The Bottom Line

In an opinion dated Jan. 10, 2020, Bankruptcy Judge Craig A. Gargotta of the Western District of Texas (San Antonio Division) held that a creditor who submits a proof of claim in bankruptcy waives its right to a jury trial, regardless of whether the creditor has couched its claim in protective language purporting to reserve its right to a jury trial. See Schmidt v. AAF Players LLC (In re Legendary Field Exhibitions LLC), 19-05053 (Bankr. W.D. Tex. Jan. 10, 2020).

What Happened?

Background

On April 10, 2019, the individual plaintiffs filed a class action against AAF Players LLC and other defendants in California state court, alleging, among other things, breach of contract, promissory estoppel, violation of California labor laws and the California Business and Professions Code, and fraud (the Complaint). The Complaint included a demand for jury trial. One week later, certain of the defendants filed Chapter 7 petitions in the Western District of Texas bankruptcy court (the Bankruptcy Court), which were subsequently consolidated (the Bankruptcy Case). The plaintiffs’ state court suit was thereafter removed to federal court and ultimately transferred to the Bankruptcy Court, where it became an adversary proceeding. 

In July 2019, before the lawsuit was transferred to the Bankruptcy Court, the plaintiffs filed a proof of claim in the Bankruptcy Case premised on their lawsuit against the debtors. The Claim included a reservation of rights, which stated that “filing of this proof of claim is not and shall not be deemed or construed as … a waiver or release of the Plaintiffs’ rights to a trial by jury.” Thereafter, upon transfer of the lawsuit to Bankruptcy Court, the parties, in keeping with local rules, briefed the issue of whether the plaintiffs were entitled to a jury trial. The key question was whether the plaintiffs, in filing a proof of claim, had waived their right to a jury trial.

Judge Gargotta’s Opinion

Relying principally on the leading Supreme Court cases on the subject — Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) and Langenkamp v. Culp, 498 U.S. 42 (1990) — Judge Gargotta concluded that by filing their proof of claim, the plaintiffs “effectively converted their legal dispute to an equitable dispute,” and “[b]ecause Granfinanciera held that the right to a jury trial only extends to matters that are legal in nature and involve private rights, a creditor that files a claim loses its Seventh Amendment right to a jury trial.” 

The Bankruptcy Court found it irrelevant that the plaintiffs had purported, through inclusion of protective language in their proof of claim, to reserve their right to a jury trial, concluding: “Even if a creditor attempts to couch its claim in protective language reserving the right to a jury trial, such protective language is not binding on the Court; rather, the Court is bound by Langenkamp and Granfinanciera, which found that filing a proof of claim results in waiver of the right to jury trial.” 

Why This Decision Is Important

In denying the plaintiffs’ request for a jury trial, Judge Gargotta upheld the general rule set forth by the Supreme Court in Granfinanciera and Langenkamp that the filing of a proof of claim results in the waiver of a party’s Seventh Amendment right to a jury trial. In doing so, Judge Gargotta found that the purported reservation of rights to a jury trial, and any related protective language set forth in a party’s pleadings, is not binding on the court and will not prevail over the Seventh Amendment waiver articulated by the Supreme Court. The court acknowledged the dilemma faced by claimants in this scenario — i.e., to file a proof of claim and lose their right to a jury trial, or to forgo filing a proof of claim but risk the loss of their right to participate in distribution of the bankruptcy estate — but essentially found it was powerless to alter this dynamic.