In re Carter Paper Co., Inc., Bankruptcy No. 90-10449

Decision Date16 April 1998
Docket NumberAdversary No. 96-1038.,Bankruptcy No. 90-10449
Citation220 BR 276
PartiesIn re CARTER PAPER COMPANY, INC., Debtor. Frank L. CARTER and Carter Paper Company, Inc. v. Martin A. SCHOTT, Trustee, et al.
CourtU.S. Bankruptcy Court — Middle District of Louisiana

COPYRIGHT MATERIAL OMITTED

Jacques F. Bezou, Covington, LA, for plaintiffs.

Martin A. Schott, Baton Rouge, LA, trustee.

Pamela Magee, Baton Rouge, LA, for trustee.

REASONS FOR ORDER STRIKING JURY TRIAL DEMAND

LOUIS M. PHILLIPS, Bankruptcy Judge.

Introduction

This adversary proceeding seeks, on behalf of Carter Paper Company, Inc. (CPC), debtor in the captioned case, and Frank L. Carter, the purported owner of the debtor, judgment against Martin A. Schott (Schott or Trustee), trustee of the CPC bankruptcy estate, for "intentional and wilful breach of fiduciary duty" to CPC and Carter, in failing either to prosecute or abandon an anti-trust claim (that the plaintiffs allege existed as an estate asset) until after the claim prescribed. The matter currently before the Court is the trustee's motion to strike the plaintiff's demand for a jury trial. For the reasons given below, the court finds that the plaintiff is not entitled to a jury trial and will grant the trustee's motion.

Facts

On April 6, 1990, three creditors of CPC filed an involuntary Chapter 7 petition against CPC.1 This court entered an order for relief on June 12, 1990. Purportedly, CPC's assets included an antitrust and unfair trade practices claim against rival paper companies (the claim). CPC's bankruptcy schedules failed to mention the claim. CPC alleges that the Trustee knew of the claim, and that despite repeated requests from debtor's counsel, the trustee failed to file an action on behalf of the estate or to abandon the claim so that CPC could bring an action.2Id. The claim prescribed on January 11, 1994.3 On February 1, 1994, three weeks after the prescription date, Schott abandoned the estate's interest in the claim. A few weeks later Schott filed a report of no distribution, and in July the court closed CPC's case.

In 1996, CPC filed a petition in state court4 alleging that Schott had violated his fiduciary duty to the estate and that debtor's counsel had committed legal malpractice. Schott removed the case to the United States District Court for the Middle District of Louisiana, which referred the matter to this Court. The bankruptcy case has been reopened. This Court severed and remanded all claims against parties other than Schott, concluding that there was no jurisdictional nexus between those claims and the action against the trustee. (The other defendants (previous lawyers and almost lawyers for CPC) had not asserted cross-claims or third party claims against the Trustee, and advised the Court they did not intend to assert such.) As a consequence of the severance, the Court instructed CPC to amend its complaint to incorporate only the allegations relevant to the action against the Trustee. In the complaint, as amended, Carter asserts a right to trial by jury and has consented to such before this Court. Implicitly, Carter has consented to issuance by this Court of a final judgment if trial by jury is not available. The Trustee has brought a motion to strike CPC's demand for a jury trial. Bankruptcy Rule 7012(b); Federal Rule of Civil Procedure 12(f).

Jurisdiction

The complaint in this adversary proceeding alleges that Schott improperly administered the bankruptcy estate and caused a loss to CPC. This Court has subject matter jurisdiction over this proceeding. 28 U.S.C. § 157(b)(1). See Matter of Baheth Construction Co., Inc., 118 F.3d 1082 (5th Cir.1997) (action seeking damages from trustee and surety for trustee's pursuit of a temporary restraining order against the plaintiff constituted, at the very least, a matter related to a case under title 11 within the meaning of 28 U.S.C. § 157(a); therefore bankruptcy court had jurisdiction). The Trustee has consented to issuance by this Court of a final judgment but denies that CPC has a right to trial by jury. CPC alleges a right to trial by jury, but has consented to such before this Court, at least implicitly consenting to the issuance by this Court of a final judgment. This Court, having subject matter jurisdiction, infers from the express consents of the parties the authority to issue a final judgment (even if this proceeding is only related to a case under Title 11). 28 U.S.C. § 157(c)(2).

A bankruptcy court can preside over a jury trial only with the approval of the district court and the consent of all parties. 28 U.S.C. § 157(e); In re Clay, 35 F.3d 190 (5th Cir.1994). This Court previously has obtained approval from the Honorable District Court to conduct jury trials pursuant to § 157(e), with consent of the parties. The parties have consented to trial by jury before this Court, in the event trial by jury is required. The Trustee disputes the right to jury trial, but consents, if such a right exists, to trial by jury here.5

The Supreme Court, Jury Trials, Bankruptcy Cases

The United States Supreme Court has published a line of cases, Schoenthal v. Irving Trust Co., 287 U.S. 92, 53 S.Ct. 50, 77 L.Ed. 185 (1932); Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966); Granfinanciera v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), and Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990), which embodies the Supreme Court's understanding of the interplay between the Seventh Amendment6 right to a jury trial and the inherently equitable nature of the bankruptcy courts. An examination of this series of cases will provide guidance in resolving the present dispute.

Schoenthal, supra, began as a suit in equity brought by the Irving Trust Company (the trustee) to recover $1500 in preferences paid by a bankruptcy debtor to Morris and Fannie Schoenthal (the Schoenthals). The trustee claimed to have no adequate remedy at law, and sought an equitable decree declaring the payments preferential and directing the Schoenthals to pay to the trustee the amount of the preferences with interest and costs. 287 U.S. at 93, 53 S.Ct. at 51.

The Schoenthals sought trial by jury. The trial court denied the motion and, after trial, entered judgment in favor of the trustee. The Second Circuit affirmed. Irving Trust Co. v. Schoenthal, 54 F.2d 1079 (2nd Cir. 1932). The Supreme Court reversed, holding that the defendants were entitled to trial by jury. 287 U.S. at 97, 53 S.Ct. at 52.

The Supreme Court invoked the rule that suits in equity are unavailable if law provides a remedy. It also observed that in England preferences were historically triable at law. The facts failed to support the trustee's assertion that it had no adequate remedy at law. 287 U.S. at 96-97, 53 S.Ct. at 52. The preferences were money payments of ascertained and definite amounts. The bill disclosed no facts calling for an accounting or other equitable relief. Consequently, the defendants had a right to trial by jury. Id.

The rule of Schoenthal is that a preference action against a party who has not filed a claim against the bankruptcy estate is a legal action, entitling the parties to the protection of the Seventh Amendment. In 1932, when Schoenthal was decided, preference actions were not considered part of the bankruptcy process; they could be brought in state courts as well as bankruptcy courts. Id., at 94-95, 53 S.Ct. at 51. Recognition of the fact that the preference action "constituted no part of the proceedings in bankruptcy," id., led the Court to distinguish the preference action from the bankruptcy process and generated the conclusion that utilizing the power to avoid a preferential transfer did not invoke the bankruptcy court's equitable jurisdiction. Since the Schoenthals had not filed a claim against the estate, the outcome of the preference action would not require the bankruptcy court to consider disallowance of their claim and would not alter the pro rata distribution of the estate. The "proceedings in bankruptcy," therefore, were seen by the court as being bound up in the allowance or disallowance of claims; the process necessary to effectuate a pro rata distribution of the res, or estate, being administered by the trustee.

Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) also involved a preference action, but this time the defendant had filed a claim against the estate. The issue was whether the filing of a claim precluded the creditor's invocation of the Seventh Amendment right to a jury trial previously recognized in Schoenthal. Id., at 325, 86 S.Ct. at 470.

Katchen's Bonus Corner, Inc. (the company) borrowed $50,000, issuing notes to memorialize the debts. Louis Katchen (Katchen), an officer of the company, was a surety on the notes. After a fire severely damaged the company's assets, Katchen placed the company's funds in a trust account under his control. He made some payments on the notes with funds from the trust account and others from his personal funds. Bankruptcy followed. Katchen filed one claim against the bankruptcy estate for rent (he owned the property on which the business operated) and another for the payments made from his personal funds on the company's notes. Landy, the trustee, claimed that the payments from the trust fund to the creditors were voidable preferences. He sought judgment against Katchen for the amount of the preferences.7 The referee overruled Katchen's objection to jurisdiction and rendered judgment for Landy. The referee further ruled that he would allow Katchen's claims only when Katchen satisfied the judgment. The District Court and the Court of Appeals affirmed. Katchen took his case to the Supreme Court. Id., at 325-26, 86 S.Ct. at 470-71.

Katchen relied on Schoenthal. He argued that there was no legal difference between a preferred party who had not filed a claim against the estate and a preferred party whose claim would be allowed...

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