Restructuring

In In re Endeavour Highrise L.P., 2010 WL 935359 (Bankr. S.D. Tex. Mar. 12, 2010), the bankruptcy court for the Southern District of Texas held that a party waived his Seventh Amendment right to a jury trial by filing a counterclaim in an interpleader action filed in the bankruptcy case.

Prior to the bankruptcy filing, the debtor, a developer of a high-rise condominium, and a prospective purchaser entered into an earnest money contract relating to the sale of a condominium unit.  The contract provided a right to claim the earnest money if the sale failed to close due to a default by the other party.  After the debtor’s bankruptcy filing, the title company holding the earnest money brought an interpleader action in the bankruptcy court seeking to deposit the earnest money into the court’s registry and have the bankruptcy court determine whether to pay the earnest money to the debtor’s estate or to the prospective purchaser.  A chapter 11 trustee appointed in the case filed an answer to the complaint and a cross-claim against the purchaser.  In response, the purchaser filed an answer and cross-claim asserting a right to the earnest money and demanding a jury trial.  The chapter 11 trustee subsequently moved to strike the demand for a jury trial.
The bankruptcy court analyzed three U.S. Supreme Court opinions involving the right to a jury trial in a dispute before a bankruptcy court –  Katchen v. Landry, 382 U.S. 323 (1996); Langenkamp v. Culp, 498 U.S. 42 (1990); and Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) – and held that these cases indicate that a creditor or party in interest who voluntarily files a claim against a bankruptcy estate loses the Seventh Amendment right to a jury trial if the trustee subsequently objects to the claim or seeks some other affirmative relief relating to the claim.  The bankruptcy court acknowledged that lower courts disagree on the waiver of a right to a jury trial when a complaint is filed against a named defendant (who has not filed a proof of claim against the estate) and, in response to the complaint, the defendant files a claim against the estate in the form of a counterclaim against the trustee.
The bankruptcy court ultimately concluded that the purchaser waived his right to a jury trial by filing a claim against the debtor’s estate.  In reaching this conclusion, the court relied upon the doctrine of “arguable property” of the estate and the holdings in Katchen, Granfinanciera, and Langenkamp.
In re Chesnut, 422 F.3d 298 (5^th Cir. 2005), established the doctrine of “arguable property” of the estate in the Fifth Circuit, which was defined as property to which the debtor has only an arguable claim of right.  The bankruptcy court cited to Chesnut and In re Global Outreach, S.A., 2009 Bankr. LEXIS 1491 (Bankr. D.N.J. June 8, 2009), for the proposition that “arguable property” of the estate should be presumed to be property of the estate.
The bankruptcy court held that the earnest money was “arguable property” of the estate because both the chapter 11 trustee and the purchaser asserted a claim to the earnest money.  Because the earnest money was presumed to be property of the estate, the bankruptcy court held that a counterclaim seeking title to and possession of the earnest money was the equivalent of filing a proof of claim against the estate.  Therefore, consistent with Katchen, Granfinanciera, and Langenkamp, the filing of the counterclaim in the interpleader represented a consent to the equity jurisdiction of the bankruptcy court to determine the merits of the counterclaim and a waiver to the right to a jury trial.
Interestingly, the bankruptcy court concluded the opinion by discussing what the purchaser should have done to preserve his right to a jury trial.  The bankruptcy court stated that the purchaser should have either filed a motion to abstain and an original answer with a demand for jury trial or only filed an original answer and demand for jury trial.  By filing a motion to abstain, the purchaser would have avoided making a claim against the estate (and thus not waived a right to a jury trial) and would have potentially allowed the purchaser to obtain a jury trial in a state court on the interpleader action.  The bankruptcy court also noted that, if the purchaser had only filed an answer that demanded a jury trial, it would have been reluctant to strike the request for a jury trial, which would have led the court to recommend that the district court withdraw the reference of the interpleader dispute.  If the district court would have accepted the bankruptcy court’s recommendation, the purchaser would have preserved his right to a jury trial.
The Endeavour opinion highlights the importance of carefully considering a party’s objectives prior to filing any pleading with a bankruptcy court.  The decision arguably extends the circumstances in which a non-debtor party may waive its jury trial right beyond the fairly narrow examples reflected in the Supreme Court precedent.  In doing so, however, it also provides some potential options for a creditor who is sued by a debtor/trustee to preserve its right to a jury trial.