July 2018

A recent court case from Missouri’s Eastern District Court of Appeals provides insight on the intersection of declaratory judgments, legal damages, and equitable relief, particularly in disputes over complicated business transactions. The case is Payne v. Cunningham, ED 105712 and ED 105850, 2018 WL 1915804 (Mo. Ct. App. April 24, 2018), and Missouri joins the growing list of states exploring the right to a jury trial and the available remedies.

Key Takeaways of the Decision Include:

  • Declaratory judgment actions are neither specifically legal nor equitable, and allow for jury findings on specific factual issues, with the Court to decide any remaining equitable claims consistent with those findings.
  • A plaintiff should be careful to clearly label and explain its claims, particularly if they involve mixed claims of law and equity or contrasting requests for legal relief (damages) and equitable relief (specific performance).
  • The clarification of jury-tried issues and judge-tried issues may also impact settlement and trial strategy.

The Payne decision is particularly relevant to complicated business transactions and resulting disputes, where parties may enter into a number of contracts and agreements related to the purchase and control of companies.

Background of the Case

An individual and his vehicle dealership entered into a Stock Purchase Agreement (SPA) to sell the dealership to the buyers in two phases: the first phase for a lump cash sum, and the second phase (after the dealership’s debt was paid down to a certain amount) with a promissory note secured by the shares. The deliverables for the closing include a shareholders’ agreement, employment agreements, lease amendments, stock certificates, and the purchase price.

However, when the closing date arrived, the buyers needed additional time to secure financing to pay the purchase price. As a result, the parties executed the SPA and closing documents, the sellers signed the stock certificates, and everything was placed in escrow pending payment. The parties disagreed about the scope of any agreed extension of the time for payment, and eventually the sellers refused the buyer’s offer to write a check, and then expressly rescinded the entire transaction by email later that day.

The Lawsuit and Trial

The buyers filed a petition with a single, untitled count, alleging breach of contract (under both SPA and the agreement to extend the time for payment) and seeking a declaration of rights and specific performance under those agreements.

At trial, the sellers moved for a directed verdict at the close of the buyer’s evidence, arguing that the buyers could not obtain a declaratory judgment because they had an adequate remedy at law (as shown by the buyer’s breach of contract claims). The buyers contended that, although their claim was for breach of contract, money damages were inadequate, thus warranting a declaration of rights and specific performance of the agreements. After a lengthy argument, the trial court granted the sellers’ motion for directed verdict, reasoning that the buyers had asserted a breach of contract claim and finding declaratory judgment relief improper.

The Appellate Court’s Decision

The appellate court reversed the trial court’s directed verdict, and held that the buyers had made a submissible case for declaratory relief and specific performance. But, because the determination of rights under the contract depended on the existence and terms of the alleged agreement to extend the time for payment, a jury would first have to make fact findings. Based on those facts, the trial court should then determine the rights of the parties, including whether the buyers were entitled to specific performance.

The Appellate Court Also Clarified the Nature of Declaratory Judgment, Equitable and Legal Relief

The court clarified that Missouri courts view declaratory judgments the same way the federal courts do—as sui generis and, thus, neither exactly legal nor equitable. The label of “legal” or “equitable” typically refers to the type of relief being sought, but even if a party primarily seeks “equitable” relief that does not necessarily prevent a jury trial on some issues.

In federal courts, whether a claim for declaratory judgment is properly classified as legal or equitable turns on the underlying controversy on which it is founded. Essentially, one must look to the kind of suit that would have been brought if there was no declaratory judgment remedy. If the declaratory judgment action is essentially an equitable claim, then there is no right to a jury. But if the suit is essentially a legal claim, then a jury trial is warranted.

Similarly, the Payne court clarified that Missouri is part of the growing trend of states looking at declaratory judgment in a similar fashion.  Specifically, under Missouri law, when a declaratory judgment action also involves issues of fact, the trial court must determine what issues should be decided by a jury and what issues should be tried to the court. Thus, in practice, the trial court would typically hold the jury trial first, and then decide the remaining equitable issues consistent with the jury’s factual findings.

This case also continues the evolution of Missouri case law after the 2004 abandonment of the equitable cleanup doctrine (under which Missouri courts had previously denied jury trials in lawsuits with mixed claims of law and equity).