PROCEDURE AT THE INTERSECTION OF LAW AND EQUITY: VEIL PIERCING AND THE SEVENTH AMENDMENT.

• Author: Howard, Samuel

INTRODUCTION

The corporate form is one of the world's greatest legal innovations when measured in terms of its contribution to modern economic growth and prosperity. With roots in medieval law, (1) beginning in the seventeenth century, corporations emerged as a method of resource pooling and investor protection that enabled business ventures on a level never before seen outside state-controlled enterprises. (2) Corporations are "individuals" in the truest sense, being able to do almost anything that a natural person could, from holding assets to entering contracts and notably, having judgments entered against them while remaining functionally distinct entities from individual shareholders. (3) The benefits of the corporate form when taking on business risk are obvious, but it is just as clear how a corporation is capable of being used to defraud and shield ill-meaning shareholders from their creditors.

In such cases, creditors have recourse to the doctrine of "piercing the corporate veil" that permits courts to hold shareholders personally liable for the debts of their corporation. As leading articles on this topic have identified, veil piercing is a "vexing" concept that exists in a murky area on the fringes of law and equity. (4) This aspect of veil piercing has a notable interplay with the Seventh Amendment that demarcates the line beyond which plaintiffs have a right to a civil jury trial directly in the murky area that veil piercing occupies.

This Note addresses the multicircuit split that veil piercing's "vexing" nature has created." (5) The First, Second and Fifth Circuits, on varying theories, have found that there exists a federal right to a jury trial on veil-piercing issues. (6) Conversely, the Sixth and Seventh Circuits have disagreed, holding that veil piercing is an action sounding primarily in equity outside the scope of the Seventh Amendment. (7) Part I will briefly discuss the Supreme Court's Seventh Amendment jurisprudence and explain how veil piercing falls into the Court's awkward demarcation of law and equity. Part II will explore the legal and equitable history of veil-piercing actions, a topic that "courts and commentators rarely address ... at length." (8) Part III will lay out the current Federal precedent on the issue. Finally, Part IV will argue that history and policy support putting veil-piercing questions to juries, that juries are well suited to this task, and address counterarguments by showing that judges and parties retain an array of tools to manage and control juries.

1. THE RIGHT TO A JURY TRIM.

   The split in authority regarding the right to a jury trial in veilpiercing actions comes directly from the difficulty in applying the Supreme Court's Seventh Amendment jurisprudence to an action that is neither a claim nor a remedy, and that does not sound clearly in either law or equity. Before evaluating the origins of veil piercing in courts of law and equity, it is worthwhile to examine the Seventh Amendment and its application in the Supreme Court to give context as to where a veil-piercing action falls.

   The Seventh Amendment states in relevant part that "[i]n suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved." (9) In practical terms, the Seventh Amendment preserves the right to a civil jury trial only in actions that would have been brought at law in English courts in 1791, carving out an exception for equitable claims. (10)

   1. Competing Tests

      The Seventh Amendment does not limit the availability of a civil jury to only those actions that would have been heard in front of a jury in 1791. Instead the analysis "depends on the nature of the issue to be tried rather than the character of the overall action." (11) As such, even if the overall cause of action may have been heard in an English court of equity in 1791, a civil jury must "be available if the action involves rights and remedies of the sort typically enforced in an action at law." (12) To navigate this assessment, the Court has handed down a two-part test. (13) In Chauffeurs, Teamsters & Helpers Local No. 391 v. Terry, (14) the Court asked first if the claim was analogous to one that would have been brought at law or in equity in 1791. (15) Second, the Court asked if the remedy sought was legal or equitable. (16) In resolving disagreements between answers to each question, the Court stated that the second question should be given more weight. (17)

      The test articulated in Terry, while theoretically good law, has been superseded by later cases that merge the two-step test into a single analysis that asks "whether we are dealing with a cause of action that either was tried at law at the time of the founding or is at least analogous to one that was." (18) This new analysis, described as the Monterey test by some academies in reference to the Court's most recent Seventh Amendment case City of Monterey v. Del Monte Dunes at Monterey, Ltd., (19) removed Terry's emphasis on the remedy sought and instead seeks to discern "whether the 'claim' or 'cause of action' is legal or equitable" in nature. (20) The Court added a new part two that asks if "the particular trial decision must fall to the jury in order to preserve the substance of the common-law right as it existed in 1791." (21) While this newer test is incompatible with Terry, the Court has never stated that Terry and its predecessors are no longer good law.

      As a result of the Court's conflicting jurisprudence, the determination of veil piercing's place on either side of the Seventh Amendment line has a threshold issue that needs to be resolved before the substance of the action can be evaluated. A district court facing this issue would first have to decide which framework it will use to evaluate a veil-piercing action, and there is a notable variance in which tests district courts around the country choose to adopt. (22) Even once a judge has chosen a test with which to approach the veil-piercing question, they are not out of the woods. The judge must then analogize a veil-piercing action to some common-law writ or equitable doctrine that existed in 1791. (23) This course is problematic in and of itself: asking whether a veil-piercing action is analogous to common-law writs or equitable doctrines of 1791 likely means looking for something that does not exist. (24)

      Equity does not operate in the same manner as law. At common law in 1791, there existed a list of writs, each distinct in its own right and analogous in function to a modern "claim" or "cause of action." (25) While some equitable doctrines have developed into their own coherent bodies of substantive law, capable of being listed alongside the common-law writs, equity generally existed as a supplement to the common law. (26) Instead of having a list of writs serving as buckets that a law judge can group like actions together in, the function of chancery was to use equitable maxims as "gap fillers" where no adequate law existed. (27) Though both Terry and Monterey ask courts to analogize to "claims" or "causes of action" arising in equity, chancellors in 1791 would not have considered their decisions using this criteria. Instead, they would have evaluated solely whether there existed a defect in the available legal remedy that prevented a plaintiff from being justly compensated and applied an equitable maxim in its place. (28) As Professor Samuel Bray puts it: "[Terry] requires a separate inquiry into 'claims' and 'remedies' .... This separation of equitable 'remedies' from equitable 'claims' has no basis in history or logic." (29)

      The more recent Monterey test also asks courts conducting Seventh Amendment analysis to evaluate whether "the particular trial decision must fall to the jury in order to preserve the substance of the commonlaw right as it existed in 1791." (30) To do so, they need to embark on a historical analysis to determine whether the issue at hand (or those analogous to it) were traditionally decided by juries. (31) Oftentimes, the historical analysis is inconclusive, and a court must instead address "precedent and functional considerations," (32) inviting a discussion of the relative merits of judges and juries as decision makers. (33) As this Note will discuss, the overwhelming majority of jurisprudence on the applicability of the Seventh Amendment to veil-piercing actions is based on interpretations of the Terry test, even though cases that used a Monterey framework had already been published. For that reason, an application of the Monterey test to a veil-piercing action is currently a theoretical endeavor.

   2. The Threshold Issue in Practice

      In the context of veil piercing and the Seventh Amendment, the procedural choice of tests is as significant an issue as the substantive analysis itself. The tests a court chooses to use will have a substantial impact on the conclusion reached on the analysis of a veil-piercing claim. Under the Terry test, the remedy is the dominant question. If a court assumes that veil piercing is not a remedy, but simply a mechanism by which courts can achieve a legal remedv, then it would follow that veil-piercing actions are covered by the Seventh Amendment (because the remedy sought is almost certainly damages). (34)

      However, if the correct test to use is the Monterey test, the analysis becomes more complex and requires a deeper look into the history of veil piercing. The Monterey test requires that a court discern if a claim or cause of action is legal or equitable in nature. There is no emphasis on the remedy sought. This is where the competing historical views of veil piercing become key: is veil piercing more analogous to a creditor's bill and related actions undertaken by a court of equity? Or is it simply a process to help resolve an action that is, at its core, seeking to address a legal right in tort or contract? This Note takes the view that the use of either test does not...