Opinion
17-31030
10-25-2021
In re: GYPC, INC., Debtor.
W. Timothy Miller Michael L. Meyer (Counsel for Christopher F. Cummings) J. Michael Debbeler Jeffrey M. Hendricks (Counsel for the Chapter 7 Trustee)
Chapter 7
W. Timothy Miller Michael L. Meyer (Counsel for Christopher F. Cummings)
J. Michael Debbeler Jeffrey M. Hendricks (Counsel for the Chapter 7 Trustee)
ORDER DENYING MOTION OF CHRISTOPHER F. CUMMINGS TO WITHDRAW PROOF OF CLAIM (DOC. 388)
Guy R. Humphrey United States Bankruptcy Judge
This order addresses the question of when a bankruptcy claimant may withdraw a proof of claim with prejudice in order to restore his jury trial rights under the Seventh Amendment. This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference of the District Court for the Southern District of Ohio. Amended General Order 05-02. This court also has constitutional authority to enter final judgment in this contested matter.
"In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law." U.S. Const. amend. VII.
Procedural Background
On March 29, 2019 Christopher F. Cummings ("Cummings") was sued in this bankruptcy case by the Chapter 11 debtor in possession, GYPC, Inc. ("GYPC"), through an adversary proceeding for, among other things, allegedly receiving preferential and fraudulent transfers. Adv. No. 19-3046 (doc. 1). Eric Webb ("Webb") is a defendant in a similar adversary proceeding. Cummings and Webb are the only two shareholders of GYPC and are represented by the same legal counsel.
On August 16, 2019 this case was converted to Chapter 7 (doc. 219). Donald F. Harker, III was appointed as trustee (the "Trustee"), and substituted as the plaintiff in various pending adversary proceedings, including the one against Cummings. On October 24, 2019 Cummings filed a non-priority unsecured proof of claim in the amount of $3,669,637. Claim 32-1.
On December 23, 2020 Cummings moved to withdraw his proof of claim specifically "to preserve his Seventh Amendment right to a jury trial on Trustee's claims." Doc. 388. Contemporaneously with that motion, Cummings also moved to withdraw the reference to allow the District Court for the Southern District of Ohio (the "District Court") to adjudicate the Harker v. Cummings adversary proceeding. Adv. No. 19-3046 (doc. 84). Webb simultaneously moved to withdraw the reference in the adversary proceeding in which he is the defendant. Adv. No. 19-3047 (doc. 85). Webb has not filed a proof of claim seeking recovery against the GYPC bankruptcy estate.
The Trustee filed a limited opposition to the motion to withdraw the Cummings proof of claim (doc. 391). The Trustee does not oppose the withdrawal of the proof of claim as long as any order approving the motion provides that this bankruptcy court will retain jurisdiction over Cummings' adversary proceeding. In Cummings' reply brief (doc. 393), he pointed out that the issue of whether this court kept jurisdiction over his adversary proceeding was the exact one pending before the District Court.
This court adjourned Cummings' motion until the District Court ruled on the Webb and Cummings' motions to withdraw the reference. On September 9, 2021 the District Court denied the motions to withdraw the reference, without prejudice to Webb and Cummings renewing their motions after all pretrial proceedings were completed. Harker v. Webb, Case Nos. 21-cv-22, 21-cv-23, 2021 WL 4125437, at *10 (S.D. Ohio Sept. 9, 2021). The District Court determined that, as to Webb, without his consent, this Article I court could not enter a final judgment on the preferential or fraudulent transfers, nor could it conduct a jury trial. Id. at *3 n.3. As to Cummings, the District Court found that, by filing a proof of claim, Cummings had submitted himself to this court's equitable jurisdiction for a final determination of all matters in his adversary proceeding. Id. at *7 (citing Langenkamp v. Kulp, 498 U.S 42, 44 (1990)). However, the District Court also noted that, if this court granted Cummings' motion to withdraw his proof of claim, he would be "on the same procedural footing as Webb." Id. at *1 n.2. See also id. at *7 ("Should Cummings maintain his proof of claim, the Bankruptcy Court's judgment will be binding.").
Analysis
As this court understands the District Court order, it did not resolve the question the court decides today, whether Cummings is permitted to withdraw his proof of claim to place him in the same "procedural footing" as Webb. Because this court determines, consistent with other reported decisions, that the withdrawal of a proof of claim to restore Cummings' jury trial rights is not permitted in these circumstances, the court denies the motion.
This court assumes that, absent Cummings being able to maintain his jury trial rights, he does not have any interest in withdrawing his proof of claim. EXDS, Inc. v. RK Elec., Inc. (In re EXDS, Inc.), 301 B.R. 436, 443 (Bankr. D. De. 2003). Under such circumstances, the withdrawal of the proof of claim would appear to avail him nothing and limit his potential recovery against the bankruptcy estate. Id. Nevertheless, Cummings may choose to withdraw his claim at any time by filing a notice of withdrawal, but, regardless, the court will maintain its equitable jurisdiction over the Harker v. Cummings adversary proceeding unless and until the District Court grants a withdrawal of the reference. See TWA Inc. Post Confirmation Estate v. Extex Ltd. (In re TWA Inc. Post Confirmation Estate), Adv. No. 02-75355, 2004 Bankr. LEXIS 2157, at *5 (Bankr. D. De. Aug. 20, 2004) (following the reasoning of EXDS). See also Sempra Energy Trading Corp. v. Covanta Union, Inc. (Ogden New York Svcs., Inc.), 312 B.R. 729, 734 (S.D.N.Y. 2004) (court finding, absent prejudice, creditor had the right to withdraw its proof of claim, but did not decide if such withdrawal preserved the claimant's jury trial rights).
Upon the District Court's determination of the motions to withdraw the reference, this court re-activated Cummings' motion to withdraw his proof of claim and gave the parties a final opportunity for supplemental briefing. Both the Trustee and Cummings declined any further briefing, and this court took the matter under advisement.
Bankruptcy Rule 3006 addresses when a claimant can withdraw a proof of claim:
Fed. R. Bankr. P. 3006 (emphasis added). Because Cummings is a defendant in an adversary proceeding, he cannot withdraw his proof of claim as of right.A creditor can withdraw a claim as of right by filing a notice of withdrawal, except as provided by this rule. If after a creditor has filed a proof of claim an objection is filed thereto or a complaint is filed against that creditor in an adversary proceeding, or the creditor has accepted or rejected the plan or otherwise has participated significantly in the case, the creditor may not withdraw the claim except on order of the court after a hearing on notice to the trustee or debtor in possession, and any creditors committee elected pursuant to § 705(a) or appointed pursuant to § 1102 of the Code. The order of the court shall contain such terms and conditions as the court deems proper. Unless the court orders otherwise, an authorized withdrawal of a claims shall constitute withdrawal of any related acceptance or rejection of a plan.
When evaluating a request to withdraw a proof of claim, the question centers around whether the opposing party will suffer legal prejudice. Resorts Int'l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1399 (9th Cir. 1995). Courts have generally applied Rule 41 of the Federal Rules of Civil Procedure which addresses the dismissal of a complaint following an answer. In re Armstrong, 215 B.R. 730, 732 (Bankr. E.D. Ark. 1997); In re 20/20 Sport, Inc., 200 B.R. 972, 977-78 (Bankr. S.D.N.Y. 1996). As the District Court has determined that this court will keep the Webb and Cummings adversary proceedings until all pre-trial proceedings are completed, the court does not find that allowing Cummings to withdraw his proof of claim would cause legal prejudice to the Trustee.
However, the issue in Cummings' motion is not as simple as whether there is legal prejudice to the Trustee under Rule 3006. Cummings can withdraw his claim if he chooses. See footnote 2, infra. But Cummings wants to withdraw his claim with prejudice because he argues that withdrawal accomplishes a specific jurisdictional purpose. Both Cummings and the Trustee agree, and the District Court determined, that when a creditor files a proof of claim and is sued by the debtor (or a trustee), the creditor becomes subject to the equitable jurisdiction of the bankruptcy court. Langenkamp v. Culp, 498 U.S. 42, 44-45 (1990) (cited in Harker, 2021 WL 4125437, at *7). The question unsettled in the Sixth Circuit is under what circumstances, if any, can this court's equitable jurisdiction end simply because the defendant-claimant subsequently withdraws the proof of claim? Cummings argues that Rule 3006 provides the answer and the court need only look at any prejudice to the Trustee.
Perhaps the strongest decision in support of Cummings' position is In re 20/20 Sport, Inc., 200 B.R. 972 (Bankr. S.D.N.Y. 1996). In 20/20 Sport, the court determined, pursuant to Rule 3006, that the claimant-defendant could withdraw the proof of claim he had filed after a fraudulent conveyance adversary proceeding was commenced against him. Id. at 978-79. The defendant sought to preserve its jury trial rights. Id. at 975. Nevertheless, the court focused on Rule 3006 to reach its conclusion that, absent prejudice, the claimant-defendant could withdraw his proof of claim.
But other decisions have determined, the bankruptcy court's equitable jurisdiction "does not turn[] on the application of Rule 3006." EXDS, Inc. v. RK Elec. (In re EXDS, Inc.), 301 B.R. 436, 438 (Bankr. D. De. 2003). This court finds the reasoning of the EXDS decision persuasive:
EXDS, Inc. v. RK Elec. (In re EXDS, Inc.), 301 B.R. 436, 440 (Bankr. D. De. 2003) (footnote added). Cummings' choice to submit to this court's equitable jurisdiction cannot be undone. Seven Counties Servs., Inc. v. NextGen Healthcare Info. Sys., Inc., Civil Action No. 3:14CV330-S (CRS), 2014 U.S. Dist. LEXIS 110899 at *7, 2013 WL 3941789, at *2 (W.D. Ky. Aug. 12, 2014) (creditor cannot "un-ring the bell" after recognizing the unforeseen consequences of filing a proof of claim).Given the clear directive of Langenkamp, I do not believe it makes any difference on the jury trial issue whether I authorize RK to withdraw its proof of claim. At the time of the filing of the adversary complaint, RK was subject to the jurisdiction of this court where there is no right to a jury trial. In the words of Langenkamp, RK submitted itself to the "claims-allowance process" of the equity court. Stated differently, in the words of the Travellers opinion, RK lost its right to a jury trial because it elected to participate in the equity court proceeding. Given the unequivocal language of Langenkamp and Travellers as to the effect of filing a proof of claim, I do not believe that a creditor can, for strategic reasons, reverse the result it triggered by filing a proof of claim by later withdrawing the claim. RK's position here is akin to the situation in Travellers where Travellers argued that its claim was contingent, i.e., subject to being mooted at a later date.
Travellers Int'l AG v. Robinson, 982 F.2d 96, 100 (3d Cir. 1992) (creditor that filed a proof of claim had no jury trial right aa a defendant in a preference action).
Cummings' argument that withdrawing his proof of claim can restore his right to a jury trial also does not fully consider the nature of the action against him. Under § 502(d) of the Bankruptcy Code, any recovery in a fraudulent or preferential transfer action disallows any claim until the estate is restored the transferred property. Sec. Inv. Protection Corp. v. Bernard L. Madoff Inv. Secs. LLC, 597 B.R. 466, 476-77 (Bankr. S.D.N.Y. 2019). The court explained that "[a]voidance claims always implicate the claims allowance process because the trustee must avoid the transfer to recover against the defendant-creditor to disallow the defendant-creditor's claim under Bankruptcy Code § 502(d)." Id. at 476. See also Bankr. Svcs., Inc. v. Ernst & Young (In re CBI Holding Co., 529 F.3d 432, 466-67 (2d Cir. 2018) ("As we recognized in Germain v. Nat'l Bank, 988 F.2d 1323 (2d Cir. 1993), filing a proof of claim is a necessary but not sufficient condition to forfeiting a creditor's right to a jury trial." Court determined that "the resolution of the [creditor] claims clearly affects the structuring of the debtor-creditor relationship . . . ."). But see also Field v. Albright (In re Maui Indus. Loan & Fin. Co.), Adv. No. 10-90121, 2012 WL 405056, at *3, 2012 Bankr. LEXIS 735, at *9 (Bankr. D. Hi Feb. 8, 2012) (court allowed a pro se creditor to withdraw a proof of claim that was filed prior to the commencement of an avoidance action proceeding against that creditor). Thus, even if certain causes of action may not trigger the court's equitable jurisdiction over the claims allowance process, the nature of this action necessarily affects the allowance of the Cummings proof of claim.
Section 502(d) states:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.11 U.S.C. § 502(d).
Some decisions have determined that, regardless of the time of the filing of the adversary proceeding and of the proof of claim, the filing of a proof of claim irrevocably submits the claimant to the bankruptcy court's equitable jurisdiction. One decision stated that "the sequence is irrelevant, and the adversary proceeding is part of the claims allowance process and subject to the bankruptcy court's equitable jurisdiction whether it is filed before or after the creditor-defendant files the proof of claim triggering the claims allowance process." Madoff, 597 B.R. at 483 n.17 (citing Travellers Int'l v. Robinson, 982 F.2d 96 (3d Cir. 1992) and In re Peachtree Lane Assocs., Ltd., 150 F.3d 788, 798 (7th Cir. 1998)). See also Roberds, Inc. v. Palliser Furniture, 291 B.R. 102, 107-08 (S.D. Ohio 2003) (Rice, J.) (defendant in preferential transfer action invoked the court's equitable jurisdiction by filing a counterclaim for administrative expenses, and waived its right to a jury trial under the Seventh Amendment); SNA Nut Co. v. The Häagen-Dazs Co., 302 F.3d 725, 731 (7th Cir. 2002) (defendant waived his right to a jury trial when proof of claim was not properly withdrawn pursuant to Rule 3006, but instead claim was disallowed).
Nevertheless, the more typical fact pattern in this area is the proof of claim is filed prior to the commencement of the adversary proceeding. See EXDS, 301 B.R. at 440 (proof of claim filed prior to an adversary proceeding commenced against the creditor could not be withdrawn to restore jury trial rights). In such circumstances, some cases focus on the "time of filing" principle of jurisdiction, and therefore conclude that the court's equitable jurisdiction is not invoked if the claim is withdrawn prior to the filing of the complaint. Smith v. Dowden, 47 F.3d 940, 943 (8th Cir. 1995). See also Onkyo Europe Elecs. GBMH v. Global Technovations Inc. (In re Global Technovations Inc.), 694 F.3d 705, 722 (6th Cir. 2012) (creditor filed a proof of claim prior to the filing of a fraudulent avoidance action against him and therefore consented to the bankruptcy court's equitable jurisdiction).
In this instance, Cummings filed his proof of claim after the adversary proceeding was commenced. In dicta, one bankruptcy court commented that "one could argue that a creditor that files a proof of claim after he has already been sued in an adversary proceeding waives any objection and impliedly consents to the exercise of the bankruptcy court of equitable jurisdiction to decide any issue in the adversary proceeding that affect the allowance of his claim." Madoff, 597 B.R. at 483 n.17. This court agrees, and finds that Cummings impliedly consented to this court making a final determination as to the avoidance actions the trustee is prosecuting against him. Cummings was aware he was a defendant in an avoidance action, and any proof of claim would be subject to provisions of 11 U.S.C. § 502(d). The Trustee's action cannot be separated from the claims allowance process. Id. at 476-77.
Conclusion
This court is aware that placing Cummings and Webb on separate procedural paths may create complexities in terms of the summary judgment process, trial, and the path of any appeals. But Cummings filed a proof of claim with full knowledge of the adversary proceeding against him, and Webb did not. By filing a proof of claim after the adversary proceeding was commenced, Cummings impliedly consented to this court's equitable jurisdiction, and the adversary proceeding became part of the claims allowance process of this bankruptcy estate. Having made this choice, Cummings cannot undo the consequences of that decision.
For all these reasons, Cummings' motion is denied.
IT IS SO ORDERED.