It is well established that by filing a proof of claim in bankruptcy, a creditor submits itself to the equitable jurisdiction of the bankruptcy court and waives any right it would otherwise have to a jury trial with respect to any issue that “bears directly on the allowance of its claim.” Such a waiver normally applies in fraudulent transfer actions, since under Section 502(d) of the Bankruptcy Code the court must disallow a claim of any entity that received an avoidable transfer. But what happens in fraudulent transfer cases where the initial transferee filed a proof of claim—thereby waiving its jury trial rights—but the subsequent transferee has not?
The Bankruptcy Court for the District of Hawaii dealt with this exact scenario as part of the converted Chapter 7 case of Hawaii Island Air, Inc. See In re Hawaii Island Air, Inc., No. 17-01078 [Adv. Pro. 19-90049] (Bankr. D. Haw. May 27, 2020). The Chapter 7 trustee brought an adversary proceeding against certain parties asserting, among other things, fraudulent transfer claims. Some of the defendants filed proofs of claim while others have not. The trustee argued that defendants who did not file proofs of claim—and therefore did not waive their right to a jury trial—should nonetheless be bound by a jury trial waiver to the extent they were subsequent transferees of the alleged fraudulent transfers and the initial transferees did file proofs of claim. The trustee reasoned that the adjudication of whether the transfers were fraudulent must be resolved through the claims allowance process, and therefore subsequent transferees should have no right to a jury trial.
The Court rejected this argument, noting that the trustee offered no authority for the proposition that, if the initial transferee of an avoidable transfer loses its right to a jury trial, all subsequent transferees lose their jury trial rights as well, even if the subsequent transferees did not file their own proofs of claim. “The Seventh Amendment right to trial by jury,” the Court explained, “is too important to permit its forfeiture by the actions of another person.” The same is true even where all defendants are members of the same corporate family. The Court rejected the argument that the loss of jury trial rights by one entity deprives all of its affiliates of jury trial rights, too.
Creditors should be aware that filing a proof of claim against a debtor could affect their jury trial rights in fraudulent transfer litigation and any other matters related to their claim. But according to the Bankruptcy Court for the District of Hawaii, such rights cannot be deprived from a subsequent transferee in an alleged fraudulent transfer who did not file its own proof of claim, simply by virtue of a proof of claim filed by the initial transferee.
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