Opinion
NOT FOR PUBLICATION
Argued and Submitted at Eugene, Oregon, May 20, 2005
Appeal from the United States Bankruptcy Court for the District of Oregon. Honorable Frank R. Alley, III, Bankruptcy Judge, Presiding. Bk. No. 04-62021. Adv. Nos. 04-6247. 04-6248.
Before: RIEGLE, [ KLEIN and MONTALI, Bankruptcy Judges.
Hon. Linda Riegle, Bankruptcy Judge for the District of Nevada, sitting by designation.
This disposition is not appropriate for publication and may not be cited except when pertinent under the doctrine of law of the case or the rules of res judicata, including issue and claim preclusion. See 9th Cir. BAP Rule 8013-1.
Appellant filed an adversary proceeding against the trustee and a non-debtor who was a party to a settlement agreement with the appellant. Subsequently, the trustee filed an adversary proceeding against the appellant. The appellant filed a jury demand in both adversaries. The bankruptcy court ruled that the appellant had waived the right to a jury trial by filing his complaint. We REVERSE and REMAND for the purpose of allowing clarification of the appellant's complaint.
FACTS
The debtor, Advanced Rods, Inc. (" debtor") purchased certain assets from KOGAP Enterprises, Inc. (" KOGAP") pursuant to an agreement (" Asset Sale Agreement") with KOGAP. The appellant, Craig S. Lausmann (" Lausmann") is an officer and director of the debtor.
Disputes arose among the parties. In 2003, the debtor, Lausmann, and KOGAP entered into a settlement agreement (" Settlement Agreement"). Under the terms of the Settlement Agreement, KOGAP was to pay Lausmann certain sums on a monthly basis.
Debtor filed a Chapter 11 petition on March 18, 2004. Later, the case was converted to a Chapter 7. Lausmann has not filed a proof of claim in the debtor's bankruptcy case.
In July 2004, the trustee made a demand on KOGAP to withhold a certain sum of money each month from KOGAP's payments to Lausmann under the Settlement Agreement.
The trustee, in his answer to Lausmann's complaint, states that the demand was made to " avoid Lausmann's fraudulent conveyance of the Debtor's interest in the Settlement Agreement to himself." Defendant Michael A. Grassmueck's Answer to Craig Lausmann's Complaint, at ¶ 3. KOGAP consented to the trustee's demand and has withheld sums from its payments to Lausmann under the Settlement Agreement (the " Withheld KOGAP Payments").
Lausmann filed a complaint against the trustee and KOGAP on September 2, 2004 (at 3:58 p.m.). The gravaman of the complaint is that Lausmann is entitled to the Withheld KOGAP Payments under the Settlement Agreement.
The claims against the trustee in Lausmann's complaint are: (1) for interference with economic relationship, and (2) that the trustee abandon its claim to the Withheld KOGAP Payments under 11 U.S.C. § 554.
Lausmann's claim against KOGAP is for breach of contract for assenting to the trustee's demand and withholding the payments under the Settlement Agreement.
On the same day (approximately fifteen minutes later), the trustee filed a complaint against Lausmann alleging fraudulent conveyance and breach of contract. The trustee's complaint alleges that Lausmann's obligation to capitalize the debtor under the Asset Sale Agreement was cancelled by the Settlement Agreement with no equivalent value given to the debtor.
Lausmann made a demand for a jury trial in both adversary proceedings. The bankruptcy court denied Lausmann a jury trial in both proceedings by an order entered on September 22, 2004 which stated:
The two adversary proceedings were consolidated on September 22, 2004.
The Court finds that plaintiff Craig Lausmann in his adversary proceeding has waived the right to jury trial. The Court further finds that referral of this litigation which is essentially a core proceeding would be inappropriate.
On December 20, 2004, the Panel granted leave to appeal the bankruptcy court's interlocutory order denying a jury trial.
ISSUE
Whether the bankruptcy court erred in finding that Lausmann waived the right to a jury trial by filing his complaint against the trustee and KOGAP.
STANDARD OF REVIEW
The Panel reviews de novo whether Lausmann has waived the right to a jury trial, Dunmore v. United States, 358 F.3d 1107, 1111 (9th Cir. 2004) and whether he is entitled to a jury trial. Id.
DISCUSSION
The Seventh Amendment guarantees the right to a jury trial in actions which are legal in nature as opposed to equitable. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41-42, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). In Granfinanciera the Supreme Court enunciated a three-part analysis for determining the right to a jury trial. A court must determine whether the action is one historically tried to juries. Id. at 42. Next, the court must consider whether the matter should be characterized as legal, rather than equitable, in nature. If the matter is equitable in nature, then the party does not have a right to a jury trial. Id. If the matter is legal, then a court must decide, as the third part of the test, whether the matter involved private rights as opposed to public rights. There is no right to a jury trial for issues of public rights. Granfinanciera, 492 U.S. 33, 42 n. 4, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). However, before this three-part inquiry is made a court must first determine whether a party has waived its Seventh Amendment right to a jury trial.
The Seventh Amendment provides that " [i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved. . . ."
A " private right" is the " liability of one individual to another under the law as defined" such as " [w]holly private tort, contract, and property cases." Granfinanciera, 492 U.S. 33, 51, 109 S.Ct. 2782, 106 L.Ed.2d 26 and n. 8 (1989).
" Public rights" are " statutory rights that are integral parts of a public regulatory scheme" and whose resolution Congress has assigned to a specialized court of equity such as bankruptcy courts. See Granfinanciera, 492 U.S. 33, 55 n. 10, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989).
The Supreme Court has held that when a party is entitled to a jury trial, the right may be waived by the filing of a proof of claim in bankruptcy. Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990). A claim waives the right to a jury trial for the resolution of disputes which are " vital to the bankruptcy process, including disputes that are part of the claims-allowance process and the hierarchical reordering of . . . creditors' claims." Dunmore v. United States, 358 F.3d 1107, 1116 (9th Cir. 2004). This is so because the filing of the claim " converts the creditor's legal claim into an equitable claim to a pro rata share of the res." Katchen v. Landy, 382 U.S. 323, 336, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). Claims can lose their legal nature, and be converted into claims in equity, if the action in which claims are brought is " integrally related" to the claims allowance process. In re CBI Holding Co., 311 B.R. 350, 365 (S.D.N.Y. 2004)(citations omitted).
As stated in Germain v. Connecticut Nat'l Bank, 988 F.2d 1323 (2d Cir. 1993):
[B]y filing a proof of claim a creditor forsakes its right to adjudicate before a jury any issue that bears directly on the allowance of that claim - and does so not so much on a theory of waiver as on the theory that the legal issue has been converted to an issue of equity.
Germain at 1329(emphasis in the original).
Therefore, a party's right to a jury trial on traditionally legal claims arising in an adversary proceeding depends on: (1) whether the party has filed a proof of claim against the bankruptcy estate; and (2) whether the resolution of the adversary proceeding affects the allowance of the proof of claim. In re CBI Holding Co., 311 B.R. 350, 365-366 (S.D.N.Y. 2004)(citations omitted).
In this appeal, Lausmann contends that he is entitled to a jury trial on the following claims brought in his complaint against the trustee and KOGAP: (1) interference with economic relationship against the trustee; (2) that the trustee abandon its claim to the Withheld KOGAP Payments under 11 U.S.C. § 554; and (3) breach of contract against KOGAP. Regarding the trustee's complaint against him, Lausmann argues that he is entitled to a jury trial on the trustee's claims for: (1) fraudulent conveyance; and (2) breach of contract (for Lausmann's purported failure to capitalize the debtor as required under the Asset Sale Agreement).
1. Lausmann v. Trustee and KOGAP
a. Lausmann v. Trustee
Bankruptcy estates are sued by naming the trustee as the party-defendant in an official capacity. A suit against a trustee in its official capacity amounts to a " claim" against the estate, and therefore waives the right to a jury trial, given that any judgment against a trustee in an official capacity is payable from estate assets. See In re Warmus, 252 B.R. 584, 587 (Bankr. S.D. Fla. 2000)(fact that counterclaim against trustee as trustee/plaintiff was filed, as opposed to filing third-party complaint against trustee individually, shows intent to recover from bankruptcy estate as opposed to trustee personally and amounts to waiver of right to jury trial), aff'd, 276 B.R. 688 (S.D. Fla. 2002); In re Sunshine Trading & Transp. Co., Inc., 193 B.R. 752 (Bankr. E.D. Va. 1995)(suit against trustee in official capacity for tortious interference with contract is necessarily a claim against the estate " since collection of damages is limited to the res of the estate").
Pursuant to 11 U.S.C. § 323, a trustee " is the representative of the estate" with the capacity to sue and be sued.
A complaint may constitute a " claim" against the estate. See In re Sambo's Restaurants, Inc., 754 F.2d 811, 815 (9th Cir. 1985)(filing of complaint together with correspondence and motion sufficient to constitute proof of claim).
As stated in In re Elac Food Corp., 226 B.R. 320, 323 (D. Puerto Rico 1998)(citation omitted):
While a trustee is generally entitled to broad immunity, a trustee may be sued in an individual capacity for intentional or negligent actions which amount to violations of the duties imposed upon the trustee by law. Bennett v. Williams, 892 F.2d 822, 823 (9th Cir. 1989); In re Cochise College Park, Inc., 703 F.2d 1339, 1357 (9th Cir. 1983); In re Kashani, 190 B.R. 875, 883-84 (9th Cir. BAP 1995). Recovery on a claim brought against a trustee in its individual capacity will come from the personal assets of the trustee, and not from the assets of the bankruptcy estate. Thus jury trial rights are preserved if the complaint seeks recovery against the trustee in its personal capacity, as opposed to official (or representative) capacity.
During the oral argument of this appeal, Lausmann's counsel stated that Lausmann " makes no claim against the bankrupt estate." Counsel represented that Lausmann seeks recovery from the trustee personally, as opposed to against the trustee in an official capacity.
Despite the statements of counsel at oral argument as to what Lausmann contemplates by bringing suit, it is not at all apparent that Lausmann seeks recovery only from the trustee as an individual, and not from the estate. Lausmann's complaint is less than entirely clear in this regard. For example, the complaint makes no allegation that the trustee is liable in a personal, as opposed to official, capacity. Furthermore, the prayer for relief does not seek recovery from the trustee personally, as opposed to against the assets of the estate. Additionally, Lausmann identifies the defendant in the case caption of his complaint as " Michael A. Grassmueck, Inc., an Oregon Corporation." While there is no requirement to aver the capacity of a party to be sued, this characterization does not indicate whether suit is brought against the trustee in its official as opposed to personal capacity. Furthermore, Lausmann makes no allegation that the trustee acted outside the scope of its authority in making the demand upon KOGAP, or that it intentionally violated a duty, acted in bad faith, or was unreasonable. See Leonard v. Vrooman, 383 F.2d 556, 561 (9th Cir. 1967)(trustee is not personally liable if it " acts reasonably under the circumstances and in good faith"), cert. denied, 390 U.S. 925, 88 S.Ct. 856, 19 L.Ed.2d 985 (1968).
Lausmann's prayer for relief, at paragraph two, states that " On Plaintiff's Second Claim for Relief for Judgment against Defendant Grassmueck in the amount of $16, 666.16 . . . ."
FED. R. CIV. P. 9(a), made applicable in adversary proceedings by FED. R. BANKR. P. 7009.
On the other hand, it is not impossible to construe the complaint as one against the trustee, individually. The complaint alleges intentional and wrongful possession of property, which, if true, might serve as the basis for personal liability on the part of a bankruptcy trustee. See, e.g.; Leonard v. Vrooman, 383 F.2d 556 (9th Cir. 1967)(trustee personally liable to owner for damages arising from wrongful possession of property which was not property of the estate), cert. denied, 390 U.S. 925, 88 S.Ct. 856, 19 L.Ed.2d 985 (1968). It is also true that Lausmann's naming of the corporation as the party-defendant and his characterization of the defendant throughout the complaint as " Defendant Grassmueck" does not indicate one way or the other whether the proceeding is brought against the trustee in its representative, as opposed to individual, capacity.
Additionally, it is well established that a bankruptcy trustee may not be sued for actions taken in the scope of its authority without first obtaining leave of court. In re Davis, 312 B.R. 681, 686 (Bankr. D. Nev. 2004). As discussed in In re Davis, there are two exceptions to this rule. Leave of court need not be sought if the trustee is acting in excess of its authority or in an unofficial capacity. See In re Leonard v. Vrooman, 383 F.2d 556, 560 (9th Cir. 1967), cert. denied, 390 U.S. 925, 88 S.Ct. 856, 19 L.Ed.2d 985 (1968). Second, as provided by 28 U.S.C. § 959(a), a trustee may be sued without first seeking permission from the appointing court if the trustee is " carrying on the debtor's business." In re Davis, 312 B.R. 681, 686 (Bankr. D. Nev. 2004). Lausmann's counsel, at the oral argument of this matter, stated that the trustee was not " carrying on the business of the debtor" and that Lausmann did not seek leave of court before filing his complaint.
A broad reading of the complaint might even suggest that Lausmann intended to present both claims: One against the estate through the trustee in its representative capacity, and one against the trustee, personally. At oral argument, counsel for Lausmann stated that the order denying the jury trial was issued by the bankruptcy court " while the pleadings were still open."
For these reasons, we reverse and remand to permit a clarification of the pleadings in order to determine whether the proceeding is one brought against the trustee in its personal, as opposed to official, capacity.
b. Lausmann v. KOGAP (Breach of Contract)
Lausmann's complaint includes a cause of action against KOGAP for breach of contract. The alleged basis is KOGAP's withholding of the Withheld KOGAP Payments upon the demand of the trustee. The complaint seeks the Withheld KOGAP Payments ($16, 666); " additional sums as may become due"; and unspecified consequential damages.
An action for money damages based on a breach of contract is traditionally legal in nature, Dairy Queen, Inc. v. Wood, 369 U.S. 469, 477, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962) to which jury trial rights attach. In re Cinematronics, Inc., 916 F.2d 1444(9th Cir. 1990)(jury trial right affirmed in suit for breach of contract, among other claims). Lausmann is entitled to a jury trial on his complaint against KOGAP if his complaint is merely a private right of action that does not engage the claims-allowance process.
However, if Lausmann has filed a " claim" in the bankruptcy he will have no jury trial right over claims in the adversary proceeding against KOGAP which are " integrally related" to the claims allowance process. A party's right to a jury trial on a traditionally legal claim depends on whether: (1) the party has filed a claim against the bankruptcy estate; and (2) resolution of the adversary proceeding affects the allowance of that proof of claim. In re CBI Holding Co., 311 B.R. 350, 366 (S.D.N.Y. 2004)(accounting firm had no right to jury trial on complaint brought by plaintiff-liquidating agent against firm where firm had filed proof of claim and plaintiff's claims were integrally related to claims allowance process; plaintiff's success on its complaint would result in disallowance of firm's proof of claim).
Lausmann's complaint against KOGAP arises from the same facts, involves the same contracts (Asset Sale Agreement and Settlement Agreement) and measures the same conduct that is the basis for his action against the trustee. Resolution of Lausmann's complaint against KOGAP necessarily involves consideration of the merits of Lausmann's complaint against the trustee. See In re Frost, Inc., 145 B.R. 878 (Bankr. W.D. Mich. 1992)(no jury trial right on debtor-plaintiff's complaint; same conduct formed basis of both plaintiff's complaint for breach of contract and defendant's proof of claim and resolution of adversary proceeding required consideration of merits of proof of claim).
Without clarification of whether Lausmann's complaint is against the trustee in its official, as opposed to personal, capacity it cannot be determined whether Lausmann has made a " claim" in the bankruptcy to which his complaint against KOGAP could be " integrally related."
2. Trustee v. Lausmann
The Trustee's complaint alleges, among other things, fraudulent conveyance and breach of contract against Lausmann.
Under the three-part analysis in Granfinanciera, there is a Seventh Amendment right to a jury trial for actions for breach of contract, In re Cinematronics, Inc., 916 F.2d 1444, 1448 (9th Cir. 1990) and fraudulent conveyance, Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989).
Langenkamp v. Culp, 498 U.S. 42, 44-45, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990), however, makes it clear that a creditor who makes a claim against the bankruptcy estate has no right to a jury trial on issues raised in defense of such a claim. Should Lausmann's complaint be construed as one against the trustee in its official, as opposed to personal, capacity then the trustee's complaint could be deemed to be a continuation the claims-allowance process triggered by Lausmann and operate, in essence, as an objection to Lausmann's 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).
On the other hand, if the complaint is one against the trustee personally, then Lausmann has made no " claim" in the bankruptcy which would effectively waive a right to a jury trial.
Therefore, we reverse and remand to the bankruptcy court for clarification of the pleadings when deciding whether to deny the Seventh Amendment right to a jury trial.
CONCLUSION
The appellant's complaint is not sufficient to determine whether the Seventh Amendment right to a jury trial has been waived. REVERSED and REMANDED.
For purposes of standing in litigation, an estate in bankruptcy is viewed as a distinct entity, but not as a legal person. Thus, the estate can be sued, but only in the name of its trustee. Such an action involves only the trustee's 'official capacity, ' so that the estate, rather than the trustee personally, is liable.