustee official unse- States trial, defendants demanded a Prior on behalf of cured Creditors’ Committee Trustee jury trial on Counts IV and V. The permission the of the Bank- Trace. With seeking equita- the responded that he was Court, Committee ruptcy Creditors’ and remedy ble of restitution on Counts TV in the District complaint filed Southern request compensatory his for (despite V J.) (Sweet, against, of New York inter complaint). In Pereira v. damages alios, Cogan and the defendants named Cogan, No. 00 Civ. 2002 WL 989460 herein. (S.D.N.Y. 2002) (“Pereira II”), May 24, 2000, January Bankruptcy On found that Counts IV and V Judge Sweet Chapter converted Trace’s 11 reor- Court law,” within did not constitute a suit “at ganization Chapter liquidation. into meaning of the Seventh Amendment appointеd Pereira was as trustee. John rea- the United States Constitution. He such, replaced Pereira the creditors as As (1) of fidu- soned that: actions for breach plaintiff in the District action. Southern ciary duty historically equitable; and were (1) (2) seeking in fact restitu- complaint alleged that: all the Trustee was Pereira’s these find- tion. Id. at *2-4. Based on Trace’s officers and directors had breach- inapplicable was because the Trustee had ings, request the court denied defendants’ trial. Id. for the brought the action benefit creditors, 533-34; not Trace. Id. at Per trial, Judge twelve-day After a bench Cogan, eira v. No. 00 Civ. 2001 WL liable for misman- Sweet found defendants 2001) (S.D.N.Y. at *9-10 Mar. III, 294 B.R. at 449. aging Trace. Pereira (“Pereira I”). holding, In so the district court found that defen- Specifically, the rejected ar (1) court the director-defendants’ disregarded corporate gov- had: dants [cjlause (2) gument “[ejxculpatory that the 532; proсedures, id. at ernance actions, only eye” Cogan’s inapplicable id. individual turned a “blind (3) 463; and, creditors, standing at therefore breached which the Trustee lacks fiduciary III, duties owed to both Trace’s 294 B.R. at 534. to assert.” Pereira creditors, and its id. at 539. shareholders majority Finally, observing that holding that defendants had breached challenged transactions were not the creditors, their duties to the subject of board action the district court that Trace was insol- district court found to apply judgment declined the “business or, least, vicinity vent at of insolven- protect rule” to the director-defendants. cy improper time of defendants’ required Id. at 530-31. The court thus applied The district two acts. court insol- defendants to show that each transaction (1) test, vency a balance sheet formulas: Trace, “entirely fair” to agreed upon by which was both the Trus- failed do. Id. (2) . experts; tee’s and defendants’ аnd judgment court entered de- Capital Adequacy test Cash Flow (a) fendants as follows: Marcus was liable (“Cash test”), Flow which was advocated (b) million; for Farace for mil- $37.4 $27.3 only by expert. the Trustee’s (c) (d) lion; million; Smith for $21.4 Additionally, the court held the director- Winters for million. $21.4 their, issuance im- defendants liable Marcus, Farace, Defendants proper allowing and for the Dow Smith dividends redemption Specifically, appeal judgment.2 to occur. this court found that the director-defendants Corpora- violated: Delaware General DISCUSSION 174, § prohibits pay- tion Law which the Defendants raise a sandstorm of claims corpora- ment of a dividend while a stock However, appeal. our focus on this insolvent, tion is or one that renders a appeal principal argument: is their wheth- (2) insolvent; company Delaware and Gen- er the in denying district court erred them 160, Corporation prohib- eral which jury triаl on Counts IV V. On the redemption capi- its the of stock “when the merits, argue defendants the court corporation impaired tal of or when [a] made in finding numerous errors them any such ... im- redemption would cause fiduciary duty liable for breach of their pairment capital corporation.” of the (Count IV) under Delaware common law

See id. at 541. (Count V). statutory and Delaware law exculpatory The court also held that the in argument address each turn to Incorporation, clause in Trace’s Articles of We in liability necessary light which to the extent of our deci- shields directors care, duty Trace for the breach of the sion to reverse the denial of a trial. prior Opinion. Winters entered into settlement with the Trustee to the issuance of this

337 country. According this Founding the Jury I. Trial Fathers, right the served as “an important argue that were enti- Defendants against tyranny corruption.” bulwark jury trial оn the Trustee’s breach tled to a Shore, Hosiery Parklane Inc. v. 439 the nature claim because 322, 343, 645, U.S. 99 S.Ct. 58 L.Ed.2d 552 underlying legal action was and the the (1979) J., (Rehnquist, dissenting). As remedy sought compensatory dam- was Rehnquist then-Justice “Tri reminded us: For the ages, equitable restitution. by jury laymen al rather than the below, agree. reasons stated we sovereign’s judges important to the review de novo a district We juries represent lay founders because the deny trial. court’s decision to See sense, man’s common ‘passional the ele Materials, Brown v. Sandimo 250 F.3d nature,’ keep ments our and thus (2d Cir.2001). 120, 125 administration of law in accord with the 2 Although Rule of the Federal Rules feelings wishes and community.” grandly proclaims Civil Procedure J., Id. at 99 (Rehnquist, S.Ct. 645 343 - “[tjhere shall be one form of action to be Holmes, dissenting) (quoting O. Collected ” thereby causing known as ‘civil action’ (1920)). Legal Papers 237 merger equity, of law and the distinc today. New viability” tion “retains its In deciding partiсular whether a (2d White, York v. 528 F.2d 338 Cir. at triggers action is a suit law that this 1975). By to a preserving right important protection, we are instructed to law,” only in trial “suits at common two-step test apply set forth Granfi Seventh Amendment of the States United nanciera, 492 U.S. at 109 S.Ct. 2782. law/equity di perpetuates Constitution First, we ask “whether the action would Const, Indeed, chotomy. amend. VII. U.S. legal equitable have been deemed or phrase “suits at common law” refers to century England.” 18th Germain Con rights legal [are] “suits be Bank, necticut Nat’l 1328 determined, in ascertained and contradis (2d Cir.1993) (citing Granfinanciera, 492 equitable rights tinction to those where “ 2782). Second, ‘we U.S. S.Ct. recognized equitable [are] alone reme sought and determine remedy examine Granfinanciera, dies administered.” [are] ” equitable in nature.’ whether 33, 41, 109 Nordberg, S.A. v. 492 U.S. S.Ct. Granfinanciera, 492 U.S. 109 S.Ct. (quoting 106 L.Ed.2d 26 Par States, (quoting Tull v. United (3 Pet.) 433, 447, Bedford, sons 417-18, U.S. S.Ct. (1830)). Therefore, despite L.Ed. 732 (1987)). L.Ed.2d 365 We then “balance ‍‌​​‌​​‌​‌‌‌‌‌‌‌‌‌‌‌​‌‌‌​​​​‌​​​‌​‌‌​‌‌​​​‌​‌​‌‌‌‍merger equity near univеrsal law and two, giving greater weight to the lat effectuated Federal Rule of Civil Proce Germain, (citing F.2d at 1328 ter.” 2, by jury today dure trial remains “the 42, Granfinanciera, at 109 492 U.S. S.Ct. prevents sword the bed that the com 2782). plete equity.” union of law and Fredal v.

Forster, 606, 215, Mich.App. 9 156 N.W.2d Equitable 1: Action in Step Legal A. (1967) (quoting unpublished 612 an lecture ? Century England 18th by Zechariah redoubtable Professor Chafee, Jr., University late of Harvard grappling After three decades School). Law analysis, the equity with the law versus up his late Justice William Brennan threw right by jury long to trial has- been “rattling He had wearied of important protection an the civil law of hands. 338 only general a rule. writs” and that this was and is dusty attics of ancient

through Bern juris- They contend that under Ross v. Amendment suggested that Seventh 733, hard, 531, 24 90 S.Ct. dependence its on 396 U.S. prudence should sever (1970), Amend common law L.Ed.2d 729 Seventh analogies English “[t]he historical depends on the nature Chauffeurs, question Team- ment in 1791. as existed tried rather than the char Terry, the issue be Helpers, Local No. 391 sters & 538, 1339, at 90 558, 574-75, acter of the overall action.” Id. 110 S.Ct. 108 494 U.S. J., (Brennan, added); see also Hal (emphasis concur- S.Ct. 733 519 L.Ed.2d (8th Verschoor, F.2d may sympathize laday v. ring). However much we Cir.1967) (“Ordinarily, enforcement of ad sug- position, with his Justice Brennan’s in unheeded, thus, proceedings we ministration of trusts gestion gone has juris “dusty volving subjects equity attics” trusts are through to scour are left diction, the basic nature of the but where ourselves. issues, only it is en present legal IV, brought pursuant to Delaware Count ... one tirely proper to treat the case as law, alleges a claim for breach common docket.”); DePinto v. belonging on the law V, fiduciary duty. Count which seeks F.2d Provident Sec. Ins. Life against Farace and Marcus for damages (9th Cir.1963) (“[W]e a hold that where of dividends while allowing payment fiduciary duty predi claim of breach is a claim for capital impaired, Tracе’s conduct, as upon underlying cated such Corporation of Delaware General negligence, is actionable in a direct 174(a). Nevertheless, Count V law, at common of whether suit issue fiduciary duty analogous to a breach jury ... a there has been such breach is claim, as such properly and was treated question.”). the district court. test, Applying the “nature of the issues” V, analyzing IV and the dis- Counts defendants maintain that the issues general trict court concluded that “[t]he negligence-based Counts IV and V are be- fiduciary rule is that ‘actions for breach of applies “gross negli- cause Delaware uni- duty, historically speaking, are almost gence” fiduciary standard to breach of formly equity” carrying actions “in with — ” duty negligence claims. Because is histor- by jury.’ right no to trial Pereira them Ross, claim, at ically see II, (quoting Page 2002 WL at *3. 90 S.Ct. defendants assert Suisse First Mgmt. Mill Asset Credit are entitled to a trial under the Sev- *4 Corр., 2001 WL at Boston enth Amendment. 2001)). (S.D.N.Y. July The court thus rejected argument. this step Judge believed that the first of the Sweet Granfi- interpreta- denying test tilted favor of He cautioned that defendants’ nanciera every effectively permit trial. tion of Ross would defendants fiduciary duty claim to be recast statement accept We the district court’s “parties action at law such “general as a rule” breach seemingly to a trial would be entitled historically within the claims were any fiduciary duty on and all breach of jurisdiction equity courts. See Ter II, claims.” Pereira WL ry, (citing 110 S.Ct. 1339 U.S. *3. Story, Equity J. Juris Commentaries 1886) (13th agree Judge § and with Sweet that defen- prudence at 266 ed. We 199(c) (Second) holding Trusts dants mischaracterize the of Ross. Restatement (1959)). however, Ross, brought In a emphasize, shareholders derivative Defendants directors, against corporate alleging actually what the claim for relief suit [was].” fiduciary duty, Queen, Wood, breach of cоn- Dairy breach See Inc. v. Ross,

tract, 469, 477-78, gross negligence. 82 S.Ct. 8 L.Ed.2d 44 (1962) (“[T]he Although 90 S.Ct. 733. share- U.S. right constitutional to trial derivative claims had been tradi- holder by jury cannot depend upon be made to tionally equity, Supreme heard choice of words used in plead- right to a trial because Court found ings.”). The district court then went on to legal plaintiffs presented issues— had, fact, that determine the Trustee negligence. breach of contract and Id. actually restitution,” “limited his relief to Despite 90 S.Ct. 733. defendants’ III, equitable nature. Pereira requires claim that Ross us to break the doing 294 B.R. at 544. so In the district fiduciary duty claim Trustee’s breach of court concluded that “the fact that parts, merely into its most elemental Ross officers and directors personally never requires beyond proce- courts to look possessed any disputed funds [does] dural vehicle of shareholders derivative not that equita- militate the relief [is] possible legal suit to the nature of the (internal ble.” Id. at 544-45 footnote and corporation’s underlying claims. Id. at omitted). citation (noting “nothing- 90 S.Ct. 733 appeal, On challenge defendants upon turns the form of the action or the court’s characterization of the eq- relief as procedural parties device which the that, They emphasize uitable. because court”). happened to come before the they possessed in question never the funds decline, therefore, adopt defen- We enriched, unjustly and thus were not expansive interpretation dants’ of Ross. remedy sought against them cannot be Accordingly, we hold that Counts IV V Rather, equitable. considered according equitable century would have been in 18th defendants, remedy sought le- England step thus one Granfi- gal and thus were entitled to a weighs against nanciera trial. trial. agree. We Step B. 2: Nature Sought of Relief We have to concede that our decision step

The second Goldman, Strom v. Sachs & Granfinan- 202 F.3d ciera test focuses the nature of the (2d Cir.1999), contrary to a points sought. Granfinanciera, relief 492 U.S. at Strom, eq- result. we as characterized upon 109 S.Ct. 2782. It calls us monetary sought by uitable the relief “type [sought] decide whether the of relief plaintiff alleged for defendant’s in equity general was available courts as fiduciary duty though even the defendant Rego Corp., rule.” v. Westvaco actually possess ques- did not the funds in (4th Cir.2003). 140, 145 step This is ac “plain- tion. Id. at 144. We wrote that first, “greater weight” corded than the alleged tiffs claim is based on the Germain, 1328, and, such, 988 F.2d at fiduciary duty, always of a a claim that has important” step. “more Granfinanci jurisdiction been within the exclusive era, 42, 109 492 U.S. at S.Ct. 2782. equity required and that never has a show- unjust relief, ing enrichment because the theo- prayer In his the Trustee sought is, ry entirely of the action is different.” Id. “compensatory damages,” which (footnote omitted). course, at 145 We also found classic form of relief. court, however, unjust The district absence of enrichment “[t]he “looked be- yond here is not inconsistent with ac- [the Trustee’s] characterization[ ] therefore

340 rejected argument. 392 at plain- of the relief this same F.3d curate characterization ” that, while the “dis ‘equitable.’ tiff as Id. 409. That court found seeks in ... on the tinction made Strom based later, however, years Supreme Two ... status of the defendant as An decision Great-West & Court’s Life may compelling have been before G'reat- Knudson, nuity Company Insurance v. West, (positing not so now.” Id. that [it is] 204, 708, 122 151 L.Ed.2d 534 U.S. S.Ct. Supreme “we must adhere to the Court’s (2002), reconfigured 635 land emphatic guidance Great- [in rather Greatr-West, In scape of restitution. West]”)) Oregon also Li see McLeod that, “for restitution Supreme Court stated (9th Inc., 376, thoprint 378 Cir. equity, generally to lie in the action must 1996) (“[T]he defendant, status liability on the impose personal seek not to nonfiduciary, fiduciary or does not whether defendant, plaintiff but to restore to the question damages whether affect the property funds or in the particular defen ”). ‘appropriate equitable constitute relief.’ 214, at 122 possession.” dant’s Id. S.Ct. omitted) added). (footnote (emphasis 708 circuits, our sister we are com- Like grain cuts across the reasoning This broadly as it pelled read G'reatr-West Indeed, al Strom. several courts have Nor ignore is written. can we the Su- ready agreed that Greatr-West has over 2, preme high- Court’s inclusion of footnote See, e.g., ruled decision in Strom. our lighting single exception to its rule that a Callery v. Ins. 392 United States Life possess defendant must the funds at issue Cir.2004) (10th 401, (stating F.3d that 408 remedy equitable for the restitution Supreme rejected “the Court ‍‌​​‌​​‌​‌‌‌‌‌‌‌‌‌‌‌​‌‌‌​​​​‌​​​‌​‌‌​‌‌​​​‌​‌​‌‌‌‍has Great-West, him. at lie ‘equitable broad definition of [Strom’s] (That 2, 214 n. 122 “limited S.Ct. 708. ”); Barasch, remedy’ Bona v. No. 01 Civ. exceрtion” accounting profits,” is for “an (S.D.N.Y. at *11 2003 WL course, which, of is not relevant to this 20, 2003); Mar. De Pace v. Matsushita Id.) case. Am., Corp. F.Supp.2d Elec. 257 563 Finally, Ginsburg’s dissent Justice (E.D.N.Y.2003); Principal Kishter v. Life guidance by offers further Great-West (S.D.N.Y. Ins. Co., F.Supp.2d 443 pointing out that restitution is measured 2002) (stating “the Second Circuit’s by “unjust gain, a defendant’s rather than reasoning superseded has been Strom [by Id. at plaintiffs] loss.” Great-West”); Augienello J., (Ginsburg, dissenting) (citing S.Ct. 708 Corp., Coast-to-Coast Fin. No. 01 Civ. 12.1(1), Dobbs, 1 D. Remedies (S.D.N.Y. 2002), Aug.7, WL at *6 9). It is undeniable here that the Trustee (un (2d Cir.2003) aff’d, Fed.Appx. only to recover funds attributable to seeks order); published summary Rego see also loss, unjust gain. Trace’s not the director’s (4th v. Westvaco Corp., 319 F.3d Cir.2003) (noting that the Supreme “[t]he court im- We thus hold that’the district rejected” argument squarely Court has dam- propérly characterized the Trustee’s fiduciary duty “actions Plaintiffs claim is for ages as restitution. only brought a trustee could be compensatory damages legal claim. —a equity”). Terry, 110 S.Ct. 1339. See U.S. holding “greater weight” Because afford The Trustee contends we. step second than to its inapplicable Great-West is here because Granfinanciera’s first, only non-fiduciary de we conclude that defendants were Greatr-West involved Cattery, to a trial on the Trustee’s fendants. Tenth Circuit entitled fiduciary duty merely we on of claims and remand because he advocated breach for on the issue. purpose. remand for that restitution trial Accordingly, we hold the that Trustee II. Additional Issues right compensa- did not waive his to seek tory on damages remand. plethora of is- Defendants raise other Because we are remand- appeal. sues on B. Standing Trustee to

ing trial we see no need However, these resolve all of issues. these argue director-defendants that recur, fully may so issues were briefed both Trace’s Incorporation Certificate of (1) three briefly we address of them: any and Delaware law shield from them right whether the Trustee has waived his damages money rooted in a of violation the (2) non-equitable damages; the Trus- duty of care. particularly, director’s More rights assert the of the standing tee’s Trustee, legal contend the (3) creditors; insolvency correct Trace, standing bring successor to lacks standard. due care claims as he too is bound agree. We Certificate. de We review novo district Delaware General Corporation court’s conclusions. See Travellers 102(b)(7) Airlines, Inc., § corporations Int’l A.G. v. Trans World authorizes (2d Cir.1994). 1570, 1574 adopt provision shielding a charter di- F.3d payment monetary rectors from the of incorporated Trace is Because on duty awards based breaches apply Delaware we Delaware law to 102(b)(7) 8, § care. See Del.Code Ann. tit. questions presented generally us. See (2005). just adopted Trace such “excul- Investors, Litig. Barclays EBS Global patory” It clause. states: N.A., 305 (applying 304 F.3d at Delaware permitted by To the fullest extent circumstances); law under similar McCall Corporation Law, General as the same Cir.2001) (6th Scott, presently may exists or hereafter be (same). amended, Corporation a director of the Corporation shall not be liable to or A. Waiver monetary damages its stockholders for maintain that Defendants the Trus as a director duty for breach any money tee has claim for dam waived (i) liability any except for for ages. They argument base this .duty loyalty to the Cor- director’s request Trustee’s of his for abandonment (ii) stockholders, or its for poration acts “compensatory damages” equi in favor of or which good or omissions not faith restitution, table which the defendants al intentional or a involve misconduct lege the Trustee did оrder to defeat (iii) law, violation of under Sec- knowing reject request. defendants’ trial We Corporation tion General argument. defendants’ (iv) Law, any for from or transaction an improper director which the derived holding our Trustee Given benefit. personal indeed, (and, sought properly in his alleged added). complaint) clause makes it compensatory damages, (emphasis This are wholly inequitable particularly abundantly would be clear directors shield- — liability pleading this era of relaxed rules —to ed from breaches of (1) care, preclude damages improper him not for dividends or seeking such but pand rights id. breaches circumscribed the trus redemptions, see tee, may only who assert the claims of good loyalty. of of faith the duties creditors, bankrupt corporation, not its see argues, and The Trustee the district Resources, Production 863 A.2d at 795. despite court that the of agreed, existence Resources, clause, In the the Production Delaware exculpatory the Trustee could Chancery court considered similar issue. bring of duty claim for breach the of care that an creditors, exculpatory court held charter on rather the than behalf of creditor provision precluded predi claims court that corporation. The reasoned mismanagement i.e., duty cated on injury is to all as a “where the creditors — not preclude care violations—but did class, standing creditors who lack it is the claims wrongdoing— based on deliberate may who a claim bring the Trustee i.e., duty loyalty violations. Id. at 793- generalized injury.” based on that Per In court holding, so found that the I, at (citing eira 2001 *11 Kalb WL fiduciary duty claim belonged Am. Fin. Corp., Voorhis & Co. v. 8 F.3d corporation and not the individual (2d Cir.1993), 130, 132-33 and St. Paul creditors. Id. at 792-93. Thus the Inc., Fire Co. v. PepsiCo, & Marine Ins. only creditors raise these сould claims de (2d Cir.1989)). 884 696-99 F.2d While 102(b)(7) rivatively. “[although Id. And may this be proposition true —because itself specifical does not mention creditors injure all creditors as a class claims ly, plain apply its terms to all claims be normally belong corporation, see longing itself, corporation regard to the Group, Production Resources LLC v. NCT less of those claims are whether asserted (Del.Ch. Inc., A.2d 792-93 Group, derivatively by by stockholders or credi 2004) imply not does the Trustee’s — it (footnote omitted). tors.” Id. at 793 rights greater rights than the the cor are Therefore, exculpatory applied clause poration against have di would malfeasant to defeat due care the creditors’ claim. Id. rectors. 793-95; Continuing at also see Creditors’ Telecomm., Code Bankruptcy “Under Comm. Inc. Edge Star comb, 03-278-KAJ, [a] stands the shoes of the bank A. trustee No. Civ. 2004 WL (D.Del. 2004) Dec.21, at *11-13 rupt corporation standing bring and has (apрlying any Production Resources to bar bankrupt corporation suit bankruptcy premised claims in on breach could petitioned instituted had have care). duty of the of due for bankruptcy.” Shearson Lehman Hut (2d ton, Wagoner, Inc. case, this because breach of Cir.1991). Thus, “a bankruptcy trustee belong corporation, they to the has standing generally no to sue third subject exculpatory are to the clause de- creditors, parties on behalf estate’s pressed by fense even when a trustee. We may only but assert claims held hold, therefore, exculpatory that the clause corporation itself.” bankrupt Id. Incorporation pre- Trace’s Certificate v. Marine (citing Caplin Midland Grace cludes bringing any the Trustee from due N.Y., 416, 434, Trust Co. monetary seeking care claims awards (1972)). S.Ct. L.Ed.2d 195 Al directors, brought whether on though officers corporate and directors behalf the creditors or Trace itself. owe fiduciary duties creditors when a Insolvency C. Standard corporation fact, Geyer is insolvent see v. Ingersoll Pubs. 621 A.2d suggest 787- Defendants that the dis (Del.Ch.1992), applied these duties do not ex trict court an incorrect standard to insolvency. Specifically, The Cash projects “cash” Flow test into the fu- determine they allege adopt- that the court erred capital ture determine whether will re- testimony con- ing expert’s the Trustee’s adequate main over time while the Dela- cerning insolvency Delaware law solely at ware test looks whether consequently determining the ex- erred corporation has paying been bills on a distress during of Trace’s tent financial timely basis whether its liabilities and/or respect to the period issue. With dis- Therefore, exceed its assets. the Cash expert’s trict court’s use the Trustee’s Flow test a cannot trier of fact in assist determining insolvenсy, Flow test Cash a determining corporation whether is in- However, agree with the we defendants. solvent under the applicable Delaware Flow useful in may prove test ad- Cash However, law. because a in- showing dressing dependent those not on a claims solvency required is not for a finding of finding insolvency. liability on two of the Trustee’s remain- Law, the financial Under Delaware sta- ie., ing improper the redemption claims — corporation of a as' the bench- tus serves and dividends claims'—it is likely that in deciding mark when certain duties arise portions expert’s of the Trustee’s Cash transactions, questioned and whether such testimony Flow test will be useful to the as the issuance of dividends and stock jury when it considers these claims. The redemptions, are See improper. generally court district should determine this issue 174(a) (2005). 8, §§ Del.Code Ann. tit. in the first instance. insolvency Delaware define courts ways. in two See Stаtes Bank United Additionally, financial status will Trace’s Nat’l Ass’n v. Timberlands United States determining be issue whether the Falls, LLC, A.2d Klamath 947-48 officers and violated directors Delaware (Del.Ch.2004), grounds, on other vacated §§ Corporation General 160 and 36, 2005, No. 875 A.2d WL 174(a). necessary The financial standards (Del. 2005). “First, company June a finding liability to make a under these if to ’' pay insolvent it is unable its is debts greatly. However, two sections differ they fall usual as due in the course of record, upon review of the the district Second, company may a be in business. standards, appropriate court set forth the if it solvent has liabilities excess of a ie., that not may directors authorize divi- reasonable market value of assets held.” corporation dends while a is insolvent or Id. corporation that would render the insol- status, In evaluating financial Trace’s and corporation may vent that a not re- district applied court Cash Flow capital its if impaired deem own stock its is only that at Trace’s abili- “look[ed] test impaired by redemption— would be ty pay maturing obligations its current and we have no reason to believe that the due, they came also the ability but court will not do when instruct- the same requirements meet cash and capital ing on remand. future, required including repay those borrowings being the additional that were

incurred to fund Trace’s cash flow defi- CONCLUSION III, Pereira at 501. cits.” 294 B.R. Based test, this found that the court Trace above, For the reasons stated we Vaoate insolvent. judgment of district court and jury trial Remand the case for a consistent

The Cash Flow does not accord test exactly opinion. with this either Delaware definition. with pay- against trustee to enforce NEWMAN, Judge, Circuit

JON ment. concurring. of a chattel If the trustee a claim available for Whether immediate- transfer under a for money damages for against unconditionally ly to the benefi- is, me, fiduciary duties ciary in breach of trust fails is confident The Court question. close beneficiary it, can main- transfer I find trial is available. against him. an action law tain equi- with centuries at odds proposition (Second) §§ of Trusts Restatement involving proceedings table added). (1959) (emphasis trustees, executors, other fidu- estate

ciaries, although acknowledge clear, I makes As the Restatement in the two support proposition finds some of a sum of remedy payment at law for by the Court unconditionally the 1960s cited cases from money immediately and and, in the dictum re- significantly, in beneficiary money more applies due in Supreme ‍‌​​‌​​‌​‌‌‌‌‌‌‌‌‌‌‌​‌‌‌​​​​‌​​​‌​‌‌​‌‌​​​‌​‌​‌‌‌‍Court cently stated being wrong- that is hands of the trustee Annuity Insurance Co. money & to be example Great-West An is fully withheld. Life 708, Knudson, 204, 122 S.Ct. a beneficiary upon reaching to a trust paid (2002). (Second) Although that 151 L.Ed.2d 635 age. Restatement specified See dictum, reluctantly agree I is from Trusts, Apart § statement illustration 1. it, therefore follow that we should law that exception, it is black letter this useful, however, to indi- I think it remedy concur. beneficiary equitable has an far closer than the that the issue is cate redress a breach of the trustee to compel acknowledges. Court trust: Equitable Benefi- § Remedies of 199 law, set literally letter

It is black ciary (Second) of forth in the Restatement

Trusts, fiduciary, against a beneficiary that remedies a trust can main- of trustee, exclusively equitable, are such aas tain a suit exception, inapplicable pend- with an (1) case, fixed recovery a sum

ing (c) compel redress a the trustee to fiduciary duty a money that the is under trust[.] breach (2) unconditionally pay immediately duty a fiduciary is under a chattel that the Liability in of Breach of § 205 Case unconditional- immediately and to transfer Trust

ly: a breach of the trustee commits If trust, chargeable he with of Benеfi-

§ 197 Nature of Remedies ciary (a) any the trust loss ... in value of resulting the breach of estate Except §in the reme- as stated trust[.] beneficiary against

dies of the (Second) §§ exclusively equitable. Trusts Restatement trustee are the matter leading encyclopedia A states Beneficiary Legal § 198 Remedies language: in similar (1) upon may equity, A be sued trustee If the trustee is under funds, for a money immediately of trust pay misapplication and uncondi- trust, and, indeed, the reme- tionally beneficiary, the benefi- breach to the of a to the beneficiaries available ciary an action at law dies can maintain duties, against testamentary trust trustee some have decisions made a distinc tion between exclusively against for a of trust are fiduciary equity and claims An equitable. action beneficiaries for law. “Where ... the beneficiaries of a equitable pro- a breach of trust trust sue the trustee in order to restore ceeding, money damages even are the if trust, funds to the the action is considered only remedy sought. equitable in nature.” Allard v. Pacific (footnotes 627-28 Am.Jur.2d Bank, 394, 400-401, National 99 Wash.2d omitted) added). (emphases 663 P.2d (citing Baldus v. A leading point: echoes the treatise Bank California, Wash.App. 621, Equitable § 199. Remedies of Bene- (1975); P.2d 1350 Spitznass v. First Na ficiary Bank, tional 269 Or. 525 P.2d 1318 (1974)). The restoration of having jurisdiction A court funds to equity, trust is often as a referred to trusts, “surcharge.” over the administration of will Allard, 99 Wash.2d at 663 P.2d 104 give to the beneficiaries of trust such (citing Corp., Lockwood v. OFB 305 A.2d necessary remedies as are for the pro- (Del.Ch.1973)). On the other tection of their interests.... These rem- “[wjhere hand, the beneficiaries seek re edies ... include redress covery. personally, for themselves the ac trust. tion is considered nature.” Id. at Fratcher, Ill William F. Scott on Trusts (citing Pratt, 663 P.2d 104 Brys v. (4th ed.1988). 199, at 208-04 (1909)). 122, 104 Wash. P. 169 supports ability Abundant case law the case, the thе pending Court cites two fiduciary of the victims of of a breach of appeals court decisions from the 1960s damages duties to in money equity obtain support in of the that proposition jury a is from a of fiduciary defendant in breach required involving in a a suit trust or a See, e.g., Interborough duties. In re Con fiduciary issues,” only “legal where Halla (2d Cir.1923); Corp., solidated 288 F. 334 Verschoor, (8th day 100, 381 F.2d 109 Bissett, 163, Or.App. Masters v. 101 790 Cir.1967), or a claim “actionable in a direct 16, grounds, other P.2d on 102 modified law,” at suit common DePinto v. Provident 289, (1990); Or.App. 445 Magill 794 P.2d Co., Security 826, Insurance 323 F.2d Life v. Dutchess Bank and Trust 150 (9th Cir.1963), Halladay 837 are involved. (2d Dep’t A.D.2d 541 437 N.Y.S.2d authority me strikes as rather weak 1989); Rothko, Estate 84 Misc.2d jury right against in a fiduciary (N.Y.Sur.1975) 379 N.Y.S.2d 978 the the because Court-noted com (surrogate required trustee to pay against plaint the defendant “failed to al $6,464,880 in damages trust beneficia lege any specific of fiduciary averments ries), grounds, on other 56 modified relationship parties.” the between Halla (1st Dep’t), A.D.2d N.Y.S.2d day, broadly 381 F.2d at 109. DePinto aff’d, 43 N.Y.2d N.Y.S.2d claim of states “where a (1977). N.E.2d 291 fiduciary duty predicated is on underlying Despite of the sweep pronounce the conduct, such as which ac negligence, is Restatement, in ments the the American law, in tionable a direct suit common the Jurisprudence encyclopedia, and the Scott has issue whether there been such a treatise, and the decisions that have ... jury question.” breach is a statement, money equity against awarded in if damages at 837. That followed literal ly, in of their fiduciary jury fiduciaries breach would authorize trials for countless jury defaulting a requires ex duties when the surcharge against actions trustees and money ecutors, pay to a claimant but normally litigated equity trustee must jury a sur- side, require typical a does not in a it is not uncommon for because pay in fiduciary charge duties to action when trustee must claim breaсh allegation breaching money that the fidu amount of to the trust for clude same duty. ciary negligent. the same breach of relevant, me, it More seems is sweep language Despite Bernhard, discussion Ross in eq- actions supporting Restatement (1970), 90 S.Ct. L.Ed.2d 729 uity against fiduciaries for breach of their a upheld right a trial for rarity requiring duties and the decisions In ruling suit. shareholder’s derivative claims, a I persuaded for such am trial, said: the Court Supreme Court’s dictum in Greal- is, claim at least corporation’s [T]he West, signal sends a that should not be The relief part, sought one. ignored. The Court there stated: “[F]or are money damages. allegations There equity, gen- to lie in action restitution complaint fiduciary in the of a breach of erally not to impose personal must seek duty, allegations but there are also defendant, liability on the but to restore to ordinary gross of contract plaintiff particular prоperty funds or it negligence. corporation, had Great-West, possession.” the defendant’s behalf, its sued on own would have been 214, 122 S.Ct. The state- U.S. determination, jury’s to a at a entitled ment with to an action respect is dictum minimum, against damages of its its bro- because the defendant brokerage ker under the contract and of fiduciary. But Great-West was own rights against its its directors be- appears Court be little concerned these negligence. cause their Under with nature of the and criti- defendant unnecessary to de- circumstances cally concerned with whether the defen- corporation’s other cide whether being compelled disgorge specif- dant is are to a properly also triable ‍‌​​‌​​‌​‌‌‌‌‌‌‌‌‌‌‌​‌‌‌​​​​‌​​​‌​‌‌​‌‌​​​‌​‌​‌‌‌‍ic, possession, traceable funds his jury- pay the action is in or to equity, case 542-43, Although Id. at 90 S.Ct. 733. money ie., a pocket, damages, out of his does whether other Court not decidе type, claimant. Restitution the latter ie., claims, fiduciary states, requires jury. my Court a claims, jury, are a a triable to reasonable view, jury right this broad assertion a introduction law inference from the equity odds with numerous traditional “but,” in claims with the word distinction historically brought that have actions been fiduciary claims to the breach of is that the currently being brought probate are latter, alone, not a standing require would ju- courts throughout country without jury. Nevertheless, ries. the Supreme Court Even if isolated state court cases has availability asserted above, Brys, Spitznass such as cited being turns on whether the funds requiring are correct in a for a claim sought possession, are the defendants’ damages per- a for trustee I obliged guidance. am follow distinguished plaintiff, sonal benefit of trust, a claim I in the replenish being sought have Since the funds difficulty why understanding pending the issue of case are in the defendants’ possession, appears claim require whether has breached his Grea1r-West, notwithstanding jury under claim breach of the basis of the reasons, I con-

fiduciary duties. For these opinion.

cur in the Court’s Appellant

UNITED STATES

in No. 04-2807

Eugene Ivor WILLIAMS

United States

Eugene Appellant Ivor Williams

in No. 04-2903. 04-2807,

No. 04-2903. Appeals,

United States Court of

Third Circuit.

Argued Dec. 2004. July

Filed:

Case Details

Case Name: Pereira v. Farace - concurrence

Court Name: Court of Appeals for the Second Circuit

Date Published: Jun 30, 2005

Citation: 413 F.3d 330

Docket Number: Docket 03-5053(L), 03-5055(CON)

Court Abbreviation: 2d Cir.