By filing a counterclaim in bankruptcy court for breach of contract, a creditor lost the right to a jury trial on a contract made during a chapter 11 reorganization.
The debtor provided construction services on oil and gas pipelines. After the chapter 11 filing, the debtor signed a contract with a pipeline owner. Several months later, the pipeline owner terminated the contract, disputed almost $700,000 in bills, and contended that the debtor did not perform in a workmanlike manner.
The debtor filed an adversary proceeding in bankruptcy court for breach of contract and injunctive relief. Nine days later, the pipeline owner filed suit in federal district court in an adjoining state, alleging breach of contract and fraud and seeking $1 million in money damages. The district judge administratively closed the case, citing the automatic stay without reference to 28 U.S.C. § 959(a).
Tossed out of district court, the pipeline owner answered the complaint in the adversary proceeding and filed a counterclaim seeking $1.2 million in damages for breach of contract. The pipeline owner demanded a jury trial but consented to having the bankruptcy judge conduct the jury trial. The debtor moved to strike the jury trial demand and won.
In an opinion on Jan. 10, Bankruptcy Judge David T. Thuma of Albuquerque, N.M., said that the pipeline owner lost the right to a jury trial by raising a counterclaim for money damages.
Judge Thuma cited Granfinanciera for the Supreme Court’s declaration that the Seventh Amendment protects jury trial rights “only if the action is legal in nature and involves a matter of private right.” Because breach of contract claims are legal in nature, Judge Thuma said the pipeline owner would have had a right to a jury trial absent the debtor’s bankruptcy.
On the other hand, Judge Thuma cited Langenkamp, where the Supreme Court held that a creditor waives the right to a jury trial by filing a claim in bankruptcy.
Combining the two concepts, Judge Thuma cited the Tenth Circuit’s unreported Bayless opinion from 1991 for the majority view that a creditor waives the right to a jury trial when it files a counterclaim for monetary relief against a debtor, thus invoking the claims resolution process.
The minority view, Judge Thuma said, holds that a creditor does not waive the right to a jury trial by filing a counterclaim unless the creditor also files a proof of claim.
Adopting the majority approach, Judge Thuma held that a counterclaim for monetary damages invokes the claims allowance process and thereby waives jury trial rights. He also adopted the “widely held” view that the right to a jury trial is lost even if the counterclaim is compulsory. He said that a counterclaim “is no more compulsory [than] a proof of claim bar date.”
Without citing Section 959(a), Judge Thuma said that jury trial rights are lost even when the counterclaim is based on a post-petition contract.
In 1881 in Barton v. Barbour, the Supreme Court prohibited suits against trustees without permission from the appointing court. Creating a limited exception to Barton, Congress originally adopted Section 959(a) in 1887 to provide that trustees and debtors in possession “may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property.” Over the years, the breadth of Section 959(a) has been eroded by decisions narrowing the scope of the exception to the automatic stay.
In 2012, the Third Circuit said in its VistaCare opinion that Section 959(a) was intended to create an exception to Barton when the trustee is continuing the business, “rather than simply administering the estate.” Since the debtor in Judge Thuma’s case carried on the business by signing the contract post petition, the pipeline owner arguably had a right to sue without leave of the bankruptcy court, perhaps explaining why the pipeline owner sued in district court in the adjoining state.
The second sentence in Subsection 959(a) is perhaps even more significant with respect to jury trials. It says, “Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.” [Emphasis added.]
One day, perhaps, a court will reconcile the loss of jury trial rights and Section 959(a) in the context of breach of a post-petition contract.