IN RE SOUTHERN INDUS. BANKING CORP.

MEMORANDUM ON DEFENDANTS' DEMANDS FOR A JURY TRIAL

CLIVE W. BARE, Bankruptcy Judge.

At issue is whether a defendant to a preference action, 11 U.S.C.A. § 547 (West 1979), has a right to a jury trial where the only relief sought is a monetary judgment.1 If so, the court must also determine whether a bankruptcy court has authority to conduct a jury trial in a core proceeding, 28 U.S.C.A. § 157(b)(2) (West Supp.1986).

I

The debtor is a former industrial loan and thrift company. As the liquidating trustee appointed pursuant to debtor's reorganization plan, plaintiff filed hundreds of preference actions seeking monetary judgments against former investors. These actions have been consolidated. Fed.R.Bankr. 7042. More than four hundred (400) preference defendants2 have demanded a jury trial. Plaintiff contends that a defendant in a preference action does not have a right to a jury trial. Represented by several different attorneys, defendants collectively assert a right to a jury trial under the Seventh Amendment to the United States Constitution, 28 U.S.C.A. § 1411(a) (West Supp.1986), or 28 U.S.C.A. § 1480(a) (West Supp.1986) (repealed 1984).

Because of the equitable nature of bankruptcy proceedings, there is generally no constitutional right to a jury trial. Merrill v. Walter E. Heller & Co., 594 F.2d 1064, 1067 (5th Cir.1979) (defendant did not have right to a jury trial on dischargeability issue). "[T]he right to a jury trial in bankruptcy proceedings is purely statutory." Beery v. Turner, 680 F.2d 705, 710 (10th Cir.1982), cert. denied, 459 U.S. 1037, 103 S.Ct. 449, 74 L.Ed.2d 604 (1982). The term "statutory" is interpreted to include the Constitution of the United States. See Air Transp. Ass'n v. Professional Air Traffic Controllers Org., 23 B.R. 271, 273 n. 4 (D.D.C.1982).

Section 1411 of title 28 of the United States Code, enacted by the Bankruptcy Amendments and Federal Judgeship Act of 1984, provides:

On its face subsection (a) pertains only to personal injury or wrongful death tort claims. In any event it is inapposite herein, because debtor's case was commenced on March 10, 1983, and section 122 of the Bankruptcy Amendments and the Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333, 346 (1984), recites in part "[S]ection 1411(a) of title 28 . . . as added by this Act, shall not apply with respect to cases under title 11 of the United States Code that are pending on the date of enactment of this Act [July 10, 1984], or to proceedings arising in or related to such cases."

Enacted as part of the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, 2671 (1978), former 28 U.S.C. § 1480 provided:

However, this statute was implicitly repealed by the Bankruptcy Amendments and Federal Judgeship Act of 1984.3 Hence, defendants' right to a jury trial, if any, must be found in the Seventh Amendment.

II

The Seventh Amendment to the United States Constitution provides:

"Suits at common law" has a broader meaning than those common law actions existing in 1791 when the amendment was ratified. Writing for the Court in 1830, Mr. Justice Story stated:

Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 446-47, 7 L.Ed. 732 (1830) (emphasis added). Cf. Reda, Inc. v. Harris Trust & Sav. Bank, 60 B.R. 178, 180 (Bankr.N.D.Ill.1986) (since there was no common law preference action there is no right to a jury trial of a preference action).

Where Congress creates a new cause of action without providing for the mode of trial, courts determine whether there is a right to trial by jury through identifying the nearest historically analogous cause of action. A jury trial is not constitutionally required if Congress creates a statutory cause of action not in the nature of a suit at common law. 9 A. Wright & C. Miller, Federal Practice and Procedure, § 2302 (1971).

Schoenthal v. Irving Trust Co., 287 U.S. 92, 53 S.Ct. 50, 77 L.Ed. 185 (1932) involved a district court suit in equity to recover cash preferences. The trustee, Irving Trust Co., asserted it had no adequate remedy at law. A petition by defendants to transfer the suit to the law side of the court, and for a jury trial, was denied. Monetary judgments were awarded by the district judge sitting in equity and affirmed by the Second Circuit Court of Appeals. Finding the trustee's assertion it had no adequate remedy at law was not supported by the facts, the Supreme Court reversed. The Court observed:

Schoenthal, 287 U.S. at 94-95, 53 S.Ct. at 51 (footnote and citation omitted).

The Court further noted Irving Trust Co. had sued to recover money payments of a definite amount and that no accounting or other equitable relief was requested.

Thus, Schoenthal, decided prior to the merger of law and equity in the federal court system, stands for the proposition that a suit to recover a cash preference is a suit at law to which the right of trial by jury attaches. Accord Black v. Boyd, 248 F.2d 156, 162 (6th Cir.1957); Prudential Ins. Co. v. Nelson, 96 F.2d 487, 488 (6th Cir.1938) (ordinarily suit to recover cash preferences of an ascertained amount may not be sustained in equity) (dictum); Warmath v. O'Daniel, 159 F. 87 (6th Cir.1908) (preference defendant in action seeking money damages entitled to jury trial on the law side); Boss-Linco Lines, Inc. v. Laidlaw Transp. Ltd., 55 B.R. 299, 308 (Bankr. W.D.N.Y.1985). Contra Country Junction, Inc. v. Levi Strauss & Co., 41 B.R. 425 (W.D.Tex.1984) (no right to jury trial in Code preference action because it is a summary proceeding for which there was no jury trial under the Act); Reda, Inc. v. Harris Trust & Sav. Bank, 60 B.R. 178 (Bankr.N.D.Ill.1986) (fact that recovery sought in preference action is monetary does not change nature of the action to one for a legal remedy); Boroff v. Carriero, 21 B.R. 132 (Bankr.D.Mass.1982) (no right to jury trial since preference action arises out of equity). In Warmath, a preference action to recover the value of certain furnishings, the court described the suggestion it must first set aside the transfer as "a devise for evading the statute forbidding a resort to a court of equity [to defeat the right of trial by jury]." Warmath, 159 F. at 89.

Plaintiff, however, insists that Schoenthal does not hold that there is a Seventh Amendment right to a jury trial in a preference action. Instead, plaintiff suggests the Court in Schoenthal simply concluded the trustee had an adequate legal remedy and that its suit should have been brought at law. This court's reading of Schoenthal is not so circumscribed; the upshot of the decision is that a preference defendant is entitled to a jury trial where the only relief sought is money damages.

Plaintiff also contends that the precedential value of Schoenthal is eroded by Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), which holds that the Bankruptcy Act of 1898 conferred summary jurisdiction to compel a claimant to surrender preferences that would require disallowance of his claim in bankruptcy. Section 57(g) of the Bankruptcy Act of 1898 provided in part: "The claims of creditors who have received or acquired preferences . . . void or voidable under this title, shall not be allowed unless such creditors shall surrender such preferences. . . ." The bankruptcy trustee in Katchen objected to the claims of a creditor, who had received cash preferences, and counterclaimed to recover the preferences. Exercising summary jurisdiction, the bankruptcy referee awarded judgment to the trustee on the preference claims. The Supreme Court disagreed with the creditor's contention that his rights under the Seventh Amendment were violated by the referee's exercise of summary jurisdiction.

Katchen v. Landy, 382 U.S. at 336-37, 86 S.Ct. at 476 (citations omitted).

Plaintiff contends Katchen would have been decided differently if the Seventh Amendment affords a right of trial by jury in preference actions. According to plaintiff, if there is a constitutional right to a jury trial in preference actions the "right exists irrespective of whether the preference claim is brought in a summary or a plenary proceeding."4

Clearly, the Court's statement that the creditor "might be entitled to a jury trial on the issue of preference if he presented no claim in the bankruptcy proceeding," Katchen, 382 U.S. at 336, 86 S.Ct. at 476, represents an equivocation of the Court's decision in Schoenthal. Also, as previously quoted, the Court observed in Katchen that the proceedings of bankruptcy courts are inherently proceedings in equity.

While the Court stated in Schoenthal that "[s]uits to recover preferences constitute no part of the proceedings in bankruptcy. . . .", 287 U.S. at 94-95, 53 S.Ct. at 51, that statement is no longer true. When the Court decided Schoenthal in 1932, jurisdiction to adjudicate preference actions was concurrently vested in the "courts of bankruptcy"5 (the federal district and territorial district courts, the Supreme Court of the District of Columbia and the United States Court of Alaska) and any state court which would have had jurisdiction but for the intervention of bankruptcy.6 Currently, jurisdiction to determine preference actions, and all other "core proceedings," is vested in the bankruptcy courts.7 Section 157 of Title 28 of the United States Code enacts in part:

When it enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984, Congress included preference actions in the same classification (core proceedings) as (1) the allowance or disallowance of claims against the estate and (2) counterclaims by the estate against persons filing claims (e.g. the trustee's counterclaim to recover preferences in Katchen). This reflects an implicit congressional intent that preference actions be tried without a jury, in the same manner as claims. Pennels v. Barnes (In re Best Pack Seafood, Inc.), 45 B.R. 194 (Bankr.D.Me.1984). Further, if pursuant to its power to establish uniform laws on bankruptcy Congress may convert a creditor's legal claim into an equitable claim, as recognized in Katchen, 382 U.S. at 336, 86 S.Ct. at 476, displacing any Seventh Amendment right of trial by jury in the determination of objections to claims, Congress may likewise treat other bankruptcy core proceedings, such as preferences. "Congress may accommodate the right to trial by jury to the need for expeditious proceedings." Best Pack Seafood, 45 B.R. at 195. Accord Baldwin-United Corp. v. Thompson, 48 B.R. 49, 56 (Bankr. S.D.Ohio 1985) (no constitutional right to a jury trial in core proceedings); 1 Collier on Bankruptcy ¶ 3.01[7][b][i] (15th ed. 1986). See also Morgan v. Lefton (In re Hendon Pools of Michigan, Inc.), 57 B.R. 801, 803 (E.D.Mich.1986) (no right to jury trial in action to avoid preferential or fraudulent transfers, both core proceedings, since equitable jurisdiction of bankruptcy court is invoked, bringing action within scope of Katchen holding).

Katchen, seriously undercutting the Court's earlier decision in Schoenthal, establishes that there is no absolute constitutional right to a jury trial in a preference action. Further, more than one hundred years ago the Supreme Court acknowledged:

Barton v. Barbour, 104 U.S. (14 Otto) 126, 134, 26 L.Ed. 672 (1881).

The Court's opinion in Katchen in conjunction with 28 U.S.C.A. § 157(b) (West Supp.1986), a recently enacted "specific statutory scheme contemplating the prompt trial of a disputed [proceeding]," Katchen, 382 U.S. at 339, 86 S.Ct. at 478, compels this court to conclude that the defendants' demands for a jury trial must be denied. Accordingly, it is unnecessary to determine whether this court has authority to conduct a jury trial in a core proceeding.