In re Hooper

• Decision Date: 10 April 1990
• Docket Number: Adv. No. C85-0809-H11.,BAP No. SC-88-1554-PAsR,Bankruptcy No. 85-01972-LM11
• Citation: 112 BR 1009
• Parties: In re C. Cortland HOOPER and Carole H. Goode, Debtors. Mary Ann SCHIEBER, an individual, Appellant, v. C. Cortland HOOPER, an individual, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

112 B.R. 1009 (1990)

In re C. Cortland HOOPER and Carole H. Goode, Debtors Mary Ann SCHIEBER, an individual, Appellant, v. C. Cortland HOOPER, an individual, Appellee.

BAP No. SC-88-1554-PAsR, Bankruptcy No. 85-01972-LM11, Adv. No. C85-0809-H11.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted May 23, 1989.

Decided April 10, 1990.

Seth T. Karpinski, Duckor & Spradling, San Diego, Cal., for appellant.

Eric Wolf, San Diego, Cal., for appellee.

Before PERRIS, ASHLAND and RUSSELL, Bankruptcy Judges.

OPINION

PERRIS, Bankruptcy Judge:

Plaintiff filed an adversary proceeding alleging that a debt owed her by the debtor was nondischargeable under 11 U.S.C. § 523(a)(2), (4) and (6).¹ From a judgment determining the debt to be dischargeable, plaintiff brings this appeal, contending that the bankruptcy court erred in striking her demand for a jury trial and in granting a non-suit as to her claim under section 523(a)(4). We AFFIRM.

FACTS

Defendant/appellee C. Cortland Hooper ("Hooper") is a real estate broker licensed in California. Hooper is also a shareholder and principal officer of Hooper, Goode Realty ("HGR"), a California corporation engaged in the real estate development business. HGR is the general partner of H.G.B., Ltd., a California limited partnership involved in the development of real property in San Diego known as the Old Town Financial Center ("the development project").

In 1980, plaintiff/appellant Mary Ann Schieber ("Schieber") loaned $100,000 to Hooper for the development project. Schieber, who was at that time going through a divorce from her husband of 30 years, contends that in exchange for the loan, Hooper agreed to assist and advise her in her dissolution and in other matters. Although the parties did not execute any documents evidencing the loan in 1980, Hooper gave Schieber a promissory note for the unpaid balance plus accrued interest in March of 1981. The note was renewed, through the execution of new notes, in September of 1982, 1983 and 1984.

The obligation was not paid and on November 26, 1984, HGR filed a Chapter 11 petition. On May 1, 1985, Hooper and Carol H. Goode ("Goode") filed a joint Chapter 11 petition.

Subsequently, Schieber filed the instant adversary proceeding against Hooper and Goode,² alleging that the debt arising from the above-described loan was nondischargeable under 11 U.S.C. §§ 523(a)(2), (a)(4) and (a)(6) and demanding a jury trial. The bankruptcy court granted Hooper's motion to strike Schieber's demand for a jury trial, indicating that there is no right to a jury trial in a dischargeability proceeding.

The proceeding was tried on February 25 and March 4, 1988. Following the close of Schieber's case, the bankruptcy court granted Hooper's motion for involuntary dismissal as to the counts alleging nondischargeability under sections 523(a)(4) and (a)(6). Following completion of the trial, the bankruptcy court found in favor of Hooper on the section 523(a)(2) claim and entered a judgment determining the debt to be dischargeable. Schieber filed this timely appeal.

ISSUES

1. Whether Schieber has a Seventh Amendment right to a jury trial in her adversary proceeding to determine the dischargeability of a debt.

2. Whether the bankruptcy court erred in granting Hooper's motion for involuntary dismissal as to Schieber's section 523(a)(4) claim.³

STANDARD OF REVIEW

Entitlement to a jury trial is a question of law that is reviewed de novo. Standard Oil Co. v. Arizona, 738 F.2d 1021, 1022-23 (9th Cir.1984), cert. denied, 469 U.S. 1132, 105 S.Ct. 815, 83 L.Ed.2d 807 (1985). A dismissal pursuant to Fed.R. Civ.P. 41(b) is viewed as a judgment in defendant's favor following a trial to the court. Great American Houseboat Co. v. United States, 780 F.2d 741, 746 (9th Cir. 1986). In reviewing such a judgment, a bankruptcy court's findings of fact will not be reversed unless clearly erroneous, see Bankruptcy Rule 8013, and conclusions of law are reviewed de novo. In re Lewis, 79 B.R. 893, 895 (9th Cir. BAP 1987).

DISCUSSION

1. Whether Schieber has a Seventh Amendment right to a jury trial in her adversary proceeding to determine the dischargeability of a debt.

Schieber contends that she has a right to a jury trial in her action to determine the dischargeability of a debt under the Seventh Amendment to the Constitution.⁴ The Seventh Amendment preserves the right to trial by jury in "suits at common law." In Granfinanciera, S.A. v. Nordberg, ___ U.S. ___, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), the Supreme Court defined the analysis to use in determining when the Seventh Amendment right to a jury trial attaches in a bankruptcy case. In holding that a party who had not filed a claim against the bankruptcy estate had a right to a jury trial in an action by the trustee to recover an allegedly fraudulent transfer of money, the Supreme Court set out a three step test based upon traditional Seventh Amendment law/equity analysis:

The form of our analysis is familiar. `First, we compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature.\' Tull v. United States, 481 U.S. 412, 417-18, 107 S.Ct. 1831, 1835, 95 L.Ed.2d 365 (1987) (citations omitted). The second stage of this analysis is more important than the first. Id. at 421, 107 S.Ct. at 1837. If, on balance, these two factors indicate that a party is entitled to a jury trial under the Seventh Amendment, we must decide whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as a factfinder.

109 S.Ct. at 2790.

The primary question, which is addressed by examining the nature of the claim and the relief requested under the first two prongs of the Granfinanciera test, is whether the proceeding at issue is legal or equitable in nature. Schieber contends that her claim is legal in nature because she seeks money damages for fraud, breach of fiduciary duty and willful and malicious conduct, which involve actions at law that were historically tried to a jury. Hooper contends that the proceeding essentially sought a declaration that the debt at issue was nondischargeable and that in that sense it was an equitable proceeding.

These opposing contentions illustrate the dual nature of a dischargeability proceeding and reveal the importance of characterizing precisely the nature of the proceeding. On the one hand a dischargeability proceeding can be a proceeding to establish the liability for and amount of a debt arising from, for example, fraud, breach of fiduciary duty or willful and malicious conduct. In this regard, the proceeding can often be legal in nature. The crux of a dischargeability proceeding, however, determines whether the debt at issue is excepted from the bankruptcy discharge. If, as in this case, it is determined that the debt, if any, is not excepted from discharge, the court need not reach questions of liability and amount.

The critical question, therefore, is whether a proceeding which addresses solely the issue of dischargeability, as opposed to questions of liability or amount, is legal or equitable under the test set out in Granfinanciera. Turning first to the historical component of the Granfinanciera test, although there may be support for the proposition that an action to recover money damages for fraud, breach of fiduciary duty, or willful and malicious conduct was the type of action that would have been brought in a court of law in the courts of England prior to the merger of law and equity, Schieber cites no authority indicating that the issue of dischargeability would have been determined in a court of law. To the contrary, a bankruptcy discharge and questions concerning the dischargeability of certain debts, involve issues with an equitable history and for which there was no entitlement to a jury trial in the courts of England prior to the merger of law and equity. See Countryman, The New Dischargeability Law, 45 Am.Bankr.L.J. 1, 36-39 (1971).

Moreover, the genesis of bankruptcy relief was in proceedings brought in English courts of equity. See 1 Norton Bankruptcy Law and Practice § 16.02 (1981). Issues surrounding a debtor's discharge and the dischargeability of certain debts are inextricably bound to and arise only in connection with bankruptcy relief because such issues concern whether the debtor will be granted the protection and benefits of bankruptcy. See id. This close and inextricable tie to the historically equitable bankruptcy process provides a further indication of the equitable roots of dischargeability issues.

An examination of the remedy sought also indicates that the dischargeability issue is equitable in nature. The ultimate relief sought is a determination that, as to a particular debt, the creditor is not bound by the injunctive effects of a discharge under section 524(a).

Because of the equitable nature of the remedy sought and the historically equitable roots of dischargeability issues, under the test of Granfinanciera,⁵ Schieber is not entitled to a jury trial on the issue of dischargeability.⁶ Although there may be a right to a jury trial on the underlying issue of damages,⁷ the bankruptcy court found the debt dischargeable and did not reach the damages question. Accordingly, there was no right to a jury trial on the issues addressed in the court below, and we determine that the bankruptcy court did not commit reversible error in striking Schieber's jury trial demand.

2. Whether the bankruptcy court erred in granting Hooper's motion for involuntary dismissal as to Schieber's section 523(a)(4) claim.

11 U.S.C. § 523(a)(4) provides that an individual debtor is not discharged from any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Schieber...