Bankruptcy Litigation Committee

ABI Committee News

Utilizing a Jury Demand to Obtain Leverage in a Preference Case

Preference suits have become the bankruptcy equivalent of spam e-mail. Like spam, the suits are usually sent out en-masse to distant shores and make dubious claims. As people have discovered new methods of dealing with spam, they have become more adept at fighting “dragnet” preference suits. This article gives some snapshots of defenses found well outside of §547.

A seldom used (but effective) tactic for a preference defendant to use is to invoke his constitutional right to a jury trial. Why does a jury demand create leverage? There are several answers, some less obvious than others.

First, preference suits are inflicted upon an already overwhelmed bankruptcy court that, besieged by the docket of gadflies titled “preference actions,” may be inclined to adopt a mathematical “bright line” test for preferences—counting the days between invoice and payment. The bright line disposes of cases quickly, but is categorically wrong. The jury, conversely, is blind to the docket, and its concern is the correct application of the equitable standard set forth by the Supreme Court in Union Bank v. Wolas, 502 U.S. 151, 159 (1991). The Wolas court held that the ordinary course defense should “leave undisturbed normal financial relations,” and not bind a defendant to a particular number of days. Consequently, jury trials make it more difficult for trustees to win preference judgments unless the creditor “disturbed normal financial relations.”

Second, the jury is not concerned with the impact of the case on non-parties such as other administrative, priority and general unsecured creditors.

Third, time is money. The preference suit in the bankruptcy court may be dealt with summarily. Concomitant with the right to a jury trial is the right to have an Article III court conduct the trial (unless the defendant has subjected himself to the bankruptcy court). The Article III court has a docket that often pushes civil matters aside. Thus, a defendant, even one who will eventually be forced to pay, may benefit from the delay caused by a jury demand and withdrawal of the reference.

Last, conducting a jury trial is much more “human” than a bench trial that might be conducted on affidavits. If a client is being asked to pay money, he may choose the option that literally gives him his “day in court,” instead of a cold proffer of his testimony.

In summary, the jury demand increases both the risks and the costs to the plaintiff. As a result of these factors, the plaintiff might be more inclined to settle for a lower amount or even drop a borderline case.

How Can You Obtain a Jury Trial in a Preference Case?

In Granfinanciera SA v. Nordberg, 492 U.S. 33, 46–47 (1989), the Supreme Court held that defendants in preference suits are entitled to trial by jury in both preference and fraudulent transfer cases. This right, however, does not exist if a defendant filed a proof of claim subjecting herself to the claims allowance and disallowance process. If you are fortunate enough to have a client who was paid in full prior to bankruptcy, you don’t have to worry about the claim issue. On the other hand, if your client was still owed money and filed a claim before contacting you, the right to a jury trial has been waived and there is nothing you can do about it. If the client with preference exposure contacts you before filing a claim, however, there are two options: to file or not to file.

In many chapter 11 cases there really is no need to file a claim. Bankruptcy Rule 3003 provides that a creditor whose claim is scheduled and is not listed as disputed, contingent or unliquidated need not file a claim. Thus, the first step is to check the schedules. If the amount is correct and none of the boxes challenging the claim are checked, then there is no need to file a claim and the right to a jury trial is preserved. If the claim is not listed, listed in substantially the wrong amount, or one of the boxes is checked, then the client has to make a decision on whether to file. If the potential recovery in the case is less than the preference exposure, the client probably should not file a claim.

Assuming no claim is filed and the client is sued for a preference, you should file an answer and jury demand. This can be done in the same document or different documents, but it should be done at the same time. The demand for a jury trial is governed by Federal Rule 38. Technically, you have up to ten days after filing your answer to file the jury demand; but there is no real reason to wait. If you do not timely file the demand, the right to jury trial is waived.

Once you file the jury demand, the case will not be automatically transferred to the district court by the clerk. Rather, you must file a motion to withdraw the reference. The motion is filed pursuant to 28 U.S.C. §157(d) and must be timely. If the motion is filed along with the jury demand, it should be timely. If you wait any appreciable amount of time, the court could determine that is not timely, effectively creating a waiver of the right to a jury trial. Section 157(d) indicates that the motion to withdraw should be made to the district court. In many districts, the local rules require the motion to be heard by the bankruptcy judge after which the bankruptcy judge issues a recommendation to the district judge. The only statutory ground for the motion is “cause shown.” Of course, cause exists because Article 1 bankruptcy judges cannot try jury cases absent the consent of the parties. See, e.g., In re Clay, 35 F.3d 190 (5th Cir. 1994) (mandamus issued to force withdrawal after jury demand). Therefore, it is important in the demand and motion to withdraw to assert that the defendant does not consent to a jury trial before the bankruptcy judge.

Is a jury demand a panacea? No. Evaluate your case with an eye to the traditional jury trial facts: the witnesses, their demeanor, and the nature of the plaintiff and defendant. There are several benefits to asserting a right to trial by jury. Whether it makes sense in a particular case is left to the experience of the practitioner.