holding that a bankruptcy court could decide a preferential-transfer claim when the creditor filed a claim because then “the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship”Summary of this case from JWL Entertainment Group, Inc. v. Solby+Westbrae Partners
Decided November 13, 1990
Respondents held thrift and passbook savings certificates, which were issued by debtor financial institutions and represented debtors' promise to repay moneys respondents had invested. Within the 90-day period before debtors filed Chapter 11 bankruptcy petitions, respondents redeemed some of the certificates. They became debtors' creditors when they filed proofs of claims against the bankruptcy estates. Subsequently, petitioner trustee instituted adversary proceedings to recover, as avoidable preferences, the payments which respondents had received. After a bench trial, the Bankruptcy Court ruled that the payments were avoidable preferences, and the District Court affirmed. The Court of Appeals, relying on Grandfinanciera, S.A. v. Nordberg, 492 U.S. 33, and Katchen v. Landy, 382 U.S. 323, reversed, ruling that respondents were entitled to a jury trial in the preference action.
Held: Respondents were not entitled to a jury trial. By filing claims against the bankruptcy estate, respondents triggered the process of "allowance and disallowance of claims," thereby subjecting themselves to the Bankruptcy Court's equitable power. Grandfinanciera, 492 U.S., at 58-59, and n. 14. Thus, the trustee's preference action became an integral part of the claims-allowance process, which is triable only in equity. As such, there is no Seventh Amendment right to a jury trial. In contrast, a party who does not submit a claim against the estate is entitled to a jury trial as a preference defendant, since the trustee could recover the transfers only by filing what amounts to a legal action. Ibid. Accordingly, "a creditor's right to a jury trial on a bankruptcy trustee's preference claim depends upon whether the creditor has submitted a claim against the estate," id., at 58, a distinction overlooked by the Court of Appeals.
Certiorari granted; 897 F.2d 1041, reversed and remanded.
This case presents the question whether creditors who submit a claim against a bankruptcy estate and are then sued by the trustee in bankruptcy to recover allegedly preferential monetary transfers are entitled to jury trial under the Seventh Amendment. This action was brought by petitioner Langenkamp, successor trustee to Republic Trust Savings Company and Republic Financial Corporation (collectively debtors). Debtors were uninsured, nonbank financial institutions doing business in Oklahoma. Debtors filed Chapter 11 bankruptcy petitions on September 24, 1984. At the time of the bankruptcy filings, respondents held thrift and passbook savings certificates issued by the debtors, which represented the debtors' promise to repay moneys the respondents had invested.
Within the 90-day period immediately preceding debtors' Chapter 11 filing, respondents redeemed some, but not all, of the debtors' certificates which they held. Thus, upon the bankruptcy filing, respondents became creditors of the now-bankrupt corporations. Respondents timely filed proofs of claim against the bankruptcy estates. Approximately one year after the bankruptcy filing, the trustee instituted adversary proceedings under 11 U.S.C. § 547(b) to recover, as avoidable preferences, the payments which respondents had received immediately prior to the September 24 filing. A bench trial was held, and the Bankruptcy Court found that the money received by respondents did in fact constitute avoidable preferences. In Re Republic Trust Savings Co., No. 84C-01461, Adversary No. 85-0337 (ND Okla., June 26, 1987), App. to Pet. for Cert. A-64. The United States District Court for the Northern District of Oklahoma affirmed. Republic Financial Corp. v. Langenkamp, Nos. 87-C-616-C, 87-C-618-C, 87-C-619-C (June 30, 1988), App. to Pet. for Cert. A-67. On appeal, the United States Court of Appeals for the Tenth Circuit upheld the District Court's judgment on three grounds, but reversed on the issue of the holders' entitlement to a jury trial on the trustee's preference claims. In re Republic Trust Savings Co., 897 F.2d 1041 (1990). Relying on our decisions in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), and Katchen v. Landy, 382 U.S. 323 (1966), the Tenth Circuit correctly held that those appellants that did not have or file claims against the debtors' estates undoubtedly [were] entitled to a jury trial on the issue whether the payments they received from the debtors within ninety days of the latter's bankruptcy constitute[d] avoidable preferences. 897 F.2d, at 1046. The Court of Appeals went further, however, concluding:
"[A]lthough some of the appellants did file claims against the estates because they continued to have monies invested in the debtors at the time of bankruptcy, . . . we believe they likewise are entitled to a jury trial under the rationale of Granfinanciera and Katchen. Despite these appellants' claims, the trustee's actions to avoid the transfers, consolidated by the bankruptcy court, were plenary rather than a part of the bankruptcy' court's summary proceedings involving the `process of allowance and disallowance of claims.'" Id., at 1046-1047.
Petitioner contends that the Tenth Circuit erred in holding that those creditors of the debtors who had filed claims against the estate were entitled to a jury trial. We agree.
In Granfinanciera, we recognized that, by filing a claim against a bankruptcy estate, the creditor triggers the process of "allowance and disallowance of claims," thereby subjecting himself to the bankruptcy court's equitable power. 492 U.S., at 58-59, and n. 14 (citing Katchen, supra, at 336). If the creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims-allowance process which is triable only in equity. Ibid. In other words, the creditor's claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy court's equity jurisdiction. Granfinanciera, supra, at 57-58. As such, there is no Seventh Amendment right to a jury trial. If a party does not submit a claim against the bankruptcy estate, however, the trustee can recover allegedly preferential transfers only by filing what amounts to a legal action to recover a monetary transfer. In those circumstances, the preference defendant is entitled to a jury trial. 492 U.S., at 58-59.
Accordingly, "a creditor's right to a jury trial on a bankruptcy trustee's preference claim depends upon whether the creditor has submitted a claim against the estate." Id., at 58. Respondents filed claims against the bankruptcy estate, thereby bringing themselves within the equitable jurisdiction of the bankruptcy court. Consequently, they were not entitled to a jury trial on the trustee's preference action. The decision by the Court of Appeals overlooked the clear distinction which our cases have drawn and in so doing created a conflict among the circuits on this issue. For this reason we grant the petition for certiorari, reverse the judgment of the Court of Appeals for the Tenth Circuit, and remand for further proceedings consistent with this opinion.
It is so ordered.
JUSTICE KENNEDY took no part in the consideration or decision of this case.