United Missouri Bank of Kansas City, N.A., In re

• Decision Date: 18 June 1990
• Docket Number: No. 89-2981,89-2981
• Parties: , 22 C.B.C. 1400, 18 Fed.R.Serv.3d 621, 20 Bankr.Ct.Dec. 644, Bankr. L. Rep. P 73,344 In re UNITED MISSOURI BANK OF KANSAS CITY, N.A., Petitioner.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1449

901 F.2d 1449

58 USLW 2638, 22 C.B.C. 1400, 18

Fed.R.Serv.3d 621,

20 Bankr.Ct.Dec. 644, Bankr. L. Rep. P 73,344

In re UNITED MISSOURI BANK OF KANSAS CITY, N.A., Petitioner.

No. 89-2981.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 17, 1990.

Decided April 23, 1990.

Rehearing and Rehearing En Banc Denied June 18, 1990.

Thomas Deacy, Kansas City, Mo., for appellant.

Thomas Franklin, Kansas City, Mo., for appellees.

Before LAY, Chief Judge, BOWMAN and BEAM, Circuit Judges.

LAY, Chief Judge.

The central issue we confront is whether a bankruptcy judge acting under the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333 (1984 Act), has the statutory and constitutional authority ¹ to conduct jury trials in a core proceeding in bankruptcy. We hold, contrary to the bankruptcy court ² and the district court, ³ that a bankruptcy judge lacks the statutory authority to conduct jury trials in an action alleging a preferential transfer between the debtor and a third party creditor.

BACKGROUND

The bankruptcy trustee for the Kroh Brothers Development Company bankrupt estate brought an adversary action in the bankruptcy court against United Missouri Bank of Kansas City (the Bank), seeking recovery of alleged preferential transfers of approximately $4 million plus interest. The Bank had not previously participated in the bankruptcy proceeding or filed a claim against the Kroh Brothers estate. Following the Supreme Court's decision in Granfinanciera, S.A. v. Nordberg, --- U.S. ----, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), which recognized a seventh amendment jury trial right in certain bankruptcy proceedings, the Bank filed a demand for a jury trial, along with a motion in the district court to withdraw the case from the bankruptcy court. ⁴ The bankruptcy judge found the jury trial demand untimely but granted the motion under Fed.R.Civ.P. 39(b), and ruled that the bankruptcy judge had the statutory and constitutional authority to conduct and preside over the jury trial. ⁵ The district court denied the Bank's motion to withdraw the proceeding, agreeing that the bankruptcy judge could conduct the jury trial. Kroh Bros. Development Co. v. United Missouri Bank of Kansas City (In re Kroh Bros. Dev. Co.), 108 B.R. 228 (W.D.Mo.1989). The Bank then filed a Petition for Writs of

Mandamus and Prohibition in this court, seeking to restrain the district and bankruptcy courts from allowing the bankruptcy judge to conduct the jury trial in the bankruptcy court.

DISCUSSION

In deciding the issue before us we focus on two recent opinions: the Supreme Court's decision in Granfinanciera, 109 S.Ct. 2782; and the recent decision of the Second Circuit in Ben Cooper, Inc. v. The Insurance Co. of Pennsylvania (In re Ben Cooper, Inc.), 896 F.2d 1394 (2d Cir.1990), which held that a bankruptcy judge has both the statutory and constitutional authority to conduct a jury trial in core proceedings. ⁶ In all due respect to our sister circuit, we must disagree with the Second Circuit's holding that a bankruptcy judge has the statutory authority to conduct jury trials.

A review of the Granfinanciera decision is critical to an understanding of our analysis in this case. In Granfinanciera, the trustee for the Chase & Sanborn bankrupt estate sought to recover alleged fraudulent transfers of approximately $1.7 million plus interest from the defendant, Granfinanciera. The trustee filed the complaint in the district court, which referred the action to the bankruptcy court. The defendant, who had not filed any claims against the bankruptcy estate, demanded a jury trial, which the bankruptcy court denied. Granfinanciera, 109 S.Ct. at 2787.

The Supreme Court found Granfinanciera had a seventh amendment right to a jury trial on the fraudulent transfer claim. The Court found that fraudulent transfer actions were historically brought in courts of law before juries, id. at 2790-94. ⁷ Since, under the 1984 Act, Congress had placed fraudulent transfers within the bankruptcy court's jurisdiction, see 28 U.S.C. Sec. 157(b)(2), (4) (Supp. V 1987) (bankruptcy court may "hear and determine" fraudulent transfer actions), the Court considered whether Congress could preempt jury trial rights by assigning a claim to a tribunal that traditionally did not conduct jury trials. "The sole issue before us is whether the Seventh Amendment confers on petitioners a right to a jury trial in the face of Congress' decision to allow a non-Article III tribunal to adjudicate the claims against them." 109 S.Ct. at 2795. ⁸ The Court concluded that Congress' ability to block seventh amendment jury trial rights by assigning a claim to an Article I tribunal is limited to those disputes involving "public rights." Since a fraudulent transfer action involves private, common law rights, the Court concluded Granfinanciera was entitled to a jury trial, notwithstanding Congress' placement of the claim in a forum that traditionally did not conduct jury trials. Id. at 2795-2802. Thus, a party to an adversary proceeding in bankruptcy may have a seventh amendment right to a jury trial before some tribunal, and since there has been no claim filed against the Kroh bankruptcy estate, Granfinanciera controls here.

A. Historical Overview

With the Granfinanciera decision as the background, we start our analysis with a historical review of the authority of bankruptcy courts. Article I courts are Under the Bankruptcy Act of 1898, see Act of July 1, 1898, ch. 541, 30 Stat. 544, the bankruptcy courts ⁹ were vested with "summary" jurisdiction over controversies involving property within the actual or constructive possession of the bankruptcy court. Matters falling within a bankruptcy court's summary jurisdiction were equitable matters that did not involve jury trials. See Katchen v. Landy, 382 U.S. 323, 336-37, 86 S.Ct. 467, 476-77, 15 L.Ed.2d 391 (1966). Plenary matters, involving disputes over property held by a third person, were heard in the district court, or with the consent of the parties, in the bankruptcy court. See Marathon Pipe Line Co., 458 U.S. at 53, 102 S.Ct. at 2862. Traditionally, when a claim of preferential transfer was not presented in the bankruptcy proceeding and arose from a plenary action brought by the trustee in federal court the claim was not considered "integral to the restructuring of debtor-creditor relations" and was not deemed to arise "as part of the process of allowance and disallowance of claims." Granfinanciera, 109 S.Ct. at 2799. As Granfinanciera makes clear, bankruptcy courts were statutorily vested with jurisdiction at law as well and could "oversee plenary proceedings." Id. at 2798 (citing Atlas Roofing Co. v. Occupational Safety and Health Review Comm'n, 430 U.S. 442, 454 n. 11, 97 S.Ct. 1261, 1268 n. 11, 51 L.Ed.2d 464 (1977)).

courts of special jurisdiction created by Congress that cannot be given the plenary powers of Article III courts. Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). The authority of the Article I court is not only circumscribed by the constitution, but limited as well by the powers given to it by Congress. See Ex parte Bakelite Corp., 279 U.S. 438, 449, 49 S.Ct. 411, 412, 73 L.Ed. 789 (1929); see also Plastiras v. Idell (In Re Sequoia Auto Brokers, Ltd., Inc.), 827 F.2d 1281, 1284 (9th Cir.1987) ("Congress vests bankruptcy courts with their jurisdiction and their authority has no 'inherent' source."). Although we view this issue in light of the 1984 Act, the historical role of bankruptcy judges illustrates an absence of legislatively authorized power to conduct a jury trial on preferential transfers.

Historically, jury trials under the 1898 Act were not held in bankruptcy court, with two narrow statutory exceptions involving involuntary petitions and the dischargeability of debts. See Gibson, Jury Trials in Bankruptcy: Obeying the Commands of Article III and the Seventh Amendment, 72 Minn. L. Rev. 967, 972-73 (1988). Until 1973, there was no indication as to which forum was to conduct these jury trials. The bankruptcy rules promulgated by the Judicial Conference in 1973 required jury trials on dischargeability claims to be held in the district court unless a local rule provided otherwise. See Fed.Bank.R. 409(c), reprinted in 12 Collier on Bankruptcy (14th ed. 1976). Jury trials involving involuntary petitions were to be conducted by the bankruptcy judge unless trial was demanded before the district court or a local rule required jury trials in the district court. See Fed.Bank.R. 115(b), reprinted in 12 Collier on Bankruptcy (14th ed. 1976). Thus, there was no statutory authority for bankruptcy judges to conduct jury trials under the 1898 Act, and the procedural rules governing the bankruptcy courts did not grant this authority until 1973.

In 1978 Congress overhauled the bankruptcy system and enacted sweeping substantive and procedural changes. See Bankruptcy Reform Act, Pub.L. No. 95-598, 92 Stat. 2549 (1978). The 1978 Act conveyed jurisdiction over all "civil proceedings arising under title 11 or arising in or related to cases under title 11," and placed that authority in the bankruptcy courts. 28 U.S.C. Sec. 1471(b), (c) (1982). Jury trial rights as they existed prior to the 1978 Act were preserved. See 28 U.S.C. Sec. 1480 (1982). Although section 1480 did not expressly provide authority for bankruptcy judges to conduct jury trials, it is Congress responded to the Marathon decision with the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333 (1984 Act). ¹¹ The 1984 act established a bifurcated method of adjudicating claims in bankruptcy court, and allocating the bankruptcy court's jurisdiction. If a claim is a "core" proceeding, the bankruptcy judge may "hear and determine" the claim and "enter appropriate orders and judgments," subject to review by the district court. See 28...