Court Opinion

ID: 8958209
Source: CourtListenerOpinion
Date Created: 2022-11-27 09:26:18.297577+00
Date Added: 2024-06-11T17:10:07.819727
License: Public Domain

WIDENER, Circuit Judge,
dissenting:
Since I believe that the Perkinsons are entitled to trial by jury, I respectfully dissent.
Huffman, as a trustee in bankruptcy, commenced adversary proceedings against the Perkinsons to avoid allegedly preferential and fraudulent transfers or voluntary conveyances. The trustee relied both upon federal law to set aside the transfers as preferential and fraudulent,1 and also upon Virginia state law which allows for the voiding of voluntary conveyances. Va. Code § 55-81. The trustee seeks repayment or judgment.2 There is no property in the hands of the Perkinsons which the trustee seeks to recover. The Perkinsons, who have not filed any claim in the bankruptcy case, challenge the court’s jurisdiction and demand trial by jury on the claims asserted by the trustee. The district court did not refer these proceedings to a bankruptcy judge, and this appeal is from an interlocutory order of the district court denying trial by jury.
My concern is not with the trustee’s ability to press for the recovery of preferential, fraudulent or voluntary transfers; rather, it is with the determination that the exer*1180cise of all avoiding powers at the trustee’s disposal are “core proceedings” subject to summary adjudication by the bankruptcy court and free of the Seventh Amendment’s jury requirement.
I
I agree with the majority that the district court has jurisdiction, although my reasons differ from those given in the majority opinion.
Congress has the undoubted power to create federal question causes of action, as it has done here, in 11 U.S.C. § 547 for preferences and § 548 for fraudulent transfers. It also has the undoubted power to authorize a trustee in bankruptcy to proceed against the beneficiary of a preferential or fraudulent transfer under federal substantive law or of a voluntary conveyance under Virginia Code § 55-81 as it has done in 11 U.S.C. § 544(b).
Following the 1978 amendments to the Bankruptcy Code as amended in 1984, the trustee has the power to bring into the bankruptcy case the beneficiaries of preferential, fraudulent or voluntary conveyances, even involuntarily as here. Northern Pipeline requires that when someone is made a party in a proceeding in a bankruptcy case involuntarily, as here, that he be brought into an Article III court. The district judge in this case prudently held to himself the decision in the adversary proceeding and did not refer it to a bankruptcy judge. By so doing, the district court wisely finessed the even more ticklish question than the one present here.
I can see nothing about bringing the Perkinsons into the case which is a violation of Northern Pipeline and the subsequent case dealing with the same subject, Commodities Future Trading Comm. v. Schor, 478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986). Neither can I see in this case the exercise by Congress of any authority relating to jurisdiction which it did not have. Since the trustee proceeds against the Perkinsons on both federal and state substantive law grounds, it is a matter of indifference on which ground, if any, he may ultimately be successful for the grounds on which he proceeds must govern the procedure.
It is the nature of the federal and state causes of action which the trustee asserts, as well as the procedural aspect in which this case finds itself, which must determine whether or not the Perkinsons are entitled to trial by jury, which will be discussed below.
II
The trustee seeks to use his avoiding powers to restore the value of the transferred assets to the debtor’s estate.3 Although the distinction may sometimes be difficult to draw, preferences are generally permitted outside of bankruptcy law while fraudulent or voluntary conveyance law reaches actions taken by a debtor irrespective of the pendency of a bankruptcy case.4 The justification for fraudulent conveyance law is fundamentally broader than the reasons for a bankruptcy proceeding. The Supreme Court has long recognized the distinction between a fraudulent and preferential conveyance:
One is inherently and always vicious; the other innocent and valid, except when made in violation of the express provisions of a statute. One is malum per se and the other malum prohibitum, -and then only to the extent that it is forbidden. A fraudulent conveyance is void regardless of its date; a preference is valid unless made within the prohibited period.
Van Iderstine v. National Discount Co., 227 U.S. 575, 582, 33 S.Ct. 343, 345, 57 *1181L.Ed. 652 (1912). And, we too have previously stated our understanding of the distinct natures of these causes of action. In considering the applicability of West Virginia preference and fraudulent conveyance law in a pre-Code bankruptcy case, a case dealing with § 544(b)’s statutory predecessor, we followed the distinction recited in Van Iderstine. David v. Woolf, 147 F.2d 629 (4th Cir.1945).
Fraudulent conveyance law has its origins at least as early as the Statute of 13 Elizabeth and has survived essentially intact for four centuries.5 In England, well before our independence, the common law actions of trover and money had and received were used to recover preferential payments made by bankrupts. Schoenthal v. Irving Trust Co., 287 U.S. 92, 94, 53 S.Ct. 50, 51, 77 L.Ed. 185 (1932). The claims allowed, indeed created, by these common law actions have long histories and existed at common law in 1791 when we adopted the Seventh Amendment.
The court today decides that federal bankruptcy law rather than the substantive rule of decision controls all procedural aspects of these adversary proceedings, since the dispute involves the restructuring of debtor-creditor relations. But, I should add, that consideration should not be of controlling moment here, for all bankruptcy cases involve such restructuring. It is the very purpose of bankruptcy. While federal law may provide the rule of decision with respect to the preference and fraudulent conveyance claims asserted under 11 U.S.C. §§ 547 and 548, it is clear that Virginia law provides the rule of decision in claims asserted under § 544(b). It is § 544(b) which provides the trustee with authority to assert the state law claim. See Glove v. Martin, 236 U.S. 288, 297, 35 S.Ct. 377, 380, 59 L.Ed. 583 (1914); Stellwagen v. Clum, 245 U.S. 605, 614, 38 S.Ct. 215, 218, 62 L.Ed. 507 (1917) (discussing § 70(e) of the Bankruptcy Act of 1898, the predecessor of § 544(b)). It is also true that the Article I, § 8 bankruptcy power allows Congress to suspend conflicting state laws, but suspension occurs only to the “extent of actual conflict with the bankruptcy act of Congress.” Stellwagen at 613, 38 S.Ct. at 217. These cases establish that § 544(b) works no such suspension but rather incorporates state law into the bankruptcy scheme, authorizing the trustee to stand in the shoes of unsecured creditors for purposes of asserting any claims available to them and existing under any law. I do not think that such a claim as here, assertible by creditors if there was no bankruptcy case, and to be determined by exclusive reference to state law, is transformed into a Congressionally created wholly federal claim to “restructure debtor-creditor relations.” The historical nature of common or state law claims has been preserved by § 544(b). That section simply works no transformation of historically legal claims into purely equitable ones. Rather than being a “core proceeding” within the summary jurisdiction of the bankruptcy court, the claim pressed under Virginia Code § 55-81 is “... a ‘private right’ for which state law provides the rule of decision. It is therefore a claim of the kind normally assumed to be at the ‘core’ of matters normally reserved to Article III courts.” Schor, 106 S.Ct. at 3259.
The federal question claims of preference under § 547 and fraudulent transfer under § 548 fare no better. In Schoenthal v. Irving Trust Co., 287 U.S. 92, 53 S.Ct. 50, 77 L.Ed. 185 (1932), the Supreme Court examined whether or not a claim of preference asserted by a trustee in bankruptcy against the beneficiary of the preference was legal or equitable. In that case, the trustee had asserted his claim of preference in a plenary proceeding in a district court. The Court reversed the court of appeals which had held that a jury trial was not required because the proceeding was equitable and had affirmed the district court which had left the case on the equity side of the docket and tried it without a jury over the defendant’s protest. The Court based its decision on the Seventh Amendment right of trial by jury in questions in which the remedy is by action at *1182law. There, as here, “[t]he preferences sued for were money payments of ascertained and definite amounts.” 287 U.S. at 95, 53 S.Ct. at 51. So, Schoenthal is a precise ruling of the Supreme Court on the question at hand, that the substantive federal questions sought to be asserted by the trustee are actions at law, for, if a preference is an action at law when a money judgment is the relief sought, how may a fraudulent conveyance be otherwise when the same relief is asked for? Thus, all of the causes of action the trustee asserts in this case are legal rather than equitable, and to make the case even stronger, one of them is a cause of action under slate law rather than federal.
Congress surely has the power to establish a federal bankruptcy scheme, but the bankruptcy power granted in Article I § 8 (clause 4) is not absolute and cannot be used to abrogate other constitutional guarantees. See, e.g., Louisville Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1934) (bankruptcy power subject to the Fifth Amendment). Indeed, the existence of a federal statutory scheme does not destroy the right to jury trial. Simmons v. Avisco, Local 713, Textile Workers Union, 350 F.2d 1012 (4th Cir.1965) (Land-rum-Griffin Act).
Civil trial by jury is guaranteed by the Seventh Amendment.6 While some trace jury trials from even earlier times, it is settled that clause 39 of Magna Carta preserved the right.7 Not only has the right a long history, it was a theme of our struggle for independence. There are numerous works which recount the role the right to jury trial in civil cases has played in our history. It was perhaps the only right universally guaranteed by state constitutions prior to the revolution; it was guaranteed in the Northwest Ordinance; and secured by the Articles of Confederation.8 In fact, the Seventh Amendment played a crucial role in ratification of the Constitution. This right, one of “deep interest and solicitude,” is to be jealously guarded against encroachment. Parsons v. Bedford, 3 Pet. (28 U.S.) 433, 445-46, 7 L.Ed. 732 (1830). It is against this historical backdrop that the Supreme Court has considered the application of the amendment.
The historical test of the cause of action which governs Seventh Amendment jurisprudence was complicated by the merger of law and equity accomplished by the enactment of the Federal Rules of Civil Procedure in 1938. The effect, if any, of the merger, however, has been to enlarge rather than restrict the application of the right to jury trial. In Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 L.Ed.2d 988 (1959), the Supreme Court held that where both legal and equitable issues are presented in a single cause, the right to jury trial is lost in only the most imperative circumstances. Three years later, the Court stated that there is a right to jury trial on issues material to both legal and equitable relief, even if the legal issues are “incidental” to the equitable issues. Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962). Still grappling with the problem created by the merger effected by the Federal Rules, the Court emphasized that restrictive application of the Seventh Amendment is not encouraged in Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970). Ross stated that the “seventh amendment question depends on the nature of the issue to be tried rather than the character of the overall action,” Id. at 538, 90 S.Ct. at 738, and specifically held that there was a right to jury trial on all legal claims in the historically equitable shareholder’s derivative suit. The court has upheld the right to jury trial in actions to enforce Congressionally created statu*1183tory rights provided the action involves rights and remedies traditionally enforced in an action at law. Curtis v. Loether, 415 U.S. 189, 94 S.Ct. 1005, 39 L.Ed.2d 260 (1974) (Seventh Amendment applies to actions for damages under Title VIII of the Civil Rights Act of 1968); Pernell v. Southall Realty, 416 U.S. 363, 94 S.Ct. 1723, 40 L.Ed.2d 198 (1974) (Seventh Amendment applies to courts established by Congress in the District of Columbia in an action to recover possession of real property). Tull v. United States, — U.S. -, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987) (Seventh Amendment guarantees a jury trial to determine liability in actions by the Government seeking civil penalties and injunctive relief under the Clean Water Act). In Tull, the Court directed that examination of both the nature of the action and the remedy sought governs Seventh Amendment analysis. Absent consent, if the action is one comparable to those which were tried in courts of law in 18th century England, and the remedy sought is legal, the Seventh Amendment attaches. 107 S.Ct.- at 1835.
The principal and perhaps the only difficulty the majority opinion finds with following the usual analysis of determining what is triable to a jury and what is not is Katchen, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). Katchen involved a trustee’s plenary action in a federal district court to recover a money judgment for a preference. The beneficiary of the preference, however, had filed two claims in the proceeding, one for back rent, the other for payment he had made as endorser of a note of the bankrupt. Section 57g of the Bankruptcy Act required that the claim of creditors who had received a preference “should not be allowed unless such creditors shall surrender such preferences....” The trustee objected to the allowance of the creditor's claim, and the Court affirmed the referee's decision to proceed to try the question of whether or not there was a preference in order to ascertain whether or not to allow the creditor’s claims. In Katchen, the creditor had submitted himself to the jurisdiction of the bankruptcy court by filing his claims. Thus, there was no question of his involuntarily being made a party to the proceeding, the key question on which Northern Pipeline turns. The Court noted its precedent, that Schoenthal and two of its other cases required a jury trial in a plenary proceeding on the question of whether or not a preference existed, and stated that the question put was whether “the situation is the same when the creditor files a claim and the trustee not only objected to the allowance of the claim but also demands surrender of the preference.” 382 U.S. at 328, 86 S.Ct. at 471. The Court held specifically that the situation was not the same. The Court based its decision on the power of the bankruptcy court to allow or disallow claims, which it stated was the full power to inquire into the validity of any alleged debt of the bankrupt upon which a demand or claim against the estate was based. 382 U.S. at 329, 86 S.Ct. at 472. So, far from holding that a jury trial was not required on the question of the existence of the preference, the holding of Katchen is that jury trial is not required on the question of existence of a preference when the creditor has filed his claim and the trustee objects to the allowance of the claim. The Court distinguished the situation in which the creditor had filed a claim and the situation in which the creditor “presented no claim in the bankruptcy proceeding and awaited a federal plenary action by the trustee,” 382 U.S. at 336, 86 S.Ct. at 476, which is the precise situation existing in the case before us. To repeat, the Court based the authority for its decision on § 57g which required the bankruptcy court to necessarily determine the amount of the preference so as to ascertain whether the claimant, should he return the preference, had satisfied the condition imposed by § 57g on allowance of the claim. 382 U.S. at 334, 86 S.Ct. at 475. Thus, I do not perceive Katchen to be any stumbling block in applying the regular test of whether or not the cause of action asserted is historically legal or equitable. It is obvious that an Article III judge, sitting in a bankruptcy proceeding, may do just that. It is the “district courts” which have jurisdiction in bankruptcy cases under 28 U.S.C. § 1334, not bankruptcy courts. Under 28 U.S.C. § 157(a), a “district *1184court” “may” refer cases and proceedings to “bankruptcy judges,” not bankruptcy courts, who under § 157(b) “may” hear and determine the matters referred (italics added). It would be rather futile to hold, I think, that under Northern Pipeline, if a party is involuntarily brought into a bankruptcy proceeding he must be brought before an Article III court if the Article III court does not have its attendant protections, notably the right to trial by jury.
Finally, I cannot leave the subject without calling attention to the fact that the Supreme Court has expressly rejected the notion that there is some necessary inconsistency between the desire for speedy justice and the right to trial by jury. Pernell, 416 U.S. at 383-84, 94 S.Ct. at 1733.
The claims asserted by the trustee in this proceeding are historically legal in nature. A money judgment is asked for. The case is pending in a United States district court. I see no reason to deny the Perkinsons their demanded trial by jury.

. 11 U.S.C. §§ 547, 548.

. As noted by the court, there were two such proceedings instituted by the trustee, one alleging voidable transfer of money and seeking an order requiring repayment or judgment for the transferred amount. The second complaint alleges voidable transfer of negotiable instruments, personal property and services. The relief sought in this second proceeding is judgment for the aggregate value of the transfers. Nowhere does the trustee seek reconveyance of property. Only the first of the two proceedings is here on appeal. The trustee and his co-plaintiff, Bluefield Holding Co., were treated as one by the parties and the district court. No question is made of Bluefield’s participation in this proceeding.

. The avoiding powers employed by this trustee are codified in 11 U.S.C. § 547 (Preferences); § 548 (Fraudulent transfers and obligations); and § 544 (Trustee as lien creditor and as successor to certain creditors and purchasers). 11 U.S.C. § 544(b) authorizes the trustee to fill the shoes of an unsecured creditor and to seek avoidance of "any" transfer voidable under “applicable law.” It is by virtue of § 544(b) that the trustee can assert a claim under Virginia's voluntary conveyance statute.

. See Jackson, Avoiding Powers in Bankruptcy, 36 Stan.L.Rev. 725 (1984).

. 13 Elizabeth ch. 5 (1571). See Kent's Commentaries v. 2, p. 439 (3rd Ed.1836); Baird & Jackson, Fraudulent Conveyance Law and its Proper Domain, 38 Vand.L.Rev. 829 (1985).

. The Seventh Amendment:
In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved

. See, generally, Pope, The Jury, 39 Tex.L.Rev. 426 (1961); Green, Jury Trial and Mr. Justice Black, 65 Yale L.J. 482 (1956); Howard, The Road from Runnymede: Magna Carta and Constitutionalism in America (1968 Univ. of Va. Press).

.See Wolfram, The Constitutional History of the Seventh Amendment, 57 Minn.L.Rev. 639 (1973); Goebel, History of the Supreme Court of the U.S., Vol. I (1971 Macmillan and Co.).