Opinion ID: 602805
Heading Depth: 2
Heading Rank: 3

Heading: Waiver and Public Rights Theories

Text: 24 CNB argues that by filing a voluntary petition in bankruptcy the Trustee has waived any right he may have had to a jury trial. The argument runs in three steps: (1) a creditor who submits a proof of claim loses its right to a jury trial, (2) there is no principled reason to distinguish between a debtor and its creditor for these purposes, and (3) if a debtor has no right to a jury trial, neither can the debtor's estate or the trustee. 25 The argument collapses at the first step. As discussed in section I-B above, the Katchen, Granfinanciera, and Langenkamp line of Supreme Court cases stands for the proposition that by filing a proof of claim a creditor forsakes its right to adjudicate before a jury any issue that bears directly on the allowance of that claim--and does so not so much on a theory of waiver as on the theory that the legal issue has been converted to an issue of equity. It is reasonable that a creditor or debtor who submits to the equity jurisdiction of the bankruptcy court thereby waives any right to a jury trial for the resolution of disputes vital to the bankruptcy process, such as those involving the determination of who is a valid creditor and which creditors are senior in the creditor hierarchy. We will not presume that the same creditor or debtor has knowingly and willingly surrendered its constitutional right to a jury trial for the resolution of disputes that are only incidentally related to the bankruptcy process. 26 We believe that the recent Seventh Circuit decision, In re Hallahan, 936 F.2d 1496 (7th Cir.1991), cited by CNB, is distinguishable on its facts. In that case the debtor had been the defendant in an action for breach of a covenant not to compete. After the debtor filed a bankruptcy petition, the plaintiff in the prior suit filed both a proof of claim and a complaint for nondischargeability. Hallahan, the debtor, asked for but was refused a jury trial on the issue of dischargeability. The court held that in this type of situation, since the creditor would have no right to a jury trial, neither should the debtor. 27 Unlike the case at bar, the dispute at issue in Hallahan was initiated pre-petition by the creditor. It struck at the very heart of the bankruptcy process because it sought to determine whether the creditor actually possessed a claim at all, and if so, in what amount. It also was couched in a nondischargeability proceeding, a proceeding that is characteristically equitable. Moreover, while we are not convinced that justice or the Bankruptcy Code requires that both creditor and trustee be treated equally, 8 the Hallahan Court may have been influenced by the manifest unfairness of the debtor's filing for bankruptcy which stymied the creditor from pursuing its legal action already in progress. In our case, of course, the Trustee could not have used the bankruptcy process as a blocking mechanism, because the misconduct occurred and the suit arose after the bankruptcy filing. Consequently, we find Hallahan to be distinguishable. 9 28 The Fifth Circuit, however, while concurring in the result reached by the Hallahan Court, disagreed with its reasoning, arguing that once a proof of claim is filed, both the creditor and debtor are assumed to have waived their right to a jury trial. In re Jensen, 946 F.2d at 374. We do not believe that to be the law. Moreover, the Jensen Court cited Hallahan only as dicta; it rested its decision not on a waiver theory, but on a theory that the debtors' claims were not part of the claims-allowance process because they were essentially claims brought ... against non-creditor third parties to augment the bankruptcy estate. Id. 29 We conclude that neither precedent nor logic supports the proposition that either the creditor or the debtor automatically waives all right to a jury trial whenever a proof of claim is filed. For a waiver to occur, the dispute must be part of the claims-allowance process or affect the hierarchical reordering of creditors' claims. Even there the right to a jury trial is lost not so much because it is waived, but because the legal dispute has been transformed into an equitable issue.
30 The Granfinanciera Court wrote that, notwithstanding the Seventh Amendment, Congress may decline to provide jury trials for cases involving statutory rights that are integral parts of a public regulatory scheme and whose adjudication Congress has assigned to ... a specialized court of equity, because such rights are public. 492 U.S. at 55 n. 10, 109 S.Ct. at 2797 n. 10. We have already explained why the Trustee's action is not statutory; he is suing in contract and tort. On its face, then, the Trustee's action cannot invoke the public rights doctrine. However, the Bank argues that the public rights doctrine is not restricted to controversies over public rights, but may be applied more loosely to controversies involving  public rights. To a limited extent we agree. Our difference with the Bank's position is that we believe that if a party is going to be deprived of as fundamental a constitutional right as a jury trial, the controversy must be inextricably intertwined with a public right; the involvement may not be casual or vague. 31 The Supreme Court has not spoken extensively on the scope of the public rights doctrine. However, in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the Court allowed that if Congress possessed the power to create a statutory right, it also had the discretion to create presumptions, or assign burdens of proof, or prescribe remedies. Id. at 83, 102 S.Ct. at 2877. These innocuous procedural matters, which are the only matters mentioned by the Court, are obviously necessary to the resolution of a dispute over the statutory public right and are certainly inextricably intertwined with it. Indeed, when Congress tried to go further and assign all contract and tort claims arising under Chapter 11 of the Bankruptcy Act of 1978 (the Act) or related to cases under Chapter 11 of the Act, the Court held that this assignment violated Article III of the Constitution. 10 Id. at 87, 102 S.Ct. at 2880. 32 Justice Brennan in Granfinanciera did not expound on how involved with public rights a controversy must be to be triable without a jury. Indeed, he consistently spoke in terms of statutory rights and was careful not to expand the scope beyond congressionally created, novel rights. However, he did find that actions such as fraudulent conveyance suits which arise out of bankruptcy proceedings were nonetheless private rights and beyond the scope of the public rights exception. 492 U.S. at 56, 109 S.Ct. at 2797. Thus, a more formal, necessary relationship to a public right is required. 33 We do not believe that the Trustee's action here bears a close nexus to any statutory public right. Indeed, his state law causes of action are paradigmatic private rights, even when asserted by an insolvent corporation in the midst of Chapter 11 reorganization proceedings. 492 U.S. at 56, 109 S.Ct. at 2797. His suit is aimed at enhancing the bankruptcy estate and does not involve any other creditor's rights or the relationship among the creditors as a group or between the debtor and another creditor. The suit seeks compensation for damage done. It has nothing to do with the essence of the bankruptcy regulatory scheme of allowing or reordering claims. 34 CNB contends, however, that because these  'seemingly private right[s]'  arose post-petition, they bear on the administration of the estate and are  'so closely integrated into a public regulatory scheme as to be a matter appropriate for agency resolution with limited involvement by the Article III judiciary.'  492 U.S. at 54, 109 S.Ct. at 2796 (quoting Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 593-94, 105 S.Ct. 3325, 3339, 87 L.Ed.2d 409 (1985)). We have recently held, however, that  'in an ordinary tort action ... the right of trial by jury is guaranteed by the Constitution'  even when the cause of action arises entirely while the bankruptcy proceedings are in progress. In re Ben Cooper, Inc., 896 F.2d 1394, 1402 (2d Cir.1990) (quoting United States v. Fotopulos, 180 F.2d 631, 634 (9th Cir.1950)), vacated on other grounds, 498 U.S. 964, 111 S.Ct. 425, 112 L.Ed.2d 408 (1990), reinstated, 924 F.2d 36 (2d Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 2041, 114 L.Ed.2d 126 (1991). Although the tort action in Cooper was litigated between the debtor and a non-creditor insurance company, it arose out of negotiations over a policy that was required by the plan of reorganization. The administration of the estate was implicated in that case to the same degree and in the same vague and unconvincing way as it is in this case. 35 The Trustee's action is simply not integrally related to any substantive bankruptcy provisions and the public regulatory scheme here will not be hampered by a jury trial. The power of the bankruptcy court to readjust debtor-creditor relations and reorder creditor claims equitably and completely will not be diminished if this action is tried before a jury. Although it may be more expeditious to eschew a separate jury trial, such concerns have little weight when balanced against a constitutional guarantee. For these reasons we conclude that the Trustee's action involves private rights and should be tried before a jury, if that is the Trustee's choice.