Suppose you have been sued by the bankruptcy trustee for an alleged fraudulent transfer or a preferential payment. Who decides the case—the bankruptcy judge or a jury? This post explores the circumstances in which parties to a fraudulent transfer or preference action can demand trial by jury.
The right to trial by jury is enshrined in the Seventh Amendment to the United States Constitution, which states, in relevant part: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved….” The Supreme Court has construed the Seventh Amendment as preserving the right to trial by jury only for those actions for which the right existed in the courts of England prior to the merger of law and equity. Although much can be said about what this means, suffice it to say that the right to jury trial depends on whether the action is legal or equitable. The Supreme Court has held that, at least from the defendant’s perspective, fraudulent transfer and preference actions are legal, which means the right to jury trial exists for these actions. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989); Langenkamp v. Culp, 498 U.S. 42 (1990).
But the inquiry does not end there. The Supreme Court has also held that the defendant is not entitled to a jury in a fraudulent transfer or preference action if he has filed a proof of claim. Schoenthal v. Irving Trust Co., 287 U.S. 92 (1932); Katchen v. Landy, 382 U.S. 323 (1966); Langenkamp v. Culp, 498 U.S. 42 (1990). This is because the bankruptcy process of restructuring the debtor-creditor relationship is equitable (as opposed to legal) in nature; hence, bankruptcy courts are considered “courts of equity.” Thus, when a creditor files a proof of claim, his legal claim for money is said to be converted into an equitable one for a share of the bankruptcy estate, and by so submitting his claim to the equitable jurisdiction of the bankruptcy court, the creditor has waived his right to jury trial on any matter that bears directly on the claims-allowance process—i.e., the process of determining his share of the estate. A fraudulent transfer or preference action against the defendant/creditor is part of this process because the defendant/creditor’s claim will be affected by the outcome of the action. See, e.g., 11 U.S.C. § 502(d) & (h). In sum, if the defendant has filed a proof of claim, then the creditor has no right to a trial by jury. If he has not filed a claim, then he may demand a jury trial.
Now suppose the defendant has not filed a proof of claim and does not want a jury trial—can he resist the trustee’s demand for one? There is surprisingly little case law on this issue. However, the best answer is that the trustee does not have a Seventh Amendment right to jury trial in fraudulent transfer or preference actions. This is because the trustee’s avoidance powers (like the trustee himself) exist solely by virtue of the bankruptcy code and exist solely for purpose of bringing property into the estate for equitable distribution. The trustee is the representative of the estate, see § 323(a), and he “stands in the shoes” of the debtor for many things. But, prior to filing bankruptcy, the debtor did not have causes of action for fraudulent transfer or preference avoidance. Thus, the trustee’s right to trial by jury cannot be derivative of a pre-petition right enjoyed by the debtor. Fraudulent transfer and preference actions are tools created by the bankruptcy code to bring property into the bankruptcy estate for equitable distribution. These actions are integral parts of the inherently equitable process of restructuring the debtor/creditor relationship—that is to say, the process of determining and distributing property of the estate to creditors. As such, the trustee has no right to a jury trial in these actions. At least two courts have set forth similar reasoning when denying a trustee’s request for jury trial. In re Enron Corp., 319 B.R. 122, 125-27 (Bankr. S.D. Tex. 2004); In re Reda, Inc., 60 B.R. 178, 179-81 (Bankr. E.D. Ill. 1986).
Lastly, assuming a jury trial is to be had, may the bankruptcy court conduct it or must the district court? It depends on whether both parties consent. Section 157(e) of Title 42 permits the bankruptcy court to conduct a jury trial only if both parties consent. Absent mutual consent, only the district court may conduct the trial. Some courts have held that refusal of one party to consent is not a basis for withdrawing the reference and the bankruptcy court may determine all pre-trial matters, just not the trial itself.