A claim for actual or punitive damages resulting from dismissal of an involuntary petition entails the Seventh Amendment right to a jury trial, according to District Judge Cynthia M. Rufe of Philadelphia.
Creditors filed an involuntary petition that was dismissed. The putative debtor and his related companies filed two suits in bankruptcy court against the petitioners, one for costs and attorneys’ fees under Section 303(i)(1) and the second for actual and punitive damages under Section 303(i)(2).
The debtor and his co-plaintiffs demanded a jury trial and filed a motion for withdrawal of the reference of the claims for actual and punitive damages.
Judge Rufe, in her opinion filed on Sept. 1, held there was a right to a jury trial, following the Supreme Court’s 1989 decision in Granfinanciera SA v. Nordberg, which required a jury in a fraudulent transfer suit since the defendant had not filed a proof of claim, even though the claims were “core.”
Comparing the suit under the Bankruptcy Code to 18th century actions in England before the merger of law and equity, Judge Rufe said that a claim for punitive damages under Section 303(i)(2) “is analogous to a common law claim for malicious prosecution.” In addition, the plaintiffs were seeking “monetary damages, a remedy traditionally provided by courts at law.”
By analogy to Granfinanciera, Judge Rufe said the claims were “‘quintessentially suits at common law that more nearly resemble’ state-law tort claims and thus involve private rights” where there is a right to a jury trial.
Judge Rufe withdrew the reference of the suit under Section 303(i)(2) “in the interest of judicial economy,” given the plaintiffs’ jury trial rights. Judge Rufe directed that she would decide the claims against the defendants who had the plaintiffs’ contractual waiver of a jury. As to other defendants who could not raise a jury-trial waiver, Judge Rufe said that the jury would decide the claims.
The opinion is the latest installment in a 10-year saga where millions of dollars in damages already have been assessed against the involuntary petitioners, throwing off several significant decisions in the process. For the latest, holding that Section 303(i) does not preempt claims by non-debtors against unsuccessful petitioning creditors, click here to read ABI’s analysis. The Third Circuit’s decision on Aug. 29 created a split with the Ninth Circuit.