Opinion
Case No. 98-16061-SSM, Adversary Proceeding No. 99-1038
September 2, 1999
Douglas A. Anderson, Esquire, Blankingship Koomey, P.C., Alexandria, Virginia, of Counsel for the Plaintiff
Mr. Sudeep Bose, Alexandria, Virginia, for Defendant pro se
MEMORANDUM OPINION
This matter came before the court on August 10, 1999, for a pre-trial conference on the complaint of Amadali Arabshahi against the debtor Sudeep Bose, who is proceeding pro se. The debtor was not present. At the hearing, the court raised, sua sponte, the question of whether the debtor is entitled to a jury trial and took the matter under advisement. The court permitted both parties to submit legal memoranda no later than August 20, 1999. At the pre-trial conference, the court scheduled this matter for trial on October 29, 1999. For the reasons set forth in this memorandum opinion, the court holds that the debtor's demand for a jury trial in connection with the dischargeability counts and his counterclaim must be stricken.
The plaintiff submitted a timely memorandum on August 12, 1999; however, the plaintiff cited to no case authority in support of his position. In a letter dated August 11, 1999, the court informed the debtor of the outcome of the pre-trial conference. The court clearly indicated to the debtor that he had until August 20, 1999 to submit a legal memorandum. To date, the debtor has not filed any memorandum, nor has he requested, by written motion, additional time to respond to the issue raised by the court.
Facts and Procedural History
The present complaint was filed on February 16, 1999 and amended on February 17, 1999. On March 17, 1999, the defendant filed a motion to dismiss the adversary complaint, alleging that the complaint was untimely filed and, in the alternative, that the plaintiff was not a creditor in his bankruptcy case. The court denied the debtor's motion by an order, entered on July 30, 1999, and required the debtor to file an answer within ten days of its entry. The defendant, through his answer filed on July 29, 1999, denies the substantive averments in the complaint and asserts two affirmative defenses. Furthermore, the debtor's answer asserts a counterclaim in the amount of $12,500. At issue is the debtor's demand for a jury trial as to all matters raised by the complaint and answer.
To place the issue in context, some background is necessary. Plaintiff's claim stems from an alleged business partnership formed by the parties in May 1997. Although the nature of the business is not specifically addressed by the complaint, it appears that the parties were engaged in some form of consulting work. The complaint first alleges that the debtor misappropriated two payments, totaling $27,425, made by a client of the business. According to the plaintiff, he and the debtor entered into a business arrangement whereby each party was to receive one half of all net profits generated by the business. In addition, the parties allegedly agreed that the plaintiff was to receive one half of all income from consulting work that he did for Applied Automated Engineering Corporation ("AAEC"). Months later, the complaint avers, the parties restructured their partnership agreement so as to increase the net profits going to the plaintiff. The crux of the plaintiffs cause of action arises from the debtor's alleged termination of the business, without notice, and failure to compensate him for consulting work he had done for AAEC. In December 1997, the plaintiff received two checks from AAEC, which he turned over to the defendant. The checks, totaling $27,425, were deposited in the business' bank account, but, the complaint alleges, the debtor later took the money for his own benefit. The remaining allegations involve the debtor's misappropriation of other partnership properties, such as office equipment, for his personal use. Consequently, the plaintiff claims that the debtor's conduct amounts to embezzlement, larceny, or a breach of his fiduciary duties as a business partner. The complaint seeks a money judgment for $27,425 and half the amount of misappropriated partnership properties, and asks the court to determine that the plaintiff's claim is nondischargeable under 11 U.S.C. § 523(a)(4).
Not surprisingly, the defendant denies the allegations plaintiff's averments in a detailed answer, which also raises affirmative defenses. Although the answer is at times difficult to follow, the debtor basically disagrees that a partnership was ever formed. The debtor instead alleges that the parties were shareholders, officers, and employees of Infringatek, Inc. As a result, the debtor asserts, the plaintiff cannot bring a lawsuit against him, personally, for activities carried out while he was serving as an employee of the corporation. In addition, the debtor asserts a counterclaim in the amount of $12,500. The debtor alleges that the plaintiff induced the debtor to make a $25,000 loan to the corporation so that the plaintiff could continue to service the needs of AAEC. That loan, according to the debtor, was made when the plaintiff agreed to be liable for one half of the loan amount and has not been repaid. The debtor accordingly seeks recovery from the plaintiff for one half of the loan.
Conclusions of Law and Discussion I.
This court has subject matter jurisdiction under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b)(2)(C) and (I), this is a core proceeding in which final judgments and orders may be entered by a bankruptcy judge.
II.
The Fourth Circuit, consistent with the rulings in several sister circuits, at one point held that bankruptcy courts were without statutory authority to conduct jury trials. Official Comm. of Unsecured Creditors v. Schwartzman (In re Stansbury Poplar Place, Inc.), 13 F.3d 122 (4th Cir. 1993). In response, Congress, in 1994, amended 28 U.S.C. § 157 as follows:
If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties.
28 U.S.C. § 157(e). Nevertheless, this statutory provision does not create any right of jury trial; it simply authorizes a bankruptcy judge to conduct a jury trial "[i]f the right to jury trial applies" and the other conditions of the statute are met. Here, in connection with a complaint to except a debt from discharge under 11 U.S.C. § 523, no provision of the Bankruptcy Code confers a general right of jury trial. The only exception is 28 U.S.C. § 1411(a), which provides that a bankruptcy case does not "affect any right to trial by jury . . . under applicable nonbankruptcy law with regard to a personal injury or wrongful death tort claim." Because Mr. Arabshahi's claim is not one for "personal injury and wrongful death," however, 28 U.S.C. § 1411(a) does not apply.
A.
Despite the lack of an express statutory right to a jury trial in bankruptcy proceedings, such a right exists if the action being tried is one in which, under the Seventh Amendment to the Constitution of the United States, a right to jury trial would exist in a nonbankruptcy forum. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). Under the Seventh Amendment, "[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved." The Supreme Court has consistently held that the term "suits at common law" refers to suits in which legal rights were being determined, as distinguished from those in which equitable rights alone were being determined. Granfinanciera, 492 U.S. at 41, 109 S.Ct. at 2790. In Granfinanciera, the Supreme Court articulated the following test for determining when the Seventh Amendment right attaches:
First, we compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature. The second stage of this analysis is more important than the first.
Id. at 42, 109 S.Ct. at 2790, quoting Tull v. United States, 481 U.S. 412, 417-18, 107 S.Ct. 1831, 1835, 95 L.Ed.2d 365 (1987). In Granfinanciera the trustee had brought a fraudulent conveyance action against a party who had not filed a proof of claim in the bankruptcy case. The Supreme Court determined that, at the time the Seventh Amendment was adopted, a fraudulent conveyance action to recover a determinate sum of money was maintainable only at law, and on that basis ruled that the defendant had a right to a jury trial on its defenses. Applying the above test, the courts have unanimously held that a dischargeability proceeding is an equitable action that may not be tried by a jury. See, e.g., N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d 1496, 1505 (7th Cir. 1991); Schieber v. Hooper (In re Hooper), 112 B.R. 1009, 1012 (9th Cir. BAP 1990) Walker v. Brown (In re Brown), 103 B.R. 734 (Bankr. D. Md. 1989); Snyder v. Devitt (In re Devitt), 126 B.R. 212, 215 (Bankr. D. Md. 1991). As to the first factor under the Granfinanciera test, historically the English courts of equity exercised sole jurisdiction over bankruptcy proceedings. See Hooper, 112 B.R. at 1012. Specifically, "the bankruptcy discharge involves issues with an equitable history for which there was no entitlement to a jury trial in the courts of England." Jaster v. Schmidt (In re Schmidt), 188 B.R. 36, 37 (Bankr. D. Nev. 1995). Furthermore, a nondischargeability proceeding is akin to the exercise of the bankruptcy court's traditional jurisdiction in the adjustment of the debtor-creditor relationship. See Brown, 103 B.R. at 734. Turning to the second component set forth in Granfinanciera, it is evident that the debtor's request for a jury trial must be denied because the plaintiff seeks relief that is equitable in nature. Hooper, 112 B.R. at 1012. In a dischargeability proceeding, the court is asked to determine whether a claim is nondischargeable or not. Hallahan, 936 F.2d at 1505 ("The relief sought is . . . equitable since the essence of a dischargeability claim is a declaration that the debt is indeed dischargeable or non-dischargeable."). Consequently, the application of the Granfinanciera test leads to the inescapable conclusion that the Seventh Amendment does not entitle the debtor to a jury trial.
As with most dischargeability complaints, the plaintiff here seeks further relief in the form of a money judgment. See Harris v. United States Fire Ins. Co., 162 B.R. 466 (E.D. Va. 1994) (holding that bankruptcy courts have jurisdiction to enter a money judgment in a dischargeability proceeding). On its face, a request for money damages would appear to transform this proceeding into a legal action; however, the court disagrees with such a view. "It is a well known maxim that once equitable jurisdiction has been properly invoked it will proceed to render a full and complete disposition of the controversy." Id. at 468. It has been argued in other cases that the parties in a dischargeability proceeding should be entitled, at minimum, to a jury trial with respect to the issues of liability and money damages. Nevertheless, the courts have struck down such arguments on the ground that the liquidation of damages is inextricably tied with the dischargeability of claims. See Locke v. United States Trustee, 205 B.R. 592, 599 (9th Cir. BAP 1996) ("The determination of liability and damages in a nondischargeability proceeding is a mere adjunct to the determination of the discharge issue"); Devitt, 126 B.R. at 295 ("[I]t is impossible to separate the determination of dischargeability function from the function of fixing the amount of the nondischargeable debt").
B.
The debtor's counterclaim is, of course, an action that traditionally would have been heard in the common law courts. Outside the bankruptcy forum, the Seventh Amendment would guarantee the debtor's right to a jury. Nevertheless, the court agrees with the line of cases holding that the debtor waives his right to a jury trial once he voluntarily files a bankruptcy petition and submits to the equitable jurisdiction of the bankruptcy court. Hallahan, 936 F.2d at 1505-06; Longo v. McLaren (In re McLaren), 3 F.3d 958, 960-61 (6th Cir. 1993); Crew v. Lyons (In re Lyons), 200 B.R. 459 (Bankr. S.D. Ga. 1994); see also Hays v. Cummins (In re Cummins), 174 B.R. 1005, 1008 n. 1 (Bankr. W.D. Ark. 1994). These decisions follow a Supreme Court case arising after Granfinanciera, where the Supreme Court upheld the denial of a creditor's request for a jury trial in a preference action brought by the trustee against a creditor who had filed a proof of claim. 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 Court held that, once a creditor has filed a proof of claim in a bankruptcy case, that creditor has submitted itself to the equitable jurisdiction of the court, and the trustee's avoidance action and the creditor's proof of claim become "part of the claims-allowance process which is triable only in equity." Id. at 44, 111 S.Ct. at 331. The court in Langenkamp reasoned that "the creditor's claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy court's equity jurisdiction. As such, there is no Seventh Amendment right to a jury trial." Id. at 44-45, 111 S.Ct. at 331.
The reason why Langenkamp is relevant is that, by filing a bankruptcy petition, the debtor forces creditors to look to the bankruptcy court to collect their claims. This is especially true with respect to this dischargeability complaint because of the plaintiff's reliance on § 523(a)(4), Bankruptcy Code. Because creditors lose the protection guaranteed by the Seventh Amendment by bringing their claims before the bankruptcy court, it is only fair that debtor be denied the same jury trial right. In Hallahan, the creditor filed a proof of claim and a complaint for nondischargeability under § 523(a)(6), Bankruptcy Code. The debtor argued that because the creditor's underlying claim was a breach of contract action which is regarded as a "suit in common law," the Seventh Amendment preserved his right to a jury trial. The Seventh Circuit, in rejecting the debtor's position, reasoned:
Complaints to determine the dischargeability of debts alleged under §§ 523(a)(2), (a)(4), (a)(6), or (a)(15), Bankruptcy Code, fall within the exclusive jurisdiction of the bankruptcy court and, thus, may not be litigated in state court. § 523(c), Bankruptcy Code.
A defendant or potential defendant to an action at law cannot initiate bankruptcy proceedings, thus forcing creditors to come to bankruptcy court to collect their claims, and simultaneously complain that the bankruptcy forum denies him or her a jury trial. This case presents the perfect example of the injustice that would result from granting a voluntary debtor who is a defendant in an adversary proceeding a right to jury trial on demand.
936 F.2d at 1505 (citations and footnote omitted). As in Hallahan, the debtor's decision in this case to file for bankruptcy was a knowing and voluntary act. The debtor cannot have it both ways by seeking the protection of bankruptcy while simultaneously asserting a right that is unavailable to the creditor seeking to collect his or her own claim.
While it is clear that a debtor has no right to a jury trial on a counterclaim to a nondischargeability complaint, the court is not called upon to determine whether a voluntary petition for bankruptcy would waive the debtor's jury trial right in all conceivable proceedings. The Fifth Circuit in In re Jensen, 946 F.2d 369 (5th Cir. 1991), held that the debtor's right to trial by jury is not lost simply by the filing of a bankruptcy petition. The facts in Jensen were that the Chapter 11 debtors removed a state court action, which was brought prepetition against non-creditor third parties, to the bankruptcy court. The lawsuit asserted numerous causes of actions, including fraud, conspiracy, and breach of fiduciary duty. The court granted the debtor's petition for mandamus and decided that the debtors were entitled to have their legal claims heard by a jury. Looking to the teachings of Granfinanciera, the court explained that the debtor's lawsuit did not trigger the process of allowance or disallowance of claims. Id. at 374. Jensen made it clear that the petition for bankruptcy does not subject all of the debtor's claims to the equitable jurisdiction of the court. In its opinion, the court discussed and distinguished Hallahan, stating that it only agreed with the outcome of the case. Accordingly, because the facts at hand are analogous to Hallahan, the court does not find it necessary to decide the merits of Jensen.
The debtor's counterclaim here is intertwined with the determination of the plaintiffs claim. See Frost, Inc. v. Miller Canfield, Paddock Stone (In re Frost, Inc.), 145 B.R. 878, 882 (Bankr. W.D. Mich. 1992); Auto Imports, Inc. v. Verres Financial Corp. (In re Auto Imports, Inc.), 162 B.R. 70, 72 (Bankr. D. N.H. 1993); see also Beugen v. Taubman Western Associates, No. 2 (In re Beugen), 81 B.R. 994 (Bankr. N.D. Cal. 1988) (holding that the debtor's compulsory counterclaim arising out of the same transaction as the creditor's claim could not be heard by a jury). Because the complaint and counterclaim in this case arise out of the same business venture, and the upcoming trial will necessarily determine the overall debtor-creditor relationship with respect to their business affairs, the debtor's demand for a jury trial fails. Frost, 145 B.R. at 882.
A separate order will be entered striking the defendant's jury demand.