Opinion
Case No. 98-17061, Chapter 7, Adversary Case No. 99-1121.
March 13, 2000.
MEMORANDUM OF DECISION
The Plaintiffs, Charles M. Greenlee, M3i Limited and Finet Holdings, Inc., commenced this adversary proceeding on September 23, 1999, with the filing of a Complaint (Doc. 1). The Complaint seeks: (1) a monetary judgment against the Debtor, Geoffrey E. Mather, in the amount of $680,000; (2) to avoid an alleged fraudulent transfer; (3) injunctive relief; and (4) a determination that the alleged debt owed to the Plaintiffs by the Debtor is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2), (4), and/or (6). Presently before the Court is: (1) a Motion to Dismiss Count One of the Complaint ("Dismissal Motion") (Doc. 8) filed by the Defendants on November 1, 1999; and (2) a Motion for Jury Trial ("Jury Motion") (Doc. 11) filed by the Plaintiffs on December 1, 1999, premised upon a jury demand endorsed on the Complaint. The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and the Standing Order of reference entered in this district on July 30, 1984. This is a core proceeding. 28 U.S.C. § 157 (b)(2)(H), (I). The following constitutes the Court's findings of fact and conclusions of law in accordance with Fed.R.Civ.P. 52, made applicable to this adversary proceeding by Fed.R.Bankr.P 7052.
The avoidance action is the only action contained in the Complaint that is directed toward Carolyn Damon Mather, who is not a debtor in the chapter 7 case.
On March 5, 1999, the Plaintiffs filed two proofs of claim in the Debtor's chapter 7 case, the basis for which are the same state law causes of action asserted in their Complaint in this proceeding. On August 18, 1999, two more proofs of claim were filed that appear to serve as attempted amendments to the March 5, 1999 claims even though they are not identified as amendments in the appropriate box on the claim forms.
I
Defendants' Motion seeks dismissal of count one of the Complaint for lack of standing. In count one of the Complaint, Plaintiffs seek to avoid an alleged fraudulent transfer between the Debtor and Carolyn Damon Mather. Specifically, the Plaintiffs allege that the Debtor, in February of 1997, fraudulently transferred to Carolyn Damon Mather certain real property located at 2821 Victoria Avenue, Cincinnati, Ohio. The Defendants contend that the Plaintiffs lack standing to avoid this alleged transfer because, with the exception of limited circumstances not present before the Court, the trustee in bankruptcy is the only entity authorized by statute to assert actions to avoid fraudulent transfers.
The Sixth Circuit has addressed this issue within the context of chapter 11 in the case of Canadian Pacific Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436 (6th Cir. 1995). The single issue before the Sixth Circuit in Gibson was "whether Congress intended to confer exclusive authority to file an action to avoid preferential or fraudulent transfers, pursuant to 11 U.S.C. § 547 and 548, on a trustee or debtor-in-possession, or whether a creditor might have standing to file such an action." Gibson, 66 F.3d at 1438. In that case, the Sixth Circuit concluded that Congress did not confer exclusive authority in a chapter 11 case upon the bankruptcy trustee or debtor in possession to assert actions to avoid a fraudulent transfer, pursuant to § 548. However, the Gibson ruling only applies in limited circumstances. As noted by Chief Judge Martin while writing for the Court:
We believe that Congress has not precluded the bankruptcy court from granting standing to a creditor if such standing furthers Congress's purpose in creating the avoidance actions found in 11 U.S.C. § 547 and 548 in the context of a Chapter 11 reorganization. We decide, therefore, that a bankruptcy court may permit a single creditor in a Chapter 11 case to initiate an action to avoid a preferential or fraudulent transfer instead of the debtor-in-possession if the creditor: 1) has alleged a colorable claim that would benefit the estate, if successful, based on a cost-benefit analysis performed by the bankruptcy court; 2) has made a demand on the debtor-in-possession to file the avoidance action; 3) the demand has been refused; and, 4) the refusal is unjustified in light of the statutory obligations and fiduciary duties of the debtor-in-possession in a Chapter 11 reorganization.
Gibson, 66 F.3d at 1438.
Because the instant adversary proceeding arises within the context of a chapter 7 case as opposed to a chapter 11 case, it is questionable whether the Gibson exception even applies under the circumstances before the Court. The Court is unaware of any decision applying the Gibson exception outside of the chapter 11 context. However, even if the Court were to conclude that the Gibson exception applies in a chapter 7 case, the Plaintiffs have failed to comply with the necessary requirements set forth in Gibson. First, by their own admission set forth in their Response to Motion to Dismiss Count One of the Complaint ("Response") (Doc. 13), Plaintiffs have failed to make any kind of demand upon the chapter 7 trustee. Second, the Plaintiffs admit that there is no equity in the property at issue. (Response at 3.) Consequently, their avoidance action would not benefit the estate financially as required by Gibson. Given this record also it appears that the trustee did not breach any fiduciary duties or statutory obligations by declining to bring an avoidance action on his own. Finally, implicit within Gibson is the requirement that the creditor seek and obtain leave of court to commence the avoidance action so that the matter can be reviewed to determine whether the Gibson requirements have been satisfied. See Society Bank, N.A. v. Sinder (In re Sinder), 102 B.R. 978, 983 (Bankr.S.D.Ohio 1989) (Waldron, J.) (leave of court necessary to assert avoidance powers); see also Starzynski v. Sequoia Forest Indus., 72 F.3d 816, 821 (10th Cir. 1995) (same); Great Southern Co. v. Allard (In re Allard), 198 B.R. 715, 719 (Bankr.N.D.Ill. 1996) (same). The Plaintiffs have not sought leave of this Court to prosecute count one of their Complaint. Accordingly, the Defendants' Dismissal Motion will be GRANTED.
The Plaintiffs argue that the filing of a no asset report constitutes an implicit rejection by the trustee of a demand that they have never made. (Response at 3.) The Court does not agree with this broad construction of Gibson.
II
By their Jury Motion, the Plaintiffs seek a ruling on the jury demand endorsed on their Complaint. The right to a jury trial is derived from the language of the Seventh Amendment to the United States Constitution, which provides: "In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved[.]" The issue of whether there exists a right to a jury trial in bankruptcy has "a long and tortured history." 1 Collier on Bankruptcy ] 3.08[1] (15th ed. rev. 1999). Much confusion was relieved by the Supreme Court decision of Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). In Granfinanciera, the Supreme Court identified, among other things, a two-part test for use as the starting point to determine whether a Seventh Amendment right to a trial by jury exists. "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.'" Granfinanciera, 492 U.S. at 42 (quoting Tull v. United States, 481 U.S. 412, 417-18, 107 S.Ct. 1831, 1835, 95 L.Ed.2d 365 (1987)).
The Plaintiffs, among other things, seek the following relief in this proceeding: (1) a determination that the Debtor is liable to them under certain state law theories; and (2) a determination that the alleged debt is nondischargeable. The Plaintiffs do not contend that they are entitled to a jury trial on the latter issue of dischargeability. However, the Plaintiffs argue that they are entitled to a jury trial on the underlying issue of liability. Specifically, the Plaintiffs argue that the issue of the Debtor's liability, under the authority of Stone v. Kirk, 8 F.3d 1079 (6th Cir. 1993), is legal in nature and properly determined by a jury. The Defendants contend that the Plaintiffs do not possess a right to a jury trial under the authority of Longo v. McLaren (In re McLaren), 3 F.3d 958 (6th Cir. 1993). To the parties' credit, these two decisions are not easily reconcilable. See Smith v. Bandy (In re Bandy), 237 B.R. 661, 671-72 (Bankr.E.D.Tenn. 1999). However, the Court need not address the distinction between Stone and McLaren because resolution of the Plaintiffs' Jury Motion is governed by the Supreme Court decisions of Katchen v. Landy, 382 U.S. 323 (1966) and Granfinanciera.
Katchen concerned a jurisdictional issue under the Bankruptcy Act of 1898 raised by a creditor who filed a claim against the bankruptcy estate. The trustee objected to the claim on the basis that the creditor had received a preferential transfer and not returned the same to the estate. The trustee not only objected to the claim, however, but also sought a judgment against the creditor on the alleged preferential transfer. The jurisdictional issue before the Court was whether the bankruptcy court had summary jurisdiction over the preference action. Because the preference action would have been viewed as an action at law if the trustee had commenced the action outside of the bankruptcy court, the creditor argued that he would be deprived of his Seventh Amendment right to a jury trial on the action if it were determined that the bankruptcy court had summary jurisdiction over the same. The Supreme Court disagreed, concluding that the claim at law was converted to a claim in equity once it was administered as part of the bankruptcy. Katchen, 382 U.S. at 336-37.
The Bankruptcy Act vested bankruptcy courts with "summary jurisdiction" over disputes concerning property in the actual or constructive possession of the court. Disputes concerning property in the possession of a third party were designated as "plenary" matters and heard by the district court. The distinction was significant with respect to the right to a jury trial because matters within the court's summary jurisdiction were deemed to be equitable in nature, carrying no right to a jury trial. See Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 53 (1982).
Subsequent to the enactment of the new jurisdictional structure under the 1984 amendments to the Bankruptcy Reform Act of 1978, with Katchen appearing to many as though it dramatically limited the Seventh Amendment right to a jury trial within the context of bankruptcy, the majority of courts held that there existed no Seventh Amendment right to a jury trial in all core proceedings. See, e.g., In re Chase Sanborn Corp., 835 F.2d 1341, 1349 (11th Cir. 1988), rev'd, Granfinanciera, 492 U.S. at 33. In Granfinanciera, however, the Supreme Court made it known that Katchen was not to be construed so broadly. Granfinanciera involved a fraudulent conveyance action by the trustee. The defendants, who did not file claims in the bankruptcy case, requested a jury trial. The trial court and the intermediate appellate courts held that the defendants were not entitled to a jury trial. The Supreme Court reversed on the basis that a fraudulent conveyance action was viewed as an action at law in 18th-century England and the fact that the action arose as a core proceeding within the context of a bankruptcy did not convert it into an equitable action. The Supreme Court noted that its holding did not conflict with Katchen. Instead, the Court stated that Katchen was distinguishable in that the creditor in Katchen had filed a claim in the bankruptcy whereas the defendants in Granfinanciera had not. Granfinanciera, 492 U.S. at 57-58. Accordingly, although the forum of bankruptcy itself does not automatically convert legal actions arising therein into equitable actions, the filing of a claim does "`when the same issue arises as part of the process of allowance and disallowance of claims.'" Granfinanciera, 492 U.S. at 58 (quoting Katchen, 382 U.S. at 336).
The foregoing proposition was reaffirmed by the Supreme Court in Langenkamp v. Culp, 498 U.S. 42 (1990), reh'g denied, 498 U.S. 1043 (1991). The facts of Langenkamp were strikingly similar to the facts of Katchen. A bankruptcy trustee filed a preference action against several individuals who maintained savings accounts at the debtor financial institutions. Some of the defendants filed proofs of claim in the bankruptcy case. The bankruptcy court held a bench trial and found in favor of the trustee. The district court affirmed. The Tenth Circuit reversed in part, holding that the defendants who filed proofs of claim were entitled to a jury trial just like those who did not. The Supreme Court reversed with respect to the jury trial rights of those defendants who filed proofs of claim.
In Granfinanciera we recognized that by filing a claim against a bankruptcy estate the creditor triggers the process of "allowance and disallowance of claims," thereby subjecting himself to the bankruptcy court's equitable power. If the creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims-allowance process which is triable only in equity. In other words, 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.
Langenkamp, 498 U.S. at 44-45 (citations omitted).
Because the Plaintiffs have filed proofs of claim in the Debtor's bankruptcy case regarding the same claims that serve as the basis of their dischargeability action, this proceeding has become part of the claims-allowance process and, under the authority of Katchen, Granfinanciera, and Langenkamp, they possess no Seventh Amendment right to a jury trial concerning the same. See also Gaines v. Thomas (In re Thomas), 235 B.R. 864 (Bankr.N.D.Tex. 1999) (filing of proof of claim by creditor who commenced dischargeability action denied both creditor and debtor of right to jury trial). Accordingly, the Plaintiffs' Jury Motion will be DENIED.
In addition to the issues of liability and dischargeability, the Plaintiffs also seek injunctive relief. Case law is clear that there is no Seventh Amendment right to a jury trial with respect to injunctive relief. See Micron Separations, Inc. v. Pall Corp., Inc. (In re Micron Separations, Inc.), 220 B.R. 733, 734 (Bankr.D.Mass. 1997); Hedback v. American Family Mut. Ins. Co. (In re Mathews), 203 B.R. 152, 157 (Bankr.D.Minn. 1996).
III
For the foregoing reasons, the Defendants' Motion to Dismiss Count One of the Complaint (Doc. 8) filed on November 1, 1999, will be GRANTED and the Plaintiffs' Motion for Jury Trial (Doc. 11) filed on December 1, 1999, will be DENIED. An order to this effect will be entered.
IT IS SO ORDERED.
ORDER
For the reasons stated in the Memorandum of Decision filed on this date, the Defendants' Motion to Dismiss Count One of the Complaint (Doc. 8) filed on November 1, 1999, is GRANTED and the Plaintiffs' Motion for Jury Trial (Doc. 11) filed on December 1, 1999, is DENIED.
IT IS SO ORDERED.