Figuring out when a pre-petition waiver of a jury trial will be respected in lawsuits brought in bankruptcy cases can be tricky. In a recent case, In re D.I.T., Inc., 2017 Bankr. LEXIS 3386 (Bankr. S.D. Fla. Oct. 2, 2017), a court distinguished between claims belonging to a debtor pre-petition and those belonging to a debtor-in-possession.
When a bankruptcy petition is filed, contract claims between a debtor and creditor, for instance, become property of the bankruptcy estate. The pre-petition waiver of a jury trial as to those claims will be honored. Fraudulent transfer and preferential transfer claims don’t belong to a debtor pre-petition but are derived from the Bankruptcy Code and thus belong to a bankruptcy trustee or a debtor-in-possession. The pre-petition contractual waiver of a jury trial by a debtor as to those claims won’t be enforced.
The court in D.I.T. explained the law and certain exceptions. The background facts were straightforward. In June 2014, the debtor filed a chapter 11 petition. The case later converted to chapter 7 and a trustee was appointed. The trustee sued the debtor’s pre-petition secured lender to recover alleged fraudulent transfers the lender received pre-petition in the amount of $13 million.
The lender had extended credit through both a term loan and a revolving credit agreement. A promissory note waived jury trials in actions between the debtor and the lender. The trustee wanted to try the avoidance claims to a jury. The lender didn’t and argued that bankruptcy trustees are never entitled to a jury trial for avoidance actions and that the trustee was bound by the waiver in the promissory note.
Bankruptcy Judge Erik Kimball ruled for the trustee. His analysis began with the proposition that when a debtor waives its right to a jury trial, that waiver will only be enforced as to claims the debtor owned pre-petition. As noted above, a debtor that contracts with a creditor pre-petition owns the contractual claims arising from the contract. But avoidance actions derive from the Bankruptcy Code. They don’t belong to a debtor pre-petition.
And when a monetary recovery is sought in an avoidance action from a defendant-creditor, the claim is an action at law entitling the defendant to a jury trial, a right supplied by the Seventh Amendment to the U.S. Constitution. Accordingly, a pre-petition waiver of a jury trial by a debtor will not be enforced as to the trustee or the debtor-in-possession with respect to avoidance actions.
But exceptions kick in when a trustee seeks to recover actual property but not a monetary recovery, or the creditor has filed a proof of claim. Actions where a bankruptcy estate seeks the return of an item or the voiding of an instrument are actions in equity not at law, and thus the constitutional right to a jury trial doesn’t exist.
Also, if a trustee or a debtor brings an avoidance action against a creditor and the creditor files a proof of claim, then the avoidance action becomes part of the claims allowance process – also an action in equity – and the creditor will not have a right to a jury trial. But if the creditor doesn’t file a proof of claim, then it retains its constitutional right to a jury trial in the avoidance action even if a pre-petition contract between the debtor and the creditor waived the parties’ right to a jury trial.
So, when a pre-petition contract has a jury-trial waiver, the short take-away is this: if the action is one belonging to a debtor, and does not derive from the Bankruptcy Code, then the waiver is enforceable. But even when the waiver is unenforceable, if the trustee or the debtor-in-possession is not seeking a monetary recovery, or if the creditor has filed a proof of claim, then the action may be one in equity for which there is no jury trial right at all.