In re Kaiser Steel Corp., Civ. A. No. 88-K-1379

Citation109 BR 968
Decision Date15 December 1989
Docket NumberCiv. A. No. 88-K-1379,Bankruptcy No. 87 B 1552E.
PartiesIn re KAISER STEEL CORP., et al., Debtor. KAISER STEEL CORP., et al., Plaintiffs, v. Joseph A. FRATES, et al., Defendants. KAISER STEEL CORP., et al., Plaintiffs, v. Monty RIAL, et al., Defendants.
CourtUnited States District Courts. 10th Circuit. United States District Court of Colorado

H. Thomas Coghill, David J. Richman, Coghill & Goodspeed, Denver, Colo., James P. McCarthy, Lindquist & Vennum, Minneapolis, Minn., for Kaiser Steel Corp.

Theresa J. Collier, Holland & Hart, Denver, Colo., Robert J. Morrow, White & Case, New York City, for Clifford V. Brokaw, III.

Robert E. Darby, Reavis & McGrath, Los Angeles, Cal., and Ronald G. Rossi, Rossi & Judd, Denver, Colo., for William R. Gould and Howard P. Allen.

William D. Treeby, Barry W. Ashe, New Orleans, La., and William H. Haring, Bostrom, Haring & Hitt, Denver, Colo., for Lloyd G. Hansen.

Douglas M. Schwab, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., Darrell Waas, Otten, Johnson, Robinson, Ness & Ragonetti, Denver, Colo., for Richard N. Gary and Stephen A. Girard.

Frank S. Mosley, Davis, Polk & Wardwell, New York City, Jerome G. Snider, Davis, Polk & Wardwell, Washington, D.C., and Douglas M. Tisdale, Brownstein, Hyatt, Farber & Madden, Denver, Colo., for Donaldson, Lufkin & Jenrette.

William G. Imig, Ireland, Stapleton, Pryor & Pascoe, Denver, Colo., Todd E. Gordiner, Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., for Dean Witter.

Alan L. Bugg, Colorado Springs, Colo., for Calder & Co., et al., and Perma Pacific Properties.

Richard P. Slivka, David L. Dain, Vinton, Slivka & Panasci, Denver, Colo., for Charles S. McNeil, Monty H. Rial and Perma-Frates Joint Venture.

Paul F. Hultin, Parcel, Mauro, Hultin & Spaanstra, Denver, Colo., for Joseph A. Frates, Charles S. Holmes, Robert E. Merrick & Stan P. Doyle and Perma-Frates Joint Venture.

John D. Phillips, Hall & Evans, Denver, Colo., Morton G. Rosen, Steven L. Hoch, Gregory J. Khougaz, Santa Monica, Cal., for Charles H. Black.

I. Thomas Bieging, Morrato, Bieging, Burris & Colantuno, Englewood, Colo., for Miles B. Yeagley.

Harden Holmes, Holmes & Starr, Denver, Colo., Arnold Jacobs, Glenn Siegel, Shea & Gould, New York City, for Touche Ross Co.

Julia T. Waggener, Denver, Colo.

Jeffrey L. Beattie, Denver, Colo.

Thomas English, English, Jones & Faulkner, Tulsa, Okl.

Joseph N. Mole, Lemle, Kelleher, et al., New Orleans, La.

Joseph Girior, Little Rock, Ark.

J. Michael Morgan, Lohf, Shaiman & Ross, Denver, Colo.

Robert M. Duitch, Duitch & Johnson, Colorado Springs, Colo.

James P. Montague, Rosemead, Cal.

Craig Christensen, Sherman & Howard, Denver, Colo.

Wayne E. Borgeest, Wilson, Elser, Moskowitz, New York City.

Deborah Schier-Rape, Gibson, Dunn & Crutcher, Denver, Colo.

Michael E. Katch, Anderson & Wasserman, Denver, Colo.

Bruce D. Celebrezze, Sedgwick, Detert, et al., San Francisco, Cal.

Jay M. Finesilver, Lisa K. Shimel, Denver, Colo.

Arthur L. Sherwood, Gibson, Dunn & Crutcher, Los Angeles, Cal.

Leon C. Marcus, Booth, Marcus & Pierce, New York City.

Scott R. Schaffer, D'Amato & Lynch, New York City.

Steven H. Frankel, Karen B. Ksander, Sonnenschein, Carlin, et al., Chicago, Ill.


KANE, Senior District Judge.

These consolidated appeals present a difficult issue of first impression: does a defendant have the right to a jury trial in a bankruptcy adversary action when the claims against him are legal in nature and when he has filed a claim against the estate only in response to the adversary action? The defendants in the Frates1 and Rial2 litigation raise this issue, contending that the bankruptcy court erred in striking the jury demands of some defendants and denying other defendants leave to amend their answers to assert jury demands.3 They have appealed the bankruptcy court's rulings in three ways: by requesting leave to appeal, by motions to withdraw the reference and by petitions for writ of mandamus. I have consolidated these actions.

Whether a party is entitled to a jury trial in a bankruptcy adversary action has been the subject of much dispute. See generally, Gibson, Jury Trials in Bankruptcy: Obeying the Commands of Article III and the Seventh Amendment, 72 Minn.L.Rev. 967 (1988). In a recent decision, however, the Supreme Court attempted to clarify when a defendant in a bankruptcy adversary action is entitled to a jury trial. The Court held in Granfinanciera, S.A. v. Nordberg, ___ U.S. ___, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), that the defendant has the right to a jury trial if the claims against him are legal, rather than equitable, and he has not filed a claim against the estate. In so holding, the Court reaffirmed its rationale in an earlier case, Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), wherein the Court held that a party who had filed a claim against the estate was not entitled to a jury trial on the trustee's preference counterclaim because, in filing the claim, the party had subjected himself to the jurisdiction of the bankruptcy court.

Neither Granfinanciera nor Katchen directly address the situation raised in this case, where the defendants' counterclaims against the estate are defensive and would not have been filed but for Kaiser's adversary action against them. Consequently, I will discuss the factual background leading to this appeal, statutory law, the Katchen and Granfinanciera decisions and the potential application of these and other cases to this consolidated appeal.

I. Factual Background

This appeal arises out of the Frates and Rial litigation, adversary actions brought by the reorganized Kaiser based on the 1985 exchange of assets between the controlling groups of Kaiser before its bankruptcy. Before the 1985 exchange, the Frates and Perma Groups held equal interests in the company, although record ownership was in the Frates Group. In the 1985 exchange, the Perma Group acquired the Frates Group's interest in Kaiser. In addition, members of these two groups received compensation in the form of consulting fees, bonuses and commissions under the Transaction Incentive Program, or "TIPS."

In Frates (the "Exchange Case"), Kaiser has alleged twelve claims for relief against various defendants. They are for breach of fiduciary duty, negligence, impairment of capital, breach of contract, unjust enrichment, failure of consideration, fraudulent conveyance (under the Code and the Uniform Fraudulent Conveyance Act enacted as California law), and conspiracy and aiding and abetting a fraudulent conveyance. In Rial (the "TIPS Case"), Kaiser seeks to recover certain compensation paid to its former directors during the 1985 Exchange. It alleges claims premised on fraudulent conveyance, breach of fiduciary duty, unjust enrichment and conspiracy to commit fraud.4 In answering these complaints, several defendants asserted jury demands. In addition, many filed counterclaims against Kaiser. Other defendants who had not asserted jury demands then moved to do so. Kaiser responded by moving to strike the jury demands and opposing the motions to amend.

Ruling on these motions, the bankruptcy court considered the defendant's rights to a jury trial by first addressing its jurisdiction. The bankruptcy court concluded "that Congress intended core matters concerning the debtor's estate and the adjustment of the debtor/creditor relationships to be determined in summary proceedings." Thus, it held that the defendants had no right to a jury trial with respect to the core matters asserted in the Frates and Rial litigation — the claims for relief under §§ 541, 542, 544, 547, 548 and 550 of the Code which are based on a fraudulent conveyance theory.

As to the non-core claims, the bankruptcy court correctly noted that, under the post-Marathon jurisdictional scheme, it could not enter final judgment on non-core matters, absent the parties' consent. See 28 U.S.C. § 157(c)(1). It ruled, however, that a party need not expressly consent, but that consent could be "manifested by a defendant in an otherwise non-core proceeding commenced in the bankruptcy case seeking relief against the debtor or the debtor's estate by the filing of a counterclaim or proof of claim." Order at 14. Thus, it held that the claims for relief based on breach of fiduciary duty, negligence, impairment of capital, breach of contract, unjust enrichment, failure of consideration, conspiracy and aiding and abetting were non-core matters within the meaning of 28 U.S.C. § 157(c), but that the defendants had no right to a jury trial with respect these claims because they had filed counterclaims against the estate.5

Finally, the court severed the defendants' cross- and third party claims, finding that they had no effect on Kaiser's estate or the underlying bankruptcy case, and questioning whether it even had jurisdiction over the claims. The court stated that "this severance results in the prompt trial of the Plaintiff's claims and preserves to the defendants the right to a jury trial on the indemnification type claims asserted among them and by them against third parties." January 16 Order at 19, 20. In a footnote, the court additionally reasoned that the severance of the defendants' cross-and third party claims "does not impermissibly impair the defendants' right to a jury trial on the legal issues, even though there conceivably may be some res judicata effect from this Court's decision on the equitable issues." Id. at 20, n. 6 (citing Katchen v. Landy). On September 25, 1989, the bankruptcy court reaffirmed its ruling in response to a rehearing held in light of the then recent decision in Granfinanciera.

II. The Bankruptcy Code

Before the comprehensive revision of bankruptcy laws in 1978, it was assumed that the Seventh Amendment did not apply to bankruptcy matters because bankruptcy courts were courts of equity with limited jurisdiction, and under the Seventh Amendment, there was no right to...

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