Opinion ID: 602805
Heading Depth: 2
Heading Rank: 1

Heading: Relationship Between the Trustee's Claims and the Bankruptcy Proceedings

Text: 8 Before directly addressing the Bank's substantive arguments, we must first discuss the relationship between the Trustee's claims and the bankruptcy proceedings. This discussion, although preliminary in nature, constitutes a great portion of our opinion because the relationship of the claims is integral to each of appellant's arguments and is at the crux of the appeal. The remainder of the opinion will draw on the reasoning and conclusions set out in this section.
9 Judge Dorsey recognized that the designation of an action as core does not control whether or not the action may be tried before a jury. Germain v. Connecticut Nat'l Bank, 112 B.R. 57, 59 (D.Conn.1990). 3 The right to a jury trial is of constitutional concern. Neither Congress nor the courts may deprive litigants of their constitutional rights simply by labeling a cause of action core. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 61, 109 S.Ct. 2782, 2800, 106 L.Ed.2d 26 (1989). Thus the determination that the Trustee's action is core is entitled to minimal weight in reaching our ultimate decision on the jury trial issue. 4
10 Resolution of the Trustee's action is not required in order to determine whether to allow CNB's claim as a creditor in the bankruptcy proceeding. The Trustee asks for money damages to compensate the estate for the destruction of the debtor's business. If he wins, the estate is enlarged, and this may affect the amount the Bank and its fellow creditors ultimately recover on their claims, but it has no effect whatever on the allowance of the Bank's claims. Thus, a court could allow the Bank's claim before hearing argument on the Trustee's complaint, and this chronology would be both logical and consistent with the Bankruptcy Code. 11 This situation differs from those treated in some leading Supreme Court cases relied on by the Bank. In both Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), and Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (per curiam), reh'g denied, 498 U.S. 1043, 111 S.Ct. 721, 112 L.Ed.2d 709 (1991), the issue was whether the trustee may void a preferential transfer without a jury trial. Under the Bankruptcy Code a court must disallow any claim of any entity from which property is recoverable because of a preferential transfer or fraudulent conveyance. 11 U.S.C. § 502(d). 5 Thus, before a claim may be allowed, a court must resolve any preference issues that the trustee might raise. 12 In denying each respective creditor a jury trial both the Langenkamp and Katchen Courts referred to the process of allowing and disallowing claims. See 498 U.S. at 43, 111 S.Ct. at 331; 382 U.S. at 336, 86 S.Ct. at 476. The Bank argues that this process is triggered as soon as a proof of claim is filed. We agree that the filing of a proof of claim is a necessary condition--the claims-allowance process can hardly begin before a claim is made--however, it is not a sufficient condition. For instance, 28 U.S.C. § 157(b)(5) requires bankruptcy litigants to try any personal injury or wrongful death action in the district court. This strongly suggests that these litigants are entitled to a jury trial in such an action even after a proof of claim has been filed in bankruptcy court. The very phrase claims-allowance process suggests that the resolution of the dispute in which a jury trial is sought must affect the allowance of the creditor's claim in order to be part of that process. A preference action does so; lender liability actions generally do not. Therefore suits like the Trustee's action in this case which would augment the estate but which have no effect on the allowance of a creditor's claim simply cannot be part of the claims-allowance process. 6
13 The Bank contends that the substance of the Trustee's complaint exclusively raises bankruptcy law issues regarding, for instance, the automatic stay and the procedure for converting a Chapter 11 proceeding to a Chapter 7 case. While Bankruptcy Code provisions may be implicated here, the essence of the Trustee's allegations is that CNB's actions were inconsistent with its role as the debtor's primary lender and that as a consequence the debtor's business was destroyed. 14 The Trustee does not charge CNB with violating any Bankruptcy Code provision. By accusing CNB of undertaking to exercise control of the debtor, he does not thereby accuse CNB of violating the automatic stay, 11 U.S.C. § 362, no matter how broadly that provision is construed; instead, he accuses CNB of threatening to violate the stay in order to put undue pressure on the debtor. Similarly, the Trustee complains that CNB used the threat of forcing conversion of the case to exert influence over the debtor. It is the threat that constitutes CNB's alleged misconduct, not any cognizable violation of a Bankruptcy Code provision. CNB also believes that the Trustee has challenged the Bank's right to participate in the bankruptcy proceedings and to support a competing reorganization effort. However, on this record the Trustee never disputed that CNB could submit a competing plan or participate in the proceedings like any other creditor. Instead, he challenged CNB's efforts to maintain the Tisdales in office through threats and coercion and to encourage the formation of a new corporation--a corporation to be formed allegedly not for the purpose of assisting in any reorganization plan, but in order to take over the debtor's assets. These are actions that are neither in violation of nor in compliance with the Bankruptcy Code, but are independent of and outside the reach of the bankruptcy process. 15 Without reviewing every attempt by CNB to recharacterize the Trustee's complaint, we observe that while some Bankruptcy Code provisions may be implicated, the form, substance and spirit of the complaint are all grounded in lender liability. The Trustee's action here is 16 quintessentially [a] suit[ ] at common law that more nearly resemble[s] state-law contract [and tort] claims brought by a bankrupt corporation to augment the bankruptcy estate than [it does] creditors' hierarchically ordered claims to a pro rata share of the bankruptcy res. 17 Granfinanciera, 492 U.S. at 56, 109 S.Ct. at 2797. 18 We now turn to CNB's main arguments.