In re Coated Sales, Inc.
| Decision Date | 11 October 1990 |
| Docket Number | Adv. No. 88-5915A.,Bankruptcy No. 88-B-11331 (CB) to 88-B-11336 (CB) |
| Citation | 119 BR 452 |
| Parties | In re COATED SALES, INC., Debtors. COATED SALES, INC., Plaintiff, v. FIRST EASTERN BANK, N.A., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Kaye, Scholer, Fierman, Hays & Handler by Lester Kirshenbaum, New York City, for Coated Sales, Inc.
Ruffa & Riso, P.C. by Gerard A. Riso, Harvey Lebowitz, New York City, for Michael Weinstein.
Paul, Weiss, Rifkind, Wharton & Garrison by Robert S. Smith, Karen A. Breslow, New York City, for First Eastern Bank, N.A.
Hellring Lindeman Goldstein & Siegel by Rachel N. Davidson, New York City, for Ernest Glantz.
Otterbourg, Steindler, Houston & Rosen, P.C. by Steven B. Soll, New York City, for Creditors Committee.
Greenberg Margolis by Kenneth J. Isaacson, Rosaland, N.J., for Richard Bober.
DECISION ON FIRST EASTERN BANK'S DEMAND FOR A JURY TRIAL ON COATED SALES, INC.'S PREFERENCE ACTION
On or about October 23, 1987, Coated Sales, Inc. ("CSI") borrowed $5,000,000 from First Eastern (the "First Eastern Term Loan"), pursuant to a 1-year unsecured term loan agreement. The First Eastern Term Loan was evidenced by a demand note, dated as of the same day. The First Eastern Term Loan remained outstanding and unpaid until April 4, 1988. On or about April 12, 1988, Coated Sales prepaid in full the First Eastern Term Loan by transferring the sum of $5,015,347.22 to First Eastern (the "Repayment").
On November 16, 1988, Coated Sales filed a Complaint in this Court, alleging that, inter alia, the Repayment made by Coated Sales (i) was made on account of an antecedent debt owed to First Eastern; (ii) was made while Coated Sales was insolvent; (iii) was made within 90 days before the Filing Date; and (iv) enabled First Eastern to receive more than it would have received if the Repayment had not been made and had First Eastern received payment of such debt to the extent permitted by the provisions of the Bankruptcy Code. Coated Sales further alleged that by reason of the foregoing, the Repayment to First Eastern on account of the First Eastern Term Loan constituted a voidable preference pursuant to § 547 of the Bankruptcy Code and, therefore, was recoverable by Coated Sales pursuant to §§ 547 and 550 of the Bankruptcy Code.
On January 6, 1989, First Eastern filed its Answer with affirmative defenses to the Complaint and demanded a trial by jury. Thereafter, on March 1, 1989, First Eastern filed three Proofs of Claim in these chapter 11 cases.
In its first proof of claim, First Eastern has asserted an unsecured claim of $151,575 against Pacstar Corporation, Inc., a debtor/subsidiary of Coated Sales, based upon a demand note annexed to that Proof of Claim. First Eastern's second Proof of Claim asserts an unsecured claim against Coated Sales in the amount of $151,575, based upon Coated Sales' purported guaranty of First Eastern's loans to Pacstar. First Eastern's third Proof of Claim asserts a contingent, secured claim to the extent First Eastern is entitled to "subrogation, indemnity and reimbursement" from Coated Sales on account of sums which First Eastern might pay to BancBoston Financial Company ("BancBoston"), with respect to BancBoston's claims against First Eastern for the recovery of some or all of the funds advanced by BancBoston to Coated Sales in April 1988 used to make the Repayment. The third Proof of Claim also asserts an unsecured, non-priority and unliquidated claim to the extent of Coated Sales' recovery from First Eastern in this Adversary Proceeding.
On August 7, 1990, Coated Sales filed its Objection and Motion to Expunge First Eastern's Proofs of Claim and asserted as its principal defense thereto the voidable preference received by First Eastern on or about April 12, 1988. Thus, the same claims being asserted affirmatively by Coated Sales in this Adversary Proceeding are asserted by Coated Sales defensively in its objection to First Eastern's claims.
The Supreme Court in Granfinanciera, S.A. v. Nordberg, ___ U.S. ___, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), determined that a defendant in an adversary proceeding arising in a bankruptcy case may be entitled to a jury trial even though the underlying action is considered a "core" matter under 28 U.S.C. § 157. In holding that the classification of an action as "core" was not dispositive of the right to a jury trial, the Court laid out a three-prong test to determine the issue. The Court focused on whether the action would have been at law or equity in eighteenth century England, and whether the remedy sought was equitable or legal in nature.1 Granfinanciera, 109 S.Ct. 2782. The third prong of the test sought to determine whether public or private rights were in issue; if public rights were implicated, the Seventh Amendment would not apply. Id. at 2795. In discussing the third prong, the Court read its previous cases, Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) and Schoenthal v. Irving Trust Co., 287 U.S. 92, 53 S.Ct. 50, 77 L.Ed. 185 (1932), as concluding that when an issue "arises as part of the process of allowance and disallowance of claims, it is triable in equity." Granfinanciera 109 S.Ct. at 2799. The implication drawn is that the bankruptcy claims process involves the determination of public rights. See In re Light Foundry Assoc., 112 B.R. 134 (Bankr.E.D.Pa.1990). The Court strongly affirmed this view by holding that since the petitioners in Granfinanciera had not filed claims against the estate, the trustee's fraudulent conveyance action did not arise "as part of the process of allowance and disallowance of claims" and, therefore, petitioner could not be divested of its right to a jury trial. Granfinanciera, 109 S.Ct. at 2799. Thus, the Court concludes that a defendant's right to a jury trial on a bankruptcy trustee's preference (or fraudulent transfer) claim depends upon whether the creditor has submitted a claim against the estate.2 Id.
A. Synopsis
As Granfinanciera makes clear, by submitting a claim against the bankruptcy estate, creditors subject themselves to the court's equitable power to disallow those claims. Concomitantly, when the claimant invokes the equitable jurisdiction of the bankruptcy court to establish its right to participate in distribution, it cannot, thereafter, object to the court's necessary determination of any misappropriations by the claimant.3See Katchen, 382 U.S. at 336, 86 S.Ct. at 476. This is true even though the debtor's claim may be legal in nature, and the Seventh Amendment might have entitled the creditor to a jury trial had it not submitted claims against the estate.4Granfinanciera, 109 S.Ct. at 2799, n. 14.
First Eastern argues that both the predecessors and progeny of Granfinanciera are factually distinguishable from the case at hand and, therefore, the law's application to First Eastern should have a different result. It is First Eastern's contention that since CSI commenced the adversary proceeding before the defendant filed any proofs of claim, that the defendant has not "waived" its right to a jury trial. First Eastern points out that in the vast majority of cases that discuss whether a party has submitted to the equitable jurisdiction of the bankruptcy court (and, thus, "waived" or "precluded" its right to a jury trial) the claimant had filed its proof of claim (or other claim) against the bankrupt estate before the estate had brought an adversary proceeding against that claimant (direct action or counterclaim). The defendant is correct that the present case is factually distinct in a chronological sense, however, the case law decisions have not focused on the timing of events in determining that the filing of a claim subjects the claimant to the equitable jurisdiction of the bankruptcy court. Katchen, itself, in its determination that it made no difference if the trustee was seeking affirmative relief via preference, or was merely objecting to the claim on that basis, can be read to intimate that the chronology of events is not dispositive.5 See Katchen, 382 U.S. at 334, 337-38, 86 S.Ct. at 475, 476-77. Similarly, Judge Lifland in In the Matter of Honeycomb, Inc., 72 B.R. 371 (Bankr.S.D.N.Y.1987), posited that the order of filing a claim and commencement of an adversary proceeding is not determinative. "Even should it be true that preference defendants retain a right to a jury trial on non-Katchen or Schoenthal facts (i.e., the Trustee asserts the preference offensively as in the present case), when the preference defendant has filed a claim against the debtor's estate, the rationale of Katchen still holds." Honeycomb, 72 B.R. at 377. These examples make clear that which party acts first, in other words, the chronology of events, is not determinative of the issue of submission to equitable jurisdiction.
Instead, when faced with a demand for a jury trial, courts have looked at various factors, including whether the estate's cause of action: (1) is legal or equitable in nature;6 (2) arises under plenary or summary jurisdiction;7 (3) is core or non-core;8 (4) involves public or private rights;9 and, (5) if the issue arises as part of the process of allowance and disallowance of claims.10
However, with regard to the present case, Granfinanciera seemingly moots the aforementioned inquiries by the negative implication of its statement that the petitioner who had not submitted a claim against the bankruptcy estate has a right to a jury trial. Granfinanciera, 109 S.Ct. at 2789-94. The Granfinanciera Court affirmed its holdings in Schoenthal and Katchen:
Because petitioners here, like the petitioner in Schoenthal, have not filed claims against the estate, respondent\'s fraudulent conveyance action does not arise "as part of...
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