In Re Frank J. Evangelist, Jr.
760 F.2d 27, 1 Fed. R. Serv. 3d 1419, 1985 U.S. App. LEXIS 30500 (1985)
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Rule of Law:
A claim brought under § 36(b) of the Investment Company Act for breach of fiduciary duty concerning an investment adviser's excessive compensation is equitable in nature, and therefore, the plaintiff does not have a right to a jury trial under the Seventh Amendment.
Facts:
- Frank Evangelist was a shareholder in Fidelity Cash Reserves, a registered investment company.
- Fidelity Cash Reserves compensated an investment adviser for its services.
- Evangelist believed the fee Fidelity was paying its investment adviser was excessively large.
- Evangelist alleged that the payment of this excessive fee constituted a breach of the investment adviser's fiduciary duty to the company.
Procedural Posture:
- Frank Evangelist (shareholder) filed a lawsuit against Fidelity and its investment adviser in federal district court.
- The suit alleged a breach of fiduciary duty under 15 U.S.C. § 80a-35(b) concerning excessive adviser fees.
- Evangelist requested a trial by jury.
- The district court ruled that the claim was equitable in nature and denied the request for a jury trial.
- Evangelist then petitioned the U.S. Court of Appeals for the First Circuit for a writ of mandamus to compel the district court to grant a jury trial.
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Issue:
Does a shareholder's claim against an investment adviser for breach of fiduciary duty regarding excessive compensation, brought under 15 U.S.C. § 80a-35(b), constitute an action 'at law' that triggers the Seventh Amendment right to a jury trial?
Opinions:
Majority - Breyer, Circuit Judge
No. A claim under 15 U.S.C. § 80a-35(b) for breach of fiduciary duty is fundamentally equitable, not an action at law, and thus does not confer a right to a jury trial. The court reasoned that the statute creates a classic 'breach of fiduciary duty' action, which historically has been tried in courts of equity by a judge. The legislative history further supports this, with congressional reports explicitly referring to the claim as an 'equitable action.' Finally, the remedy of returning excess fees is akin to the traditional equitable remedies of an 'accounting' or 'restitution,' which involve disgorging improperly held funds, rather than seeking legal damages for an injury. While the statute uses the word 'damages,' the court concluded this was likely used as a shorthand for monetary recovery, not as a legal term of art intended to trigger the jury trial right, especially given the overwhelming evidence of congressional intent to create an equitable action.
Analysis:
This decision solidifies the legal understanding that shareholder derivative suits under § 36(b) of the Investment Company Act are to be decided by a judge, not a jury. It reinforces the importance of the historical distinction between actions at law and suits in equity for Seventh Amendment analysis. The court's focus on the substance of the claim and its remedy over the specific terminology used in the statute or pleadings provides a clear analytical framework for future cases involving new statutory causes of action. By aligning with the Second Circuit's 'Gartenberg' decisions, this case creates strong persuasive authority and promotes uniformity in how federal courts handle these investor protection claims.
