In re Hudson, Bankruptcy Adv. No. S-92-00216-8-AP.

• Citation: 170 BR 868
• Decision Date: 02 August 1994
• Docket Number: Bankruptcy Adv. No. S-92-00216-8-AP.
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: In re Harold Leroy HUDSON, Jr. and Karen Jackson Hudson, Debtors. Ocie F. MURRAY, Jr., Trustee, Harold Leroy Hudson, Jr., Debtor, and Karen Jackson Hudson, Debtor, d/b/a Amana Mechanical Construction and Steel Erectors, Plaintiffs, v. RICHMOND STEEL & WELDING CO., Defendant.

170 B.R. 868 (1994)

In re Harold Leroy HUDSON, Jr. and Karen Jackson Hudson, Debtors.

Ocie F. MURRAY, Jr., Trustee, Harold Leroy Hudson, Jr., Debtor, and Karen Jackson Hudson, Debtor, d/b/a Amana Mechanical Construction and Steel Erectors, Plaintiffs, v. RICHMOND STEEL & WELDING CO., Defendant.

Bankruptcy Adv. No. S-92-00216-8-AP.

United States District Court, E.D. North Carolina.

August 2, 1994.

COPYRIGHT MATERIAL OMITTED

Ocie F. Murray, Jr., Fayetteville, NC, for plaintiffs.

Walter L. Hinson, Wilson, NC, Richard G. Buckner, Rockingham, NC, for defendant.

ORDER

HOWARD, District Judge.

This matter is before the court on the plaintiffs' motion to refer this adversary proceeding back to the United States bankruptcy court for a non-jury trial. The motion was made by the bankruptcy trustee ("the trustee") during a hearing held by the court at the Federal Courthouse in Greenville, North Carolina, on May 13, 1994. Defendant objected to the motion, and the parties presented oral argument at the hearing. The matter is ripe for disposition.

STATEMENT OF THE FACTS

The trustee filed this adversary proceeding on behalf of the debtors on October 20, 1992. The complaint and the answer indicate that the defendant was a subcontractor on a school construction project in North Carolina and that the debtors were sub-subcontractors hired by the defendant to perform steel erection work on the project. The trustee alleged that the debtors "fully and faithfully" performed the work and that the defendant unjustly refused to pay $67,000 the defendant owed the debtors under the parties' contract.

Defendant filed an answer and a counterclaim on June 25, 1993. Defendant admitted that the debtors performed part of the steel erection work required by the parties' contract. However, the defendant contended that the debtors failed to complete the work and that the defendant was forced to hire someone else to complete the work "at a substantial expense." Answer, ¶ 5.

Defendant further alleged that the debtors fraudulently induced the defendant to pay the debtors for their steel erection work by submitting intentionally false affidavits stating that the debtors had fully paid all of the suppliers they used to complete their work under the subcontract with the defendant. Because the debtors allegedly did not fully pay their suppliers, the defendant contends that it was forced to pay the suppliers after it had already paid the debtors.

Defendant further alleged that the debtors' failure to complete the steel erection work in a timely and satisfactory manner caused the general contractor on the school construction project to withhold payment on the general contractor's contract with the defendant subcontractor. As a result, the defendant alleged that it was engaged in litigation with the general contractor and that it was incurring substantial legal expenses.

Defendant concluded its answer to the adversary proceeding complaint by lodging a counterclaim seeking

a sum to be assessed by a jury in order to compensate this Defendant for its losses as alleged, for such sums to bear interest at the lawful rate from the date of breach of contract by the debtors or from the date of the commission of the first fraudulent act, which ever date occurred first, as well as the costs of this action, including reasonable attorney fees.

Defendant also made a formal demand for a jury trial on all issues.

The parties have stipulated that all allegations supporting the defendant's counterclaim "occurred before the debtors filed their petition in bankruptcy on August 5, 1991." 7/5/94 Stip. at 1.

In an order filed May 3, 1994, the court acknowledged that "because of the decision by the United States Court of Appeals for the Fourth Circuit in In re Stansbury Poplar Place, Inc., 13 F.3d 122 (4th Cir.1993), bankruptcy jury trials must be conducted in the district court." However, the court noted that under relevant case law, the defendant may have lost its right to a jury trial by filing a counterclaim in its answer to the trustee's adversary proceeding complaint. The court scheduled the aforementioned May 13 hearing to allow the parties to present argument on this matter.

At the hearing, the defendant argued that its counterclaim was compulsory and that the filing of such a counterclaim could not equitably operate as a waiver of the right to a jury trial. The trustee contended that the defendant had lost its right to a jury trial by submitting the counterclaim, regardless of whether it was permissive or compulsory.

Both the debtors and the trustee also stated that they would be willing to consent to a jury trial before a bankruptcy judge.

DISCUSSION OF THE LAW

I. History of Bankruptcy Jury Trials

The court finds it appropriate to lay the groundwork for this discussion by briefly reviewing the history of jury trials in bankruptcy cases. The court's history is based on the thorough scholarship provided in Jury Trials in Bankruptcy: Obeying the Commands of Article III and the Seventh Amendment, 72 Minn.L.Rev. 967 (May 1988) (hereinafter "Gibson at ____").

The Bankruptcy Act of 1898 based the right to jury trials in bankruptcy on a distinction between summary and plenary proceedings. "Summary proceedings" included three types of cases: "administrative matters arising in the course of bankruptcy proceedings," issues of title and possession regarding assets in the custody of the bankruptcy courts, and "matters submitted to the bankruptcy courts with the consent of the parties, even if the disputes involved property not within the courts' custody." Gibson at 971 n. 20. "Plenary proceedings" included "`litigation involving the bankruptcy trustee and third parties brought in the form of an ordinary civil action.'" Gibson at 1013 n. 213, quoting J. Moore & W. Phillips, Debtors' and Creditors' Rights at 6-2 (1966).

"Proceedings falling within the bankruptcy court's summary jurisdiction were generally conducted by bankruptcy referees¹ without the aid of a jury, while . . . the right to a jury trial in plenary proceedings was determined either by the seventh amendment or by nonbankruptcy state or federal law." Gibson at 971-72 (footnotes omitted).

There were, however, two statutory exceptions to the rule barring jury trials in summary proceedings. First, a person against whom an involuntary bankruptcy petition was filed could demand a jury trial on the questions of insolvency and commission of acts of bankruptcy. Second, a 1970 amendment to the 1898 Act provided for jury trials in proceedings before the bankruptcy court to determine the dischargeability of debts.

Gibson at 972-73 (footnotes omitted). "The Bankruptcy Act of 1898 was silent as to who should conduct the summary proceedings jury trial in the two exceptional situations in which the statute established such a right." Gibson at 974. Bankruptcy rules issued in 1973 by the Judicial Conference provided that the trials could be conducted by bankruptcy referees unless a debtor requesting a jury trial made a specific request for a district judge to conduct the trial. Id.

Other than the two summary proceedings jury trials described above, "the Bankruptcy Act of 1898 provided no jury trial rights. In addition, it was generally believed that there was no constitutional entitlement to a jury trial in summary proceedings." Gibson at 973.

Congress specifically addressed the right to bankruptcy jury trials when it enacted a comprehensive new set of bankruptcy laws in 1978. The new statutes provided in part in 28 U.S.C. § 1411:

"(a) Except as provided in subsection (b) of this section, this chapter and title 11 do not affect any right to trial by jury, in a case under title 11 or in a proceeding arising under title 11 or arising in or related to a case under title 11, that is provided by any statute in effect on September 30, 1979.

(b) The bankruptcy court may order the issues arising under section 303 of title 11 governing involuntary bankruptcies to be tried without a jury."

Gibson at 975 (quoting the statute). Subsection (b) "expressly and intentionally reversed the jury trial practice for involuntary bankruptcies under the Bankruptcy Act of 1898." Gibson at 975. "The impact of subsection (a) on preexisting law, however, was less easily determined." Gibson at 976.

Subsection (a) was subject to two primary interpretations. The first held that the subsection intended to maintain existing jury trial rights which depended on the distinction between summary and plenary proceedings. The second interpretation held that the subsection intended to "abandon the summary/plenary dichotomy" and thus make the right to a jury trial depend on

the same analysis as that applied by the district courts in a civil case. The court was required to analyze both the nature of the claim and the relief sought. If equitable in nature, there was no right to a jury trial. If legal, however, there was a jury trial right.

Gibson at 976-77 (footnotes omitted). Under either interpretation, "there was apparent agreement that the bankruptcy judge was authorized to conduct" any jury trials allowed in the bankruptcy court. Gibson at 986.

The 1978 restructuring of the bankruptcy laws was rejected in part by the Supreme Court in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In a plurality opinion whose judgment was joined by a majority of the justices,

Justice Brennan concluded that the 1978 Act violated article III of the Constitution by vesting the `essential attributes of the judicial power\' in bankruptcy judges who lacked lifetime tenure and protection against salary diminution.

Gibson at 986 n. 84. In the wake of Northern Pipeline, the district courts adopted an emergency rule which "expressly prohibited bankruptcy judges from conducting jury trials, . . . thus requiring the district judges to conduct any bankruptcy jury trials that took place." Gibson at 987-88.

Congr...