Jury Trials and Bankruptcy Getting the Procedures Right

Journal Issue

Apr 2001

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Juries and bankruptcy, all of us have learned over the years, don't mesh particularly
well. Jury trials tend to take a long time and require large blocks of dedicated
time, while bankruptcies tend to demand speed and efficiency, and most discrete matters
occupy relatively short blocks of trial time. Jury trials tend to be controlled by
the litigants, with the court's role limited to law and evidence rulings. Indeed,
judges presiding over jury trials are usually quite circumspect, lest they unduly
influence the jury panel in favor of one or the other party. In most bankruptcy
matters, by stark contrast, judges are both the law-givers and the fact-finders,
and so can exercise enormous control over the flow of proceedings. Many bankruptcy
judges are quite proactive in comparison to their colleagues on the district and
magistrate benches.

Despite these differences, the hard legal fact is that the Constitution guarantees
a right to trial by jury in many matters that might arise in the course of a
bankruptcy case, as many cases at both the Supreme Court and circuit court
levels have found. Another equally harsh reality is that bankruptcy courts' status as
non-Article III tribunals makes the conduct of jury trials in that forum legally
troublesome. There are two easy and obvious fixes for these problems, but neither is
truly satisfactory. One is to simply staff the bankruptcy bench with Article III
judges, a solution that has thus far proven to be politically unpalatable. The other
is to revert to the summary versus plenary distinctions employed under the Act, a
course that tends to undermine the effort by Congress in enacting the Code to
centralize all bankruptcy and bankruptcy-related matters into a single forum.<a href="#1" name="1a">1</a> Neither
of these solutions is likely to emerge in the near future. We are thus left with
the current system of rules and procedures. Unfortunately, those rules and
procedures, in an effort to resolve the legal problems, create legal, practical and
ethical problems for both judges and practitioners alike. Others have addressed the
legal problems, and I will not try to improve on what they have had to say.
Fewer, unfortunately, have focused on the practical and moral problems.

Not many lawyers seem to really appreciate the practicalities associated with jury
demands, and fewer yet think about the moral dimensions. In this column, I want
to offer a primer on the practical issues (and some editorializing on some of the
ethical questions).

A party that decides it wants a jury trial<a href="#2" name="2a">2</a> must make a "timely demand." That
usually means a written statement simply demanding a jury trial, made within 10
days of the last active pleading filed in the case, directed to the issue for which
a jury is requested. Fed.R.Civ.P. 38(b). The demand may be incorporated
within a pleading, or may be a separate document. As a practical matter, you will
do your court a tremendous favor (and avoid charges of trying to "hide" the jury
demand in order to create error) if you file a separate pleading, denominated "jury
demand." Failure to timely demand a jury is treated as a waiver. Fed.R.Civ.P.
38(d). All of this is the easy part, and looks essentially the same as jury
demands in civil matters in district court.

From here, things get strange. The Judicial Code authorizes bankruptcy judges to
conduct jury trials, but only if (a) the district court has "specially designated"
the bankruptcy judges of the district to conduct jury trials,<a href="#3" name="3a">3</a> and (b) both parties
consent to the bankruptcy judge's conducting the jury trial. This second element becomes
important because, in the vast majority of cases, the only real reason for demanding
a jury has less to do with a party's deep and abiding respect for the jury system
and much more to do with either delay or forum-shopping. Not surprisingly, then,
most jury demands are accompanied by (or include) a statement that the party demanding
the jury does not consent to the conduct of the jury trial by the bankruptcy judge.<a href="#4" name="4a">4</a>

Another way to substantially assure that the jury trial matter will not be
conducted by the bankruptcy judge is to demonstrate that the matter is a non-core
matter.<a href="#5" name="5a">5</a> If one party refuses to consent to the bankruptcy judge's entering final
judgment in a non-core matter, then the bankruptcy judge may only enter proposed
findings and conclusions, which are then reviewed de novo by the district judge, to
the extent they are challenged by a party. The district judge, in that
circumstance, enters the final judgment. If a non-core matter was tried with both
parties' consent, but one party still refused to consent to the bankruptcy judge's
entry of final judgment, the resulting procedure would probably violate the
Constitution. This is because the Seventh Amendment prohibits retrial of any matter
decided by a jury, and de novo review probably counts as a retrial.

These two "poison pills" thus all but assure that the matter cannot be heard by
the bankruptcy judge, accomplishing the tactical objective normally intended by the
party making the jury demand. What many lawyers miss, however, is that the
bankruptcy judge has no legal or procedural means to transfer or dismiss the case.
Asking for a jury is an exercise of a constitutional right—it does not operate to
defeat subject-matter jurisdiction and is therefore not grounds for dismissal. And
transfer is impossible because matters come to the bankruptcy court via referral

(albeit a general referral) from the district court. Referral is a one-way street,
however. Bankruptcy judges can't refer cases back to the district court.

The district court can withdraw the reference, of course, and that is what ought
to happen once a "poison pill" has been inserted into a matter. But how is the
district court to even know that it should withdraw the reference? After all,
district judges never see cases that are filed with the bankruptcy clerk. Many
lawyers seem not to realize this. If you, the lawyer, do not affirmatively ask
the district court, in a pleading filed with the district clerk, to withdraw the
reference for the matter, then nothing will happen! The bankruptcy judge will have
to set the matter on a trial docket, with all of its poison pills, leading to
inevitable error, costly trial, reversal and retrial. Any party that intentionally
went down that road is squarely on course for sanctions under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§1927</a>.

So, if you inserted the poison pills, then be sure to follow through. Petition
the district court to withdraw the reference. The district court might well elect to
withdraw only the trial portion, leaving pretrial and discovery matters to be handled
by the bankruptcy judge (perhaps neutralizing many or most of the forum-shopping
aspects of jury demands, at least). But one final note of caution: be sure that
you actually have a right to a trial by jury in the first place. There are many
situations in bankruptcy when that right is either not available or has been waived.
Usually, the question of entitlement will (and should) be made by the bankruptcy
judge, so submit a brief with your jury demand, please.

In the best of all possible bankruptcy worlds, neither courts, parties nor
lawyers would have to learn the byzantine byways of jury trial law and procedure in
bankruptcy. But we do not live in the best of all possible bankruptcy worlds, and
are not likely to for some time. In the meantime, it behooves lawyers to learn
how to do it right. Not doing it right creates a procedural nightmare for both the
courts and their clerks, and unnecessarily increases the costs of litigation. Doing
it wrong also, unfortunately, tends to corrode the relationship between bankruptcy
judges and district judges. I personally find current usage of jury demands ethically
offensive, but there is little that I or any other judge can do about that. One
can never be sanctioned for exercising a Constitutional right. But if you are going
to exercise that right, for whatever motivation (virtuous or otherwise), at least
do us the courtesy of doing it right.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> The old summary/plenary distinction led to costly and time-consuming litigation over whether a given matter was one or the other. It also
drove up the cost of bankruptcy reorganization, requiring counsel to conduct litigation in multiple forums at the same time. Most nefariously,
it offered numerous opportunities for abuse to those intent on frustrating the bankruptcy process. <a href="#1a">Return to article</a>

<a name="2">2</a> The decision to "want" a jury trial is primarily tactical. The Constitution guarantees a "right" to a trial by jury in civil matters, but
lawyers will opt for juries only when it offers a tactical advantage. In bankruptcy, those advantages usually come down to two: (1) asking
for a jury usually means getting a different judge, and (2) asking for a jury almost always assures a substantial delay in the conduct
of a trial on the merits. Both intentional delay and intentional judge shopping, in other contexts, are usually considered to be ethically
questionable. They become less so when they enjoy Constitutional cover. <a href="#2a">Return to article</a>

<a name="3">3</a> In most cases, this is accomplished by standing order, though the statute permits a district court to do this on a case-by-case basis.
Because bankruptcy matters are filed in a different clerk's office, district judges are not aware of matters that appear on the bankruptcy
judge's docket, so there is little opportunity for district judges to "specially designate" on a case-by-case basis, absent a motion directed
to the district court. The standing order, or general order, procedure has proven to be more efficient in most districts. <a href="#3a">Return to article</a>

<a name="4">4</a> It would be helpful to Congress and the courts to see if this author's instincts (and personal experience) on this point is borne out by
the actual data—which is retrieved easily enough, it would seem. <a href="#4a">Return to article</a>

<a name="5">5</a> Section 157(b)(2) of title 28 defines matters that are core. Everything else is non-core. The section also describes how non-core
matters are to be handled. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §157(c)</a>. <a href="#5a">Return to article</a>

Journal Authors

Leif M. Clark

Journal Date

Sunday, April 1, 2001 - 12:00

Bankruptcy Rule

2001