Kapila v. Bank of Am., N.A. (In re Pearlman), Case No. 6:07-bk-00761-KSJ
| Decision Date | 16 July 2013 |
| Docket Number | Adversary No. 6:09-ap-00054-KSJ,Case No. 6:07-bk-00761-KSJ |
| Parties | In re LOUIS J. PEARLMAN et. al., Debtors. SONEET R. KAPILA, Plaintiff, v. BANK OF AMERICA, N.A., Defendant. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida |
In re LOUIS J. PEARLMAN et. al., Debtors.
SONEET R. KAPILA, Plaintiff,
v.
BANK OF AMERICA, N.A., Defendant.
Case No. 6:07-bk-00761-KSJ
Adversary No. 6:09-ap-00054-KSJ
UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION
Dated: July 16, 2013
The Chapter 11 Trustee, Soneet R. Kapila, has requested a jury trial in this adversary proceeding seeking the recovery of numerous alleged fraudulent transfers made by the Debtors to the Defendant and other similarly situated banks in furtherance of a massive Ponzi scheme. The Court concludes that the Trustee is not entitled to a jury trial and denies his request.
On March 1, 2007, four creditors1 filed an involuntary bankruptcy petition against Louis J. Pearlman under § 303 of the Bankruptcy Code.2 This petition prompted other involuntary bankruptcies.
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Debtor Louis J. Pearlman and his co-debtor companies—Trans Continental Airlines ("TCA"), Trans Continental Records ("TCR"), and Louis J. Pearlman Enterprises ("Enterprises")—allegedly carried out three different fraudulent schemes. Two of the schemes offered 'investments" fitting the classic Ponzi scheme model. The third scheme was a so-called "Bank Fraud Scheme," in which Pearlman and TCA fraudulently obtained large loans by falsifying due diligence materials to "con" the banks, including the Defendant, into lending the Debtors millions of dollars.3 The loans allegedly were used to pay the Debtors' investors and to keep the two other Ponzi schemes going. For example, the Defendant in this adversary proceeding, Bank of America, loaned the Debtors over $20 million in various revolving loans.4 The Debtors repaid nearly $10 million to the Defendant with capital provided by new investors before the house of cards came tumbling down and the Debtors were forced into bankruptcy.
The Court appointed Mr. Kapila as a Chapter 11 Trustee to marshal the Debtors' assets and to liquidate the jointly administered and later substantively consolidated estates.5 The Trustee filed over 700 adversary proceedings against the Defendant and others to avoid and recover fraudulent transfers made pursuant to §§ 544, 548, and 550 of the Bankruptcy Code and Chapter 726 of the Florida Statutes. The Trustee filed this four-count adversary proceeding on February 27, 2009, against the Defendant to recover, as fraudulent transfers, the loan payments Bank of America received from the Debtors during the four years prior to bankruptcy.6 Counts I
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and II assert actual fraud under bankruptcy and Florida law because they were made to perpetuate the Ponzi scheme and with the actual intent to hinder, delay or defraud present and future creditors of the Debtors.7 Counts III and IV assert constructive fraud arguing that, to the extent the Debtors were operating a Ponzi scheme, they were insolvent and allegedly received less than reasonably equivalent value in exchange for the loan payments made to the Defendant.8
Bank of America filed a motion to dismiss the Trustee's complaint on May 11, 2009,9 but, before the Court ruled on the motion, the Trustee requested that the Court implement procedures to resolve all pending adversary proceedings filed against similarly situated bank defendants.10 At a hearing on July 16, 2009, the Court directed the Trustee, the Official Committee of Unsecured Creditors, and counsel for each bank to propose "test case" procedures that would govern the resolution of all of the adversary proceedings. On August 3, 2009, all cases relating to the Bank Fraud Scheme were stayed until further order of the Court.11
On April 16, 2010, this Court entered a Bank Test Case Order adopting specific procedures designed to facilitate the orderly, prompt, and efficient resolution of the bank fraud cases.12 The Bank Test Case Order classified the claims into two scenarios. Test Case No. 1 assessed the Trustee's claims for actual fraudulent transfers against the banks, while Test Case No. 2 tested the viability of the Trustee's claims for constructively fraudulent transfers.13
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On December 2, 2010, the Court denied the lead bank's motion to dismiss the actual fraudulent transfer claims in Test Case No. 1,14 and further stayed all dates and deadlines until "eleven days after the date of the entry of an order of the District Court on an appeal of the ruling on the Test Case No. 1."15
The District Court affirmed this Court's ruling on the actual fraudulent transfers in Test Case No. 1 on September 7, 2012.16 Accordingly, the stay of this adversary proceeding terminated on September 18, 2012. Eleven days later, on October 5, 2012, the Trustee filed a demand for jury trial, more than three years after the adversary proceeding was filed, but two months prior to the deadline of December 21, 2012, established in the case management order.17
Bank of America, like many of the other bank defendants,18 raises various arguments opposing a jury trial by the Trustee.19 It argues the Trustee's jury demand was untimely. It argues that the underlying loan documents specifically waive any right to a jury trial and that the Trustee is bound by this waiver. It argues that the equitable claims resolution process arising upon the filing of a proof of claim trumps any right the Trustee otherwise may have to try his fraudulent transfer claims before a jury. It lastly argues that, even is no proof of claim is filed, the inherent nature of the Trustee's role as administrator of this equitable estate and his reliance on his avoiding powers prevents him from seeking a jury trial. The Trustee disputes each of these arguments. I will address each of these arguments in turn.
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A request for jury trial under Federal Rule of Civil Procedure 38 is not absolute. Parties waive their right to a jury when they fail to make a timely request.20 A party seeking a jury trial must serve a written demand on interested parties no later than fourteen days after the last responsive pleading is filed.21 Because the right to a trial by jury is a fundamental constitutional right, "courts must indulge every reasonable presumption against waiver."22
Here, the Trustee filed his request for a jury trial on October 5, 2012, well before the deadline to amend pleadings of December 21, 2012.23 Even though the demand was made long after the complaint was filed on February 27, 2009, the delay was reasonable under the circumstances.
All parties were focused on the Bank Test Case One and Two issues, the appeal to the District Court, and the determination of whether substantive consolidation was merited and would moot the constructive fraud counts. Indeed, this adversary proceeding was formally stayed until after the District Court entered its ruling on September 7, 2012. Until these preliminary issues were resolved and the stay was lifted, this and similar adversary proceedings remained in embryonic form. The Trustee's jury trial demand is deemed timely under Rule 38.
Even if the Trustee's demand were untimely, however, courts have broad discretion to grant a tardy demand for jury trial under Rule 39, which allows a court to "order a jury trial on any issue for which a jury might have been demanded."24 In the Eleventh Circuit, a court generally should overlook the delay and "grant a jury trial in the absence of strong and compelling reasons to the contrary," considering these factors:
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(1) whether the case involves issues which are best tried to a jury; (2) whether granting the motion would result in a disruption of the court's schedule or that of the adverse party; (3) the degree of prejudice to the adverse party; (4) the length of the delay in having requested a jury trial; and (5) the reason for the movant's tardiness in requesting a jury trial.25
The Eleventh Circuit Court of Appeals directs courts to give significant weight in the analysis to a party's reason for making the belated request.26
For the same reasons the Court earlier found the Trustee's demand timely, the Court also holds that an extension of time, until December 21, 2012, is merited to request a jury trial. The delay, if any, in making the demand for a jury trial is understandable in the context of this complex litigation. Given the imposition of the stay, the extensive litigation on preliminary issues raised by the motions to dismiss, and the "inextricably interwoven state of the Debtors' financial affairs and the costs [and time] associated with unwinding the financial mess,"27 the Court finds sufficient justification for the Trustee's perhaps belated request for a jury trial.
A modest extension of time does not disrupt the Court's schedule or cause any unwarranted prejudice to any adverse party. The fact that the Trustee made his demand eleven days after the stay lifted indicates that he did not act dilatorily. The bank test procedures imposed an important "breather" allowing the defendants, who now oppose the Trustee's jury trial demand, a chance to watch from the sidelines while the Trustee and the lead bank tirelessly labored to resolve the preliminary issues. Allowing belated jury trial demands under these circumstances would impose no undue prejudice upon the idling defendants, nor would this Court find any of the other factors compelling enough to justify abrogating the Trustee's Seventh Amendment rights.
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Bank of America next argues that the underlying loan documents executed by the parties waived any right to a jury trial and that the Trustee is bound by this waiver.28 Paragraph 24 of the Third Amendment to the loan agreement, executed by the Debtor on June 15, 2005, states:
24. Waiver of Trial by Jury. Borrower, Guarantor, and Bank hereby knowingly, irrevocably, voluntarily, and intentionally waive any right to a trial by jury in respect of any litigation based on this Third Amendment, the other Loan Documents, or any other documents...
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