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There Is a Jury Trial for that Proof of Claim

posted by Bob Lawless

Imagine the following. A debtor files bankruptcy and schedules a $10,000 bill owing to a credit card company. The credit card company files a proof of claim, saying the debt is $20,000. The debtor objects. OK, at that point, the dispute sounds like a pretty routine procedural matter requiring a hearing before the bankruptcy judge to resolve the disputed claim. Bankruptcy mavens would call it a "contested matter" under Federal Rule of Bankruptcy Procedure 9014.

Suppose the credit card company objects to this procedure and instead insists on a jury trial to resolve the disputed claim, arguing the Seventh Amendment requires a jury trial unless the parties waive it. Well, that's just crazy talk.

A creditor who has submitted a proof of claim has voluntary participated in the statutory mechanism for the payment of claims to the debtor's assets and thereby has submitted to the bankruptcy court's jurisdiction. The credit card company's Seventh Amendment argument seems obviously wrong.

My colleague, Suja Thomas, has a paper on SSRN ("The Unconstitutionality of Administrative and Bankruptcy Adjudication of Damage Claims") that suggests the argument may not be so obviously wrong. The U.S. Supreme Court has held that a jury trial right exists for any cause of action for which a jury trial right existed in England at the time of the Seventh Amendment's adoption in 1791. Because the basis for a jury trial in England in 1791 depended on the nature of the relief sought, "with damages being heard by juries," Thomas argues the Supreme Court has been inappropriately deferential to Congress in placing certain causes of action beyond Seventh Amendment protection. Specifically, Thomas states, "The inquiry as to whether a jury trial right exists under the Seventh Amendment should be based only on the relief sought and a jury trial right exists for Congressionally-created causes of action with damages remedies, including ones that Congress has relegated to administrative agencies and bankruptcy courts."

The upshot of this analysis is that the right to a jury trial would be much broader than bankruptcy practitioners generally assume. Thomas's paper is careful. The paper only lays out a general theory about the interplay of the Seventh Amendment and Congressional powers. Thomas mentions some possible implications in the areas of bankruptcy and administrative law but concedes the resolution of specific issues could depend on contextual information and concepts outside the scope of this paper.

As applied to bankruptcy, I'm somewhat skeptical of these arguments given other Supreme Court cases holding creditors waive jury trial rights by participating in a bankruptcy case. Bankruptcy mavens will be thinking about cases like Katchen v. Landy and Langenkamp v. Culp. I spoke to Thomas about this, and as I understand her response, she sees these cases as sitting uncomfortably with the Supreme Court's general approach to Seventh Amendment issues.

I am not yet convinced that Thomas's general theory has much specific application that wouuld change the jury trial rights in bankruptcy (at least not without overturning a whole slew of cases). But, I am persuaded that an expansive view of Seventh Amendent rights in bankruptcy is at least not obviously wrong. As a statutory matter, 28 U.S.C. § 1411 perserves a jury trial right in bankruptcy for personal injury or wrongful death claims, so we'll have to stick to contract or other tort claims as an example. Consider that I started this post with the jury trial right asserted by a credit card company, figuring it would be a rather unsympathetic claimant to most of our readers. If the claimant was instead a class of consumers who were asserting warranty claims against a bankrupt corporation, would that make you more inclined to accept an argument that they have a Seventh Amendment right to a jury trial on objections to the claims? If so, then maybe the argument is not so obviously wrong to you either. If so, the full paper might be worth a read.

Comments

Crazy talk is right.

Many arguments that are "not obviously wrong" will nevertheless surely fail in the courts. Failing to distinguish the two categories gives legal academics a bad name.

In law school (late 1980's), I remember people stringing together Warren court precedents to expand rights in fields such as criminal law where the courts were obviously intent on contracting them. Not only did the very intelligent proponents of these arguments seem to believe that there was a point to making them; they managed to keep their fly up at the same time! Awesome.

"Many arguments that are 'not obviously wrong' will nevertheless surely fail in the courts."

And some that are succeed anyway!

Resolution of a proof of claim is not an award of damages in the real sense. It merely liquidates the amount that the creditor is entitled to receive from the bankruptcy estate. Therefore, the Seventh Amendment jury trial right likely does not apply.

Interesting academic discussion, but how many creditors--in either consumer or business cases--would want a jury trial, anyway?

Voir dire would be a blast. Let the creditors find a panel that doesn't have at least one juror who secretly hates banks.

I believe Professor Thomas needs to re-examine Hannoverian chancery jurisdiction. First, equity courts had some authority to award damages, so a request for damages is not dispositive of whether a case is in equity. Second, much of what was considered bankruptcy law at the time was traditionally a chancery matter. Trusts, uses, and special reorganization provisions had long been in the chancery courts, and Henry VIII had established that, to utilize the special protections against bankrupts provided by the Crown, creditors had to petition the Chancellor for a writ. The bankruptcy elements that most commonly stayed in the law courts were the criminal elements, just as today.

I have talked to at least 10 people who have filed for bankruptcy, and all these people (including myself) have credit card bill that were discharged, but none of them have debt that has been challenged by the creditors. So in real life situation, I don't know if this much need for any jury trial or if the creditors will actually care since this write-off is so common nowadays.

Isn’t it sort of disingenuous to suggest that the adjudication of certain matters in bankruptcy is inconsistent with the Seventh Amendment when the author fails to examine the legal significance of filing a proof of claim. As you note, when an entity files a proof of claim, its legal claim is converted to an equitable claim, that being a pro rata share of the debtor’s estate to be determined by the bankruptcy court.

Filing a proof of claim is significant because it triggers the claims-allowance process. Upon filing a proof of claim, those actions that may have been legal in nature before become part of the claims-allowance process which is triable only in equity. That is what Langenkamp says. The Court in Langenkamp also recognized that if an entity didn’t file a proof of claim, the right to a jury trial would be preserved.

I’m all for taking an expensive view of the Seventh Amendment in bankruptcy—it is part of the Constitution—but Thomas should at least attempt to explain how the two are related, at least more than a stray footnote reference at the end of the article. Ultimately, if the action relates to the claims-allowance process, then one has waived his or her Seventh Amendment jury right by filing a proof of claim. Again, I agree it’s important to suggest that courts take a broad view of the jury right. For example, the Seventh Circuit takes a rather narrow view in Peachtree Lane because it does not analyze whether the asserted claims are part of the claims-allowance process as, for example, the Second Circuit does in Germain. In Peachtree, the court was only focused on whether a proof of claim had been filed whereas the Germain court properly went to the next step, it examined whether resolution of the dispute involved the claims-allowance process. The latter takes a more expansive view of the jury right in bankruptcy and, to my mind, a more correct view.

Back to the Ms. Thomas’s article, she suggests that bankruptcy courts impinge on the Seventh Amendment, but she makes no effort to explain how. I don’t get that.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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