A creditor’s proof of claim purporting to reserve the right to a jury trial is ineffectual once the creditor files a proof of claim, according to Bankruptcy Judge Craig A. Gargotta of San Antonio. In other words, the unique facts of a particular case won’t overcome the general rule laid down in Langenkamp v. Culp, 498 U.S. 42 (1990), where the Supreme Court held that filing a claim waives the Seventh Amendment right to a jury trial.
Before bankruptcy, plaintiffs had filed a class action in a California state court alleging that the corporate defendants breached a contract and failed to pay wages in violation of state labor law. The complaint in state court demanded a jury trial.
One week later, the defendants filed chapter 7 petitions in San Antonio. Their cases were substantively consolidated.
After bankruptcy, the suit was removed to federal court in California, where the judge transferred the case to federal district court in San Antonio. The district judge in San Antonio referred the lawsuit to Judge Gargotta in bankruptcy court.
While the suit was still pending in the San Antonio district court, the plaintiffs filed a proof of claim in the bankruptcy case seeking almost $700 million. The claim contained a reservation of rights where the plaintiffs said that the claim “shall not be deemed or construed” to be a waiver of the right to a jury trial.
In his January 10 opinion, Judge Gargotta decided that the plaintiffs were not entitled to a jury trial.
In large part, the disposition was based on two Supreme Court decisions. In Granfinanciera S.A. v. Nordberg, 492 U.S. 33 (1989), the Supreme Court ruled that the defendant in a fraudulent transfer suit was entitled to a jury trial even if the defendant had not filed a claim.
A year later in Langenkamp, the high court decided that the filing of a claim brings the creditor within the bankruptcy court’s equitable jurisdiction, allowing the bankruptcy judge to determine an avoidance action without a jury.
The plaintiffs advanced a litany of reasons why their case was distinguishable from Granfinanciera and Langenkamp. Among other things, the plaintiffs argued that those cases involved trustees who brought suits to recover money for the bankrupt estate. Their case was also distinguishable, the plaintiffs said, because they had sued before filing the proof of claim and because the claim expressly reserved the right to a jury.
Judge Gargotta didn’t buy the arguments. Rather, the Supreme Court required him to decide whether the suit involved private rights or public rights, because private rights alone are protected by the Seventh Amendment.
Judge Gargotta cited Granfinanciera for the proposition that filing a claim triggers the claim-allowance process and subjects the claimant to the bankruptcy court’s equitable powers. In other words, seeking a portion of a bankrupt estate involves public rights to which jury trial rights do not attach. Furthermore, he said, “Disputes that are integrally related to allowance or disallowance of a filed claim are equitable in nature,” citing Granfinanciera, 492 U.S. at 58.
By filing a claim, Judge Gargotta said that the plaintiffs “effectively converted their legal dispute to an equitable dispute” in which they had no right to a jury trial.
Judge Gargotta said he appreciated how the plaintiffs were facing a Hobson’s choice. They could file a claim and lose the right to a jury, or forgo a claim and lose the right to collect from the corporate defendants. The plaintiffs, he said, “should have appreciated the possibility of their case being transferred to this Court before deciding to file a proof of claim.”
Finally, Judge Gargotta dealt with the reservation of rights. “[S]uch protective language,” he said, “is not binding on the Court; rather, the Court is bound by Langenkamp and Granfinanciera, which found that filing a proof of claim results in waiver of the right to jury trial.”
A creditor’s proof of claim purporting to reserve the right to a jury trial is ineffectual once the creditor files a proof of claim, according to Bankruptcy Judge Craig A. Gargotta of San Antonio. In other words, the unique facts of a particular case won’t overcome the general rule laid down in Langenkamp v. Culp, 498 U.S. 42 (1990), where the Supreme Court held that filing a claim waives the Seventh Amendment right to a jury trial.
Before bankruptcy, plaintiffs had filed a class action in a California state court alleging that the corporate defendants breached a contract and failed to pay wages in violation of state labor law. The complaint in state court demanded a jury trial.
One week later, the defendants filed chapter 7 petitions in San Antonio. Their cases were substantively consolidated.
After bankruptcy, the suit was removed to federal court in California, where the judge transferred the case to federal district court in San Antonio. The district judge in San Antonio referred the lawsuit to Judge Gargotta in bankruptcy court.
While the suit was still pending in the San Antonio district court, the plaintiffs filed a proof of claim in the bankruptcy case seeking almost $700 million. The claim contained a reservation of rights where the plaintiffs said that the claim “shall not be deemed or construed” to be a waiver of the right to a jury trial.
In his January 10 opinion, Judge Gargotta decided that the plaintiffs were not entitled to a jury trial.