
    John S. PEREIRA, As Trustee of Trace International Holdings, Inc., & Trace Foam Sub, Inc., Plaintiff-Appellee, v. Andrea FARACE, Frederick Marcus, Philip Smith, & Karl Winters, Defendants-Appellants, Marshall S. Cogan, Robert Nelson, Saul S. Sherman, & Tambra King, Defendants.
    Docket Nos. 03-5053(L), 03-5055(CON).
    United States Court of Appeals, Second Circuit.
    Argued: Nov. 12, 2004.
    Decided: June 30, 2005.
    
      Theodore J. Fischkin, LeBoeuf, Lamb, Greene & MacRae, L.L.P., New York, N.Y. (John P. Campo & John S. Kinzey, on the brief), for Plaintiff-Appellee.
    Andrew J. Levander, Dechert LLP, New York, NY (Guy Petrillo, Yun G. Lee & Robert W. Topp, on the brief), for Defendant-Appellant Andrea Farace.
    
      Brian E. Maas, Frankfurt Kurnit Klein & Selz, PC, New York, NY. (Wendy Stryker, on the brief), for Defendant-Appellant Frederick Marcus.
    Robert A. Meister, DLA Piper Rudnick Gray Cary US LLP, New York, N.Y. (John J. Clarke, Jr. & Joshua S. Sohn, on the brief), for Defendants-Appellants Philip Smith and Karl Winters.
    Martin S. Kaufman & Briscoe R. Smith, Atlantic Legal Foundation, New York, N.Y., for Amicus Curiae Corporate Law Department’s Section of the L.A. County Bar Association, in support of Defendant-Appellant Philip Smith.
    Before: NEWMAN, McLAUGHLIN, and POOLER, Circuit Judges.
   Judge JON 0. NEWMAN concurs in the majority opinion and in a separate opinion.

McLAUGHLIN, Circuit Judge:

Defendants Andrea Farace, Frederick Marcus, and Philip Smith (collectively, “defendants”) are former officers and directors of Trace International Holdings, Inc. (“Trace”), which is now in bankruptcy. Plaintiff John Pereira is the trustee (“Trustee” or “plaintiff’) acting on behalf of Trace; he was appointed by the bankruptcy court. Defendants now appeal from a judgment entered against them by Judge Robert Sweet in the United States District Court for the Southern District of New York.

In July 2000, the Trustee filed an amended complaint suing defendants and other Trace officers and directors for, inter alia, breach of fiduciary duty arising from their roles in Trace’s financial demise. In November 2002, having denied defendants’ request for a jury trial, the district court conducted a twelve-day bench trial. In an opinion dated May 8, 2003, the court held that defendants breached their fiduciary duties by allowing a number of improper transactions to take place that exhausted Trace funds. Judgment was granted to the Trustee against all defendants, who were found jointly and severally liable.

On appeal, defendants challenge the denial of their request for a jury trial, as well as the finding that they breached their fiduciary duties.

Because we agree that the district court erred in denying defendants a jury trial, we vacate the judgment below and remand for a jury trial. We also find that: (1) the Trustee did not waive his right to seek compensatory damages on remand; (2) the Trustee does not have standing to bring due care claims; and (3) the district court erred in applying the Cash Flow and Capital Adequacy test to determine insolvency.

BACKGROUND

I. The Facts

The facts are set forth exhaustively by the district court. See Pereira v. Cogan, 294 B.R. 449 (S.D.N.Y.2003) (Sweet, J.) (“Pereira III ”). We therefore summarize the background only to the extent relevant to this appeal.

Until 2000, Trace was a privately-held Delaware corporation headquartered in Manhattan. Trace served as a holding company, the primary assets of which were stock in Foamex International, Inc. (“Foamex”), United Auto Group, Inc., and CHF Industries.

Marshall Cogan helped to form Trace in 1974. Since that time, he has been Trace’s majority shareholder, chairman of the board of directors (“Board”), and the company’s chief executive officer (“CEO”). Although Cogan’s conduct lies at the heart of this case, he is not a party to this appeal.

Defendant Andrea Farace was a member of the Trace Board from December 1993 until December 1997. During that period, Farace also served as Trace’s executive vice-president. Farace became Trace’s President in December 1994, a position he held until December 1997. Although Farace was named CEO of Foa-mex in April 1997, his employment at Trace did not end until two months later when he assumed the Foamex position. Farace left Foamex in 1999.

Defendant Frederick Marcus served on Trace’s Board from 1975 until 1999, and on the Trace Compensation Committee in 1997 and 1998. Between 1984 and 1997, Marcus was vice-chairman of the Board and Trace’s senior managing director/

Defendant Philip Smith, a lawyer, held numerous positions as an officer at Trace. He served as General Counsel from January 1988 until December 1999. He also served as corporate secretary and as one of Trace’s vice-presidents.

Defendant Karl Winters, a certified public accountant, was also a Trace officer. Winters worked at Trace from September 1993 to December 1999. He became a vice-president in June 1994'. As such, he reported to the chief financial officer (“CFO”).

At the core of this appeal are several transactions which effectively exhausted Trace’s capital, driving Trace into bankruptcy.

Cogan’s original employment agreement (“Employment Agreement”) with Trace, entered into in 1987, called for Cogan to serve as chairman and CEO for a ten-year “initial term.” The Employment Agreement set Cogan’s compensation at $2.4 million per year, which could be increased only with Board authorization. The Employment Agreement was approved by the Board.

In 1991, Cogan unilaterally increased his annual salary to $3.6 million without Board approval. Five years later, however, upon the recommendation of the Compensation Committee and outside counsel, the Board retroactively ratified Cogan’s compensation for the period between 1988 and 1994.

In August 1997, when the ten-year Employment Agreement was about to expire, Cogan unilaterally renewed it for a second ten-year term. Despite having the right to reject the renewal, the Board was not even involved.

From 1995 through 1998, Cogan unilaterally borrowed over $13 million from Trace. Without any input from Trace’s other officers or directors, Cogan’s personal lawyer drafted notes evidencing the loans. Cogan also caused Trace Inc. to make $1.7 million in loans and gifts to his wife and other employees — all without Board approval.

Between 1995 and 1998, in spite of its precarious financial condition, Trace paid $5.1 million in dividends to its shareholders. Nearly $2 million of the dividend payments were made without Board approval.

Dow Chemical Company (“Dow”) owned $10 million of Trace Series A Preferred Stock. In 1997, Dow asked Trace to buy back the stock. Complying with Dow’s request, Smith drafted, and Cogan signed, an agreement whereby Trace would buy back Dow’s stock or cause it to be purchased by May 1998.

By May 1998, Trace was almost $2 million in arrears on cumulative dividends due to a convertible preferred stock that ranked pari passu with Dow’s Series A Stock. Smith was advised by a Delaware law firm that Trace could not buy back Dow’s stock without first paying all the dividend arrearages. To save Trace $2 million, Smith had Cogan purchase Dow’s stock with a $3 million secured loan from Trace. The preferred stock in question served as the collateral.

In June 1997, Cogan spent $1 million of Trace’s funds to throw himself a 60th birthday party at the Museum of Modern Art in New York. The funds were used without Board approval. The party included the screening of a film entitled “The Life of Marshall Cogan,” which cost $108,000 to produce.

II. Procedural History

In July 1999, Trace filed for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. At the time, Trace’s liabilities exceeded its assets by $121 million.

In August 1999, the Office of the United States Trustee appointed an official unsecured Creditors’ Committee on behalf of Trace. With the permission of the Bankruptcy Court, the Creditors’ Committee filed a complaint in the Southern District of New York (Sweet, J.) against, inter alios, Cogan and the defendants named herein.

On January 24, 2000, the Bankruptcy Court converted Trace’s Chapter 11 reorganization into a Chapter 7 liquidation. John Pereira was appointed as trustee. As such, Pereira replaced the creditors as plaintiff in the Southern District action.

Pereira’s complaint alleged that: (1) all Trace’s officers and directors had breached their fiduciary duties to Trace under Delaware common law (Count IV); and (2) all the directors had violated Delaware General Corporation Law §§ 160 and 174(a), which prohibit the payment of dividends while the corporation is insolvent or which will render it insolvent, see EBS Litig. v. Barclays Global Investors, N.A., 304 F.3d 302, 305 (3d Cir.2002), or the redemption of stock when a corporation’s capital is impaired or which will impair the corporate capital (Count V). See Del. Code. Ann. tit. 8, §§ 160, 174(a) (2005).

According to the complaint, Trace had been insolvent since 1995; therefore the directors and officers owed fiduciary duties to Trace’s creditors as well as to its stockholders. The Trustee sought damages for: (1) Cogan’s unauthorized borrowing of over $13 million from Trace; (2) Cogan’s unauthorized loans and gifts to other insiders; (3) Cogan’s excessive compensation; (4) Cogan’s unilateral renewal of his employment agreement; (5) payment of dividends without Board approval and at a time when Trace’s capital was impaired; (6) a $3 million redemption of Trace preferred stock when capital was impaired; and (7) use of over $1 million in corporate funds for Cogan’s birthday party.

Prior to trial, defendants demanded a jury trial on Counts IV and V. The Trustee responded that he was seeking the equitable remedy of restitution on Counts TV and V (despite his request for compensatory damages in the complaint). In Pereira v. Cogan, No. 00 Civ. 619, 2002 WL 989460 (S.D.N.Y. May 10, 2002) (“Pereira II”), Judge Sweet found that Counts IV and V did not constitute a suit “at law,” within the meaning of the Seventh Amendment of the United States Constitution. He reasoned that: (1) actions for breach of fiduciary duty were historically equitable; and (2) the Trustee was in fact seeking restitution. Id. at *2-4. Based on these findings, the court denied defendants’ request for a jury trial. Id.

After a twelve-day bench trial, Judge Sweet found defendants liable for mismanaging Trace. Pereira III, 294 B.R. at 449. Specifically, the court found that defendants had: (1) disregarded corporate governance procedures, id. at 500, 532; (2) turned a “blind eye” to Cogan’s actions, id. at 463; and, therefore (3) breached the fiduciary duties owed to both Trace’s shareholders and its creditors, id. at 539.

In holding that defendants had breached their fiduciary duties to the creditors, the district court found that Trace was insolvent or, at least, in the vicinity of insolvency at the time of defendants’ improper acts. The district court applied two insolvency formulas: (1) a balance sheet test, which was agreed upon by both the Trustee’s . and defendants’ experts; and (2) a Cash Flow and Capital Adequacy test (“Cash Flow test”), which was advocated only by the Trustee’s expert.

Additionally, the court held the director-defendants liable for their, issuance of improper dividends and for allowing the Dow redemption to occur. Specifically, the court found that the director-defendants violated: (1) Delaware General Corporation Law § 174, which prohibits the payment of a stock dividend while a corporation is insolvent, or one that renders a company insolvent; and (2) Delaware General Corporation Law § 160, which prohibits the redemption of stock “when the capital of [a] corporation is impaired or when such ... redemption would cause any impairment of the capital of the corporation.” See id. at 541.

The court also held that the exculpatory clause in Trace’s Articles of Incorporation, which shields directors from liability to Trace for the breach of the duty of care, was inapplicable because the Trustee had brought the action for the benefit of the creditors, not Trace. Id. at 533-34; Pereira v. Cogan, No. 00 Civ. 619, 2001 WL 243537, at *9-10 (S.D.N.Y. Mar. 8, 2001) (“Pereira I”). In so holding, the district court rejected the director-defendants’ argument that the “[ejxculpatory [cjlause is inapplicable only to claims by individual creditors, which the Trustee lacks standing to assert.” Pereira III, 294 B.R. at 534.

Finally, observing that the majority of the challenged transactions were not the subject of board action the district court declined to apply the “business judgment rule” to protect the director-defendants. Id. at 530-31. The court thus required defendants to show that each transaction was “entirely fair” to Trace, which they failed to do. Id. at 529.

The court entered judgment against defendants as follows: (a) Marcus was liable for $37.4 million; (b) Farace for $27.3 million; (c) Smith for $21.4 million; and (d) Winters for $21.4 million.

Defendants Marcus, Farace, and Smith appeal this judgment.

DISCUSSION

Defendants raise a sandstorm of claims on appeal. However, our focus on this appeal is their principal argument: whether the district court erred in denying them a jury trial on Counts IV and V. On the merits, defendants argue that the court made numerous errors in finding them liable for breach of their fiduciary duty under Delaware common law (Count IV) and Delaware statutory law (Count V).

We address each argument in turn to the extent necessary in light of our decision to reverse the denial of a jury trial.

I. Jury Trial

Defendants argue that they were entitled to a jury trial on the Trustee’s breach of fiduciary duty claim because the nature of the underlying action was legal and the remedy sought was compensatory damages, not equitable restitution. For the reasons stated below, we agree.

We review de novo a district court’s decision to deny a jury trial. See Brown v. Sandimo Materials, 250 F.3d 120, 125 (2d Cir.2001).

Although Rule 2 of the Federal Rules of Civil Procedure grandly proclaims that “[tjhere shall be one form of action to be known as ‘civil action’ ” thereby causing the merger of law and equity, the distinction “retains its viability” today. New York v. White, 528 F.2d 336, 338 (2d Cir.1975). By preserving the right to a jury trial only in “suits at common law,” the Seventh Amendment of the United States Constitution perpetuates the law/equity dichotomy. U.S. Const, amend. VII. Indeed, the phrase “suits at common law” refers to “suits in which legal rights [are] to be ascertained and determined, in contradistinction to those where equitable rights alone [are] recognized and equitable remedies [are] administered.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) (quoting Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 447, 7 L.Ed. 732 (1830)). Therefore, despite the near universal merger of law and equity effectuated by Federal Rule of Civil Procedure 2, trial by jury remains today “the sword in the bed that prevents the complete union of law and equity.” Fredal v. Forster, 9 Mich.App. 215, 156 N.W.2d 606, 612 (1967) (quoting an unpublished lecture by the redoubtable Professor Zechariah Chafee, Jr., late of Harvard University Law School).

The right to trial by jury has- long been an important protection in the civil law of this country. According to the Founding Fathers, the right served as “an important bulwark against tyranny and corruption.” Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 343, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979) (Rehnquist, J., dissenting). As then-Justice Rehnquist reminded us: “Trial by a jury of laymen rather than by the sovereign’s judges was important to the founders because juries represent the layman’s common sense, the ‘passional elements in our nature,’ and thus keep the administration of law in accord with the wishes and feelings of the community.” Id. at 343-44, 99 S.Ct. 645 (Rehnquist, J., dissenting) (quoting O. Holmes, Collected Legal Papers 237 (1920)).

In deciding whether a particular action is a suit at law that triggers this important protection, we are instructed to apply the two-step test set forth in Granfinanciera, 492 U.S. at 42, 109 S.Ct. 2782. First, we ask “whether the action would have been deemed legal or equitable in 18th century England.” Germain v. Connecticut Nat’l Bank, 988 F.2d 1323, 1328 (2d Cir.1993) (citing Granfinanciera, 492 U.S. at 42, 109 S.Ct. 2782). Second, “‘we examine the remedy sought and determine whether it is legal or equitable in nature.’ ” Granfinanciera, 492 U.S. at 42, 109 S.Ct. 2782 (quoting Tull v. United States, 481 U.S. 412, 417-18, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987)). We then “balance the two, giving greater weight to the latter.” Germain, 988 F.2d at 1328 (citing Granfinanciera, 492 U.S. at 42, 109 S.Ct. 2782).

A. Step 1: Legal or Equitable Action in 18th Century England ?

After three decades of grappling with the law versus equity analysis, the late Justice William Brennan threw up his hands. He had wearied of “rattling through dusty attics of ancient writs” and suggested that Seventh Amendment jurisprudence should sever its dependence on historical analogies to English common law as it existed in 1791. Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 574-75, 110 S.Ct. 1339, 108 L.Ed.2d 519 (1990) (Brennan, J., concurring). However much we may sympathize with his position, Justice Brennan’s suggestion has gone unheeded, and thus, we are left to scour through the “dusty attics” ourselves.

Count IV, brought pursuant to Delaware common law, alleges a claim for breach of fiduciary duty. Count V, which seeks damages against Farace and Marcus for allowing payment of dividends while Trace’s capital was impaired, is a claim for breach of Delaware General Corporation Law § 174(a). Nevertheless, Count V is analogous to a breach of fiduciary duty claim, and was properly treated as such by the district court.

In analyzing Counts IV and V, the district court concluded that “[t]he general rule is that ‘actions for breach of fiduciary duty, historically speaking, are almost uniformly actions “in equity” — carrying with them no right to trial by jury.’ ” Pereira II, 2002 WL 989460, at *3. (quoting Page Mill Asset Mgmt. v. Credit Suisse First Boston Corp., 2001 WL 863552, at *4 (S.D.N.Y. July 30, 2001)). The court thus believed that the first step of the Granfi-nanciera test tilted in favor of denying defendants a jury trial.

We accept the district court’s statement that as a “general rule” breach of fiduciary duty claims were historically within the jurisdiction of the equity courts. See Terry, 494 U.S. at 567, 110 S.Ct. 1339 (citing 2 J. Story, Commentaries on Equity Jurisprudence § 960, at 266 (13th ed. 1886) and Restatement (Second) of Trusts § 199(c) (1959)). Defendants emphasize, however, that this was and is only a general rule. They contend that under Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970), “[t]he Seventh Amendment question depends on the nature of the issue to be tried rather than the character of the overall action.” Id. at 538, 90 S.Ct. 733 (emphasis added); see also Halladay v. Verschoor, 381 F.2d 100, 109 (8th Cir.1967) (“Ordinarily, enforcement of administration of trusts and proceedings involving trusts are subjects for equity jurisdiction, but where the basic nature of the claims present only legal issues, it is entirely proper ... to treat the case as one belonging on the law docket.”); DePinto v. Provident Sec. Life Ins. Co., 323 F.2d 826, 837 (9th Cir.1963) (“[W]e hold that where a claim of breach of fiduciary duty is predicated upon underlying conduct, such as negligence, which is actionable in a direct suit at common law, the issue of whether there has been such a breach is ... a jury question.”).

Applying the “nature of the issues” test, defendants maintain that the issues in Counts IV and V are negligence-based because Delaware applies a “gross negligence” standard to breach of fiduciary duty claims. Because negligence is historically a legal claim, see Ross, 396 U.S. at 542, 90 S.Ct. 733, defendants assert they are entitled to a jury trial under the Seventh Amendment.

Judge Sweet rejected this argument. He cautioned that defendants’ interpretation of Ross would effectively permit every breach of fiduciary duty claim to be recast as an action at law such that “parties seemingly would be entitled to a jury trial on any and all breach of fiduciary duty claims.” Pereira II, 2002 WL 989460, at *3.

We agree with Judge Sweet that defendants mischaracterize the holding of Ross. In Ross, shareholders brought a derivative suit against corporate directors, alleging breach of fiduciary duty, breach of contract, and gross negligence. Ross, 396 U.S. at 531, 90 S.Ct. 733. Although shareholder derivative claims had been traditionally heard in equity, the Supreme Court found a right to a jury trial because plaintiffs claims presented legal issues— breach of contract and negligence. Id. at 542, 90 S.Ct. 733. Despite defendants’ claim that Ross requires us to break the Trustee’s breach of fiduciary duty claim into its most elemental parts, Ross merely requires courts to look beyond the procedural vehicle of a shareholders derivative suit to the possible legal nature of the corporation’s underlying claims. Id. at 540, 90 S.Ct. 733 (noting that “nothing-turns upon the form of the action or the procedural device by which the parties happened to come before the court”).

We decline, therefore, to adopt defendants’ expansive interpretation of Ross. Accordingly, we hold that Counts IV and V would have been equitable in 18th century England and thus that step one of Granfi-nanciera weighs against a jury trial.

B. Step 2: Nature of Relief Sought

The second step of the Granfinan-ciera test focuses on the nature of the relief sought. Granfinanciera, 492 U.S. at 42, 109 S.Ct. 2782. It calls upon us to decide whether the “type of relief [sought] was available in equity courts as a general rule.” Rego v. Westvaco Corp., 319 F.3d 140, 145 (4th Cir.2003). This step is accorded “greater weight” than the first, Germain, 988 F.2d at 1328, and, as such, is the “more important” step. Granfinanciera, 492 U.S. at 42, 109 S.Ct. 2782.

In his prayer for relief, the Trustee sought “compensatory damages,” which is, of course, the classic form of legal relief. The district court, however, “looked beyond [the Trustee’s] characterization[ ] to what the claim for relief actually [was].” See Dairy Queen, Inc. v. Wood, 369 U.S. 469, 477-78, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962) (“[T]he constitutional right to trial by jury cannot be made to depend upon the choice of words used in the pleadings.”). The district court then went on to determine that the Trustee had, in fact, actually “limited his relief to restitution,” which is equitable in nature. Pereira III, 294 B.R. at 544. In so doing the district court concluded that “the fact that the officers and directors never personally possessed any of the disputed funds [does] not militate that the relief [is] not equitable.” Id. at 544-45 (internal footnote and citation omitted).

On appeal, defendants challenge the court’s characterization of the relief as equitable. They emphasize that, because they never possessed the funds in question and thus were not unjustly enriched, the remedy sought against them cannot be considered equitable. Rather, according to defendants, the remedy sought was legal and thus they were entitled to a jury trial. We agree.

We have to concede that our decision in Strom v. Goldman, Sachs & Co., 202 F.3d 138 (2d Cir.1999), points to a contrary result. In Strom, we characterized as equitable the monetary relief sought by plaintiff for defendant’s alleged breach of fiduciary duty even though the defendant did not actually possess the funds in question. Id. at 144. We wrote that “plaintiffs claim is based on the alleged breach of a fiduciary duty, a claim that always has been within the exclusive jurisdiction of equity and that never has required a showing of unjust enrichment because the theory of the action is entirely different.” Id. at 145 (footnote omitted). We also found that “[t]he absence of unjust enrichment here therefore is not inconsistent with accurate characterization of the relief plaintiff seeks as ‘equitable.’ ” Id.

Two years later, however, the Supreme Court’s decision in Great-West Life & Annuity Insurance Company v. Knudson, 534 U.S. 204, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002), reconfigured the legal landscape of restitution. In Greatr-West, the Supreme Court stated that, “for restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession.” Id. at 214, 122 S.Ct. 708 (footnote omitted) (emphasis added). This reasoning cuts across the grain of Strom. Indeed, several courts have already agreed that Greatr-West has overruled our decision in Strom. See, e.g., Callery v. United States Life Ins. Co., 392 F.3d 401, 408 (10th Cir.2004) (stating that “the Supreme Court has rejected [Strom’s] broad definition of ‘equitable remedy’”); Bona v. Barasch, No. 01 Civ. 2289, 2003 WL 1395932, at *11 (S.D.N.Y. Mar. 20, 2003); De Pace v. Matsushita Elec. Corp. of Am., 257 F.Supp.2d 543, 563 (E.D.N.Y.2003); Kishter v. Principal Life Ins. Co., 186 F.Supp.2d 438, 443 (S.D.N.Y. 2002) (stating that “the Second Circuit’s reasoning in Strom has been superseded by Great-West”); Augienello v. Coast-to-Coast Fin. Corp., No. 01 Civ. 11608, 2002 WL 1822926, at *6 (S.D.N.Y. Aug.7, 2002), aff’d, 64 Fed.Appx. 820 (2d Cir.2003) (unpublished summary order); see also Rego v. Westvaco Corp., 319 F.3d 140, 145 (4th Cir.2003) (noting that the “[t]he Supreme Court has squarely rejected” the argument that “actions for breach of fiduciary duty by a trustee could only be brought in equity”).

The Trustee contends that the holding of Great-West is inapplicable here because Greatr-West involved only non-fiduciary defendants. In Cattery, the Tenth Circuit rejected this same argument. 392 F.3d at 409. That court found that, while the “distinction made in Strom ... based on the status of the defendant as a fiduciary ... may have been compelling before G'reat-West, [it is] not so now.” Id. (positing that “we must adhere to the Supreme Court’s rather emphatic guidance [in Great-West]”)) see also McLeod v. Oregon Lithoprint Inc., 102 F.3d 376, 378 (9th Cir.1996) (“[T]he status of the defendant, whether fiduciary or nonfiduciary, does not affect the question of whether damages constitute ‘appropriate equitable relief.’ ”).

Like our sister circuits, we are compelled to read G'reatr-West as broadly as it is written. Nor can we ignore the Supreme Court’s inclusion of footnote 2, highlighting a single exception to its rule that a defendant must possess the funds at issue for the remedy of equitable restitution to lie against him. Great-West, 534 U.S. at 214 n. 2, 122 S.Ct. 708. (That “limited exception” is for “an accounting of profits,” which, of course, is not relevant to this case. Id.)

Finally, Justice Ginsburg’s dissent in Great-West offers further guidance by pointing out that restitution is measured by a defendant’s “unjust gain, rather than [by a plaintiffs] loss.” Id. at 229, 122 S.Ct. 708 (Ginsburg, J., dissenting) (citing 1 D. Dobbs, Law of Remedies § 12.1(1), at 9). It is undeniable here that the Trustee seeks only to recover funds attributable to Trace’s loss, not the director’s unjust gain.

We thus hold that’the district court im-propérly characterized the Trustee’s damages as restitution. Plaintiffs claim is for compensatory damages — a legal claim. See Terry, 494 U.S. at 570, 110 S.Ct. 1339. Because we. afford “greater weight” to Granfinanciera’s second step than to its first, we conclude that defendants were entitled to a jury trial on the Trustee’s breach of fiduciary duty claims and we remand for that purpose.

II. Additional Issues

Defendants raise a plethora of other issues on appeal. Because we are remanding for a jury trial we see no need to resolve all of these issues. However, these issues were fully briefed and may recur, so we briefly address three of them: (1) whether the Trustee has waived his right to non-equitable damages; (2) the Trustee’s standing to assert the rights of the creditors; and (3) the correct insolvency standard.

We review de novo a district court’s legal conclusions. See Travellers Int’l A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1574 (2d Cir.1994).

Because Trace is incorporated in Delaware we apply Delaware law to the questions presented to us. See generally EBS Litig. v. Barclays Global Investors, N.A., 304 F.3d at 305 (applying Delaware law under similar circumstances); McCall v. Scott, 250 F.3d 997, 999 (6th Cir.2001) (same).

A. Waiver

Defendants maintain that the Trustee has waived any claim for money damages. They base this argument on the Trustee’s abandonment of his request for “compensatory damages” in favor of equitable restitution, which the defendants allege the Trustee did in order to defeat defendants’ jury trial request. We reject defendants’ argument.

Given our holding that the Trustee sought (and, indeed, properly alleged in his complaint) compensatory damages, it would be wholly inequitable — particularly in this era of relaxed pleading rules — to preclude him from seeking such damages on remand merely because he advocated for restitution on the jury trial issue.

Accordingly, we hold that the Trustee did not waive his right to seek compensatory damages on remand.

B. Trustee Standing

The director-defendants argue that both Trace’s Certificate of Incorporation and Delaware law shield them from any money damages rooted in a violation of the director’s duty of care. More particularly, they contend that the Trustee, as legal successor to Trace, lacks standing to bring due care claims as he too is bound by the Certificate. We agree.

Delaware General Corporation Law § 102(b)(7) authorizes corporations to adopt a charter provision shielding directors from the payment of monetary awards based on breaches of the duty of care. See Del.Code Ann. tit. 8, § 102(b)(7) (2005). Trace adopted just such an “exculpatory” clause. It states:

To the fullest extent permitted by the General Corporation Law, as the same presently exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director’s .duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.

(emphasis added). This clause makes it abundantly clear that directors are shielded from liability for breaches of the duty of care, but not for (1) improper dividends or redemptions, see id. § 174, or (2) breaches of the duties of good faith or loyalty.

The Trustee argues, and the district court agreed, that despite the existence of the exculpatory clause, the Trustee could bring a claim for breach of the duty of care on behalf of the creditors, rather than the corporation. The court reasoned that “where the injury is to all creditors as a class, it is the creditors who lack standing and the Trustee who may bring a claim based on that generalized injury.” Pereira I, 2001 WL 243537, at *11 (citing Kalb Voorhis & Co. v. Am. Fin. Corp., 8 F.3d 130, 132-33 (2d Cir.1993), and St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 696-99 (2d Cir.1989)). While this proposition may be true — because claims that injure all creditors as a class normally belong to the corporation, see Production Resources Group, LLC v. NCT Group, Inc., 863 A.2d 772, 792-93 (Del.Ch.2004)—it does not imply that the Trustee’s rights are greater than the rights the corporation would have against malfeasant directors.

“Under the Bankruptcy Code [a] trustee stands in the shoes of the bankrupt corporation and has standing to bring any suit that the bankrupt corporation could have instituted had it not petitioned for bankruptcy.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.1991). Thus, “a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held by the bankrupt corporation itself.” Id. at 118 (citing Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416, 434, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972)). Although corporate officers and directors owe fiduciary duties to creditors when a corporation is insolvent in fact, see Geyer v. Ingersoll Pubs. Co., 621 A.2d 784, 787-88 (Del.Ch.1992), these duties do not expand the circumscribed rights of the trustee, who may only assert claims of the bankrupt corporation, not its creditors, see Production Resources, 863 A.2d at 795.

In Production Resources, the Delaware Chancery court considered a similar issue. The court held that an exculpatory charter provision precluded creditor claims predicated on mismanagement — i.e., duty of care violations — but did not preclude claims based on deliberate wrongdoing— i.e., duty of loyalty violations. Id. at 793-95. In so holding, the court found that the breach of fiduciary duty claim belonged to the corporation and not the individual creditors. Id. at 776, 792-93. Thus the creditors could raise these claims only derivatively. Id. And “[although § 102(b)(7) itself does not mention creditors specifically, its plain terms apply to all claims belonging to the corporation itself, regardless of whether those claims are asserted derivatively by stockholders or by creditors.” Id. at 793 (footnote omitted). Therefore, the exculpatory clause applied to defeat the creditors’ due care claim. Id. at 793-95; see also Continuing Creditors’ Comm. of Star Telecomm., Inc. v. Edgecomb, No. Civ. A. 03-278-KAJ, 2004 WL 2980736, at *11-13 (D.Del. Dec.21, 2004) (applying Production Resources to bar claims in bankruptcy premised on breach of the duty of due care).

In this case, because breach of fiduciary duty claims belong to the corporation, they are subject to the exculpatory clause defense even when pressed by a trustee. We hold, therefore, that the exculpatory clause in Trace’s Certificate of Incorporation precludes the Trustee from bringing any due care claims seeking monetary awards against the directors, whether brought on behalf of the creditors or Trace itself.

C. Insolvency Standard

Defendants suggest that the district court applied an incorrect standard to determine “cash” insolvency. Specifically, they allege that the court erred by adopting the Trustee’s expert’s testimony concerning Delaware law on insolvency and consequently erred in determining the extent of Trace’s financial distress during the period at issue. With respect to the district court’s use of the Trustee’s expert’s Cash Flow test in determining insolvency, we agree with defendants. However, the Cash Flow test may prove useful in addressing those claims not dependent on a finding of insolvency.

Under Delaware Law, the financial status of a corporation serves as' the benchmark in deciding when certain duties arise and whether questioned transactions, such as the issuance of dividends and stock redemptions, are improper. See generally Del.Code Ann. tit. 8, §§ 160, 174(a) (2005).

Delaware courts define insolvency in two ways. See United States Bank Nat’l Ass’n v. United States Timberlands Klamath Falls, LLC, 864 A.2d 930, 947-48 (Del.Ch.2004), vacated on other grounds, No. 36, 2005, 2005 WL 1353766, 875 A.2d 632 (Del. June 6, 2005). “First, a company is insolvent if it is unable to pay its debts as they fall due in the usual course of business. Second, a company may be insolvent if it has liabilities in excess of a reasonable market value of assets held.” Id.

In evaluating Trace’s financial status, the district court applied the Cash Flow test that “look[ed] not only at Trace’s ability to pay its current maturing obligations as they came due, but also the ability to meet cash and capital requirements in the future, including those required to repay the additional borrowings that were being incurred to fund Trace’s cash flow deficits.” Pereira III, 294 B.R. at 501. Based on this test, the court found that Trace was insolvent.

The Cash Flow test does not accord exactly with either Delaware definition. The Cash Flow test projects into the future to determine whether capital will remain adequate over time while the Delaware test looks solely at whether the corporation has been paying bills on a timely basis and/or whether its liabilities exceed its assets. Therefore, the Cash Flow test cannot assist a trier of fact in determining whether a corporation is insolvent under the applicable Delaware law. However, because a showing of insolvency is not required for a finding of liability on two of the Trustee’s remaining claims — ie., the improper redemption and dividends claims' — it is likely that portions of the Trustee’s expert’s Cash Flow test testimony will be useful to the jury when it considers these claims. The district court should determine this issue in the first instance.

Additionally, Trace’s financial status will be an issue in determining whether the officers and directors violated Delaware General Corporation Law §§ 160 and 174(a). The financial standards necessary to make a finding of liability under these two sections differ greatly. ’' However, upon review of the record, the district court set forth the appropriate standards, ie., that directors may not authorize dividends while a corporation is insolvent or that would render the corporation insolvent and that a corporation may not redeem its own stock if its capital is impaired or would be impaired by the redemption— and we have no reason to believe that the court will not do the same when instructing the jury on remand.

CONCLUSION

For the reasons stated above, we Vaoate the judgment of the district court and Remand the case for a jury trial consistent with this opinion.

JON 0. NEWMAN, Circuit Judge,

concurring.

Whether a jury is available for a claim against a fiduciary for money damages for breach of fiduciary duties is, for me, a close question. The Court is confident that a jury trial is available. I find that proposition at odds with centuries of equitable proceedings involving claims against trustees, estate executors, and other fiduciaries, although I acknowledge that the proposition finds some support in the two cases from the 1960s cited by the Court and, more significantly, in the dictum recently stated by the Supreme Court in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002). Although that statement is dictum, I reluctantly agree that we should follow it, and therefore concur. I think it useful, however, to indicate that the issue is far closer than the Court acknowledges.

It is literally black letter law, as set forth in the Restatement (Second) of Trusts, that remedies against a fiduciary, such as a trustee, are exclusively equitable, with an exception, inapplicable in the pending case, for recovery of (1) a fixed sum of money that the fiduciary is under a duty to pay immediately and unconditionally or (2) a chattel that the fiduciary is under a duty to transfer immediately and unconditionally:

§ 197 Nature of Remedies of Beneficiary

Except as stated in § 198, the remedies of the beneficiary against the trustee are exclusively equitable.

§ 198 Legal Remedies of Beneficiary

(1) If the trustee is under a duty to pay money immediately and unconditionally to the beneficiary, the beneficiary can maintain an action at law against the trustee to enforce payment.
(2) If the trustee of a chattel is under a duty to transfer it immediately and unconditionally to the beneficiary and in breach of trust fails to transfer it, the beneficiary can maintain an action at law against him.

Restatement (Second) of Trusts §§ 197, 198 (1959) (emphasis added).

As the Restatement makes clear, the remedy at law for payment of a sum of money immediately and unconditionally due the beneficiary applies to money in the hands of the trustee that is being wrongfully withheld. An example is money to be paid to a trust beneficiary upon reaching a specified age. See Restatement (Second) Trusts, § 198, illustration 1. Apart from this exception, it is black letter law that the beneficiary has an equitable remedy to compel the trustee to redress a breach of trust:

§ 199 Equitable Remedies of Beneficiary

The beneficiary of a trust can maintain a suit
(c) to compel the trustee to redress a breach of trust[.]

§ 205 Liability in Case of Breach of Trust

If the trustee commits a breach of trust, he is chargeable with
(a) any loss ... in value of the trust estate resulting from the breach of trust[.]

Restatement (Second) Trusts §§ 199, 205.

A leading encyclopedia states the matter in similar language:

A trustee may be sued in equity, upon misapplication of trust funds, for a breach of trust, and, indeed, the remedies available to the beneficiaries of a testamentary trust against the trustee for a breach of trust are exclusively equitable. An action by beneficiaries for a breach of trust is an equitable proceeding, even if money damages are the only remedy sought.

76 Am.Jur.2d § 598, at 627-28 (footnotes omitted) (emphases added).

A leading treatise echoes the point:

§ 199. Equitable Remedies of Beneficiary

A court of equity, having jurisdiction over the administration of trusts, will give to the beneficiaries of a trust such remedies as are necessary for the protection of their interests.... These remedies include ... redress for a breach of trust.

Ill William F. Fratcher, Scott on Trusts § 199, at 208-04 (4th ed.1988).

Abundant case law supports the ability of the victims of a breach of fiduciary duties to obtain money damages in equity from a defendant in breach of fiduciary duties. See, e.g., In re Interborough Consolidated Corp., 288 F. 334 (2d Cir.1923); Masters v. Bissett, 101 Or.App. 163, 790 P.2d 16, modified on other grounds, 102 Or.App. 289, 794 P.2d 445 (1990); Magill v. Dutchess Bank and Trust Co., 150 A.D.2d 531, 541 N.Y.S.2d 437 (2d Dep’t 1989); Estate of Rothko, 84 Misc.2d 830, 887, 379 N.Y.S.2d 923, 978 (N.Y.Sur.1975) (surrogate required trustee to pay $6,464,880 in damages to trust beneficiaries), modified on other grounds, 56 A.D.2d 499, 392 N.Y.S.2d 870 (1st Dep’t), aff’d, 43 N.Y.2d 305, 401 N.Y.S.2d 449, 372 N.E.2d 291 (1977).

Despite the sweep of the pronouncements in the Restatement, the American Jurisprudence encyclopedia, and the Scott treatise, and the decisions that have awarded money damages in equity against fiduciaries in breach of their fiduciary duties, some decisions have made a distinction between claims against a fiduciary in equity and claims against a fiduciary at law. “Where ... the beneficiaries of a trust sue the trustee in order to restore funds to the trust, the action is considered equitable in nature.” Allard v. Pacific National Bank, 99 Wash.2d 394, 400-401, 663 P.2d 104, 108 (1983) (citing Baldus v. Bank of California, 12 Wash.App. 621, 530 P.2d 1350 (1975); Spitznass v. First National Bank, 269 Or. 676, 525 P.2d 1318 (1974)). The restoration of funds to the trust is often referred to as a “surcharge.” Allard, 99 Wash.2d at 401, 663 P.2d 104 (citing Lockwood v. OFB Corp., 305 A.2d 636, 638 (Del.Ch.1973)). On the other hand, “[wjhere the beneficiaries seek recovery. for themselves personally, the action is considered legal in nature.” Id. at 400, 663 P.2d 104 (citing Brys v. Pratt, 55 Wash. 122, 104 P. 169 (1909)).

In the pending case, the Court cites two court of appeals decisions from the 1960s in support of the proposition that a jury is required in a suit involving a trust or a fiduciary where only “legal issues,” Halladay v. Verschoor, 381 F.2d 100, 109 (8th Cir.1967), or a claim “actionable in a direct suit at common law,” DePinto v. Provident Security Life Insurance Co., 323 F.2d 826, 837 (9th Cir.1963), are involved. Halladay strikes me as rather weak authority for a jury right in claims against a fiduciary because the Court-noted that the complaint against the defendant “failed to allege any specific averments of fiduciary relationship between the parties.” Halladay, 381 F.2d at 109. DePinto broadly states that “where a claim of breach of fiduciary duty is predicated on underlying conduct, such as negligence, which is actionable in a direct suit at common law, the issue of whether there has been such a breach is ... a jury question.” 323 F.2d at 837. That statement, if followed literally, would authorize jury trials for countless surcharge actions against trustees and executors, normally litigated on the equity side, because it is not uncommon for a claim of breach of fiduciary duties to include an allegation that the breaching fiduciary was negligent.

More relevant, it seems to me, is the discussion in Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970), which upheld a right to jury trial for a shareholder’s derivative suit. In ruling for a jury trial, the Court said:

[T]he corporation’s claim is, at least in part, a legal one. The relief sought is money damages. There are allegations in the complaint of a breach of fiduciary duty, but there are also allegations of ordinary breach of contract and gross negligence. The corporation, had it sued on its own behalf, would have been entitled to a jury’s determination, at a minimum, of its damages against its broker under the brokerage contract and of its rights against its own directors because of their negligence. Under these circumstances it is unnecessary to decide whether the corporation’s other claims are also properly triable to a jury-

Id. at 542-43, 90 S.Ct. 733. Although the Court does not decide whether the other claims, ie., the breach of fiduciary duty claims, are triable to a jury, a reasonable inference from the introduction of the law claims with the word “but,” in distinction to the breach of fiduciary claims is that the latter, standing alone, would not require a jury.

Even if the isolated state court cases such as Spitznass and Brys, cited above, are correct in requiring a jury for a claim against a trustee for damages for the personal benefit of a plaintiff, as distinguished from a claim to replenish a trust, I have difficulty understanding why the issue of whether a fiduciary has breached his duties requires a jury when the defaulting trustee must pay money to a claimant but does not require a jury in a typical surcharge action when the trustee must pay the same amount of money to the trust for the same breach of duty.

Despite the sweep of the language from the Restatement supporting actions in equity against fiduciaries for breach of their duties and the rarity of decisions requiring a jury for such claims, I am persuaded that the Supreme Court’s dictum in Greal-West, sends a signal that should not be ignored. The Court there stated: “[F]or restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession.” Great-West, 534 U.S. at 214, 122 S.Ct. 708. The statement is dictum with respect to an action against a fiduciary because the defendant in Great-West was not a fiduciary. But the Court appears to be little concerned with the nature of the defendant and critically concerned with whether the defendant is being compelled to disgorge specific, traceable funds in his possession, in which case the action is in equity, or to pay money out of his pocket, ie., damages, to a claimant. Restitution of the latter type, the Court states, requires a jury. In my view, this broad assertion of a jury right is at odds with numerous traditional equity actions that have historically been brought and currently are being brought in probate courts throughout the country without juries. Nevertheless, the Supreme Court has asserted that the availability of the jury turns on whether the funds being sought are in the defendants’ possession, and I am obliged to follow that guidance.

Since the funds being sought in the pending case are not in the defendants’ possession, the claim appears to require a jury under Grea1r-West, notwithstanding that the basis of the claim is breach of fiduciary duties. For these reasons, I concur in the Court’s opinion. 
      
      . Cogan was found liable by the district court for $44.4 million. He then settled with the Trustee.
     
      
      . Winters entered into a settlement with the Trustee prior to the issuance of this Opinion.
     