Summary:
The Trustee alleged fraudulent conveyances by the Debtor to his non-filing spouse and sought to recover the transfers. In her answer, Ms. Houseman asserted, and the Trustee disputed, her 7th Amendment right to a jury trial. Her answer did not explicitly raise any counterclaims, but did assert a right of “setoff” or “credit” for funds she contributed, as well as asserting both that the transfers were made in good faith and for value under N.C.G.S. § 39-23.3 and also barred by the statute of limitations.
Starting from In re Stansbury Poplar Place, Inc., 13 F.3d 122 (4th Cir. 1993), the bankruptcy court recognized that parties who had not filed a Proof of Claims were entitled to jury trial when a trustee brought a fraudulent conveyance action. If that party has filed a Proof of Claim, however, “[i]t is clear that by filing a proof of claim against a bankruptcy estate, a creditor ‘triggers the process of ‘allowance and disallowance of claims,’ thereby subjecting himself to the bankruptcy court’s equitable power.’ Id. at 125, quoting Langenkamp v. Culp, 498 U.S. 42, 44 (1990) (quoting Granfinanciera, S.A. v. Norberg, 492 U.S. 33, at 57-58 & n.14 (1989)).
In the present case, while Ms. Houseman had not filed a Proof of Claim, the bankruptcy court held that Ms. Houseman’s counterclaims qualified as a claim and subjected her to the equitable power of the bankruptcy court, depriving her of the right to a jury trial. See Murray v. Richmond Steele & Welding Co., 170 B.R. 868, 874 (E.D.N.C. 1994) (“The court finds that convincing authority has held that a counterclaim does qualify as a ‘claim’ for purposes of the ... Granfinanciera and Langenkamp private rights jury trial analysis.”); see also In re Americana Expressways, 161 B.R. 707, 713 (D. Utah 1993) (“The majority of other courts that have considered whether a counterclaim constitutes a “claim” under Granfinanciera and Langenkamp have reached the same conclusion.”); In re Commercial Fin. Servs., Inc., 251 B.R. 397 (Bankr. N.D. Okla. 2000) (defendant who did not file proof of claim or counterclaim invoked equitable jurisdiction of bankruptcy court through assertion of setoff defense); In re Big Springs Realty LLC, 430 B.R. 629, 634 (Bankr. D. Mont. 2010) (“[The defendant’s] setoff defense in this case is akin to an informal proof of claim and if successful, would directly impact the administration of the Debtor’s bankruptcy estate.”).
Commentary:
What is unclear is how Ms. Houseman could have protected both her 7th Amendment constitutional right to a jury trial, which was admitted by all parties, and also preserve her counterclaims, which, under Federal Rule of Civil Procedure 13(a), would likely have been compulsory. Perhaps the answer to this dilemma is that Rule 13 is, at least when it comes to bankruptcy actions, unconstitutional, but that seems an extreme step.
Alternatively, perhaps Ms. Houseman could withdraw her counterclaims, thereby removing the bankruptcy court’s equitable jurisdiction, but costing her the counterclaims. (This is not dissimilar to the question raised in Moses v. Cashcall on whether a party can remove jurisdiction from the bankruptcy court by withdrawing its Proof of Claim.) See also Anderson v. Brokers, Inc. (http://www.ncmb.uscourts.gov/sites/default/files/opinions/Brokers_jury_demand.pdf), which held that a creditor could not include limiting language in a Proof of Claim preserving the right to a jury trial. Or she could have filed a Motion to Extend Time to Answer and for Jury Trial, only raising her counterclaims after that point. Magers v. Bond (http://www.ncmb.uscourts.gov/sites/default/files/opinions/Bondsjury.PDF) is a rather exhaustive catalogue of causes of action that can be heard by a jury and, through the Defendant’s motion with the district court to remove the reference from the bankruptcy court, may show how to preserve the right.
All of these, however, seem to be a convoluted minefield to negotiate in requesting a jury trial, which, while more inconvenient and expensive for the trustee, is a rather fundamental right. (Insert quote of your choice from Thomas Jefferson about juries here.)
For a copy of the opinion, please see:
Houseman- Jury Trial in Bankruptcy Court
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