Bankruptcy Litigation Committee

ABI Committee News

The Right to Trial by Jury in Bankruptcy Cases: Waiver and Enforceability

Your client is getting ready to sign an agreement with another party. Maybe it is a loan document. Maybe it is an offer to purchase. Somewhere near the end of the agreement, you see that there is bold, capitalized language indicating that by signing the agreement, your client will waive its right to a trial by jury. It is standard in nearly all contracts so you do not even bat an eye about advising your client to sign. After all, what are the benefits of having your case heard by a jury? Jury trials take longer, and juries are unpredictable.

But perhaps before you advise your client to sign on the dotted line, you should consider why your client might want a jury trial. A jury may be more sympathetic to your claims than would a judge. This may be particularly true if you represent an individual against a big, rich company. And when do individuals often face off against big companies? In bankruptcy court. But can you even ask for a jury trial in bankruptcy court? You’ve never heard of such a thing.

The answer is yes. Under certain circumstances, a bankruptcy court can conduct a jury trial. This article will discuss when a party in a bankruptcy suit has the right to have its case decided by a jury in lieu of a district or bankruptcy court judge. More importantly, this article will also discuss how parties often waive their right to a jury trial, both intentionally and unintentionally, and whether such a waiver will ultimately be enforced.

The Right to Trial By Jury

The Constitutional Right

The Seventh Amendment to the U.S. Constitution guarantees the right to a trial by jury in certain civil suits. The Constitution only guarantees this right for trials held in the federal courts and has not been extended to state court proceedings.

Because the right to a jury trial is only extended to certain civil suits, this begs the question: in which civil suits is the right to a jury trial guaranteed? The Seventh Amendment uses the phrase “suits at common law.” The United States Supreme Court has “consistently interpreted the phrase ‘suits at common law’ to refer to suits in which legal rights were to be ascertained and determined, in contradistinction to those where equitable rights alone were recognized, and equitable remedies were administered.” Granfinanciera, S.A., et al. v. Nordberg, 492 U.S. 33, 41 (1989), quoting Parsons v. Bedford, 3 Pet. 433, 447 (1830) (emphasis in original).

The Jury Demand

The federal courts have held that the right to a jury trial in federal court is to be determined as a matter of federal law. See, e.g., Smith v. Lucent Tech., Inc., No. 02-0481, 2004 U.S. Dist. LEXIS 4074, *58 (E.D. La., Mar. 15, 2004). If a party seeks to have its case heard and decided by a jury in circuit or district court, that party must make a timely request. Demands for a jury trial are governed by Federal Rules of Civil Procedure 38 and 39. In re Inacom Corp., No. 00-02426, 2005 U.S. Dist. LEXIS 19117, *7-8 (D. Del., Sept. 6, 2005). If a party makes an untimely request for a jury trial, district courts are to consider five factors in determining whether to grant such an untimely demand:

(1)        whether the issues are suitable for a jury;

(2)        whether granting the motion would disrupt the schedule of the court or the adverse party;

(3)        whether any prejudice would result to the adverse party;

(4)        how long the party delayed in bringing the motion; and

(5)        the reasons for the failure to file a timely demand.

Id. at *9.

 Analyzing the Cause of Action

If a timely request is made, then the court will examine the cause of action at issue to determine whether the party is entitled to have its claim heard by a jury. In Granfinanciera, to determine whether a party is entitled to a jury trial under the Seventh Amendment, the U.S. Supreme Court held that the court must:

[F]irst compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, the court must examine the remedy sought and determine whether it is legal or equitable in nature . . . If, on balance, these two factors indicate that a party is entitled to a jury trial under the Seventh Amendment, the court must decide whether the U.S. Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as factfinder. 

Granfinanciera, 492 U.S. at 42. The second step is of utmost importance because the Seventh Amendment only guarantees the right to a jury trial for legal, and not equitable, rights. If the claim at issue is only in equity, a jury trial will not be allowed.

The third step, determining whether Congress has assigned resolution of the claims to a non-Article III court, refers specifically to the bankruptcy courts. In this regard, 28 U.S.C. §157(e) states:

 If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specifically designated to exercise such jurisdiction by the district court and with the express consent of all parties.

 

“One must assume this language refers to the civil proceedings that may be heard to conclusion by bankruptcy judges.” 1 Collier on Bankruptcy ¶3.08[3] (15th ed. 2007). With regard to the second part of 28 U.S.C. §157(e), it is likely that a district court can enter a standing order giving bankruptcy judges the general authority to conduct jury trials rather than requiring the district court to grant authority on a case by case basis. Id. Lastly, all parties must consent to a jury trial by the bankruptcy judge.

Strategy For Requesting or Waiving Jury Trial

As in other federal civil litigation, the decision to exercise the right to a jury trial is one that counsel should consider carefully in bankruptcy matters. In matters where the issues to be decided are complex, or where one party is particularly unsympathetic, it may be in that party’s best interest not to request a jury trial—even if the right to a jury trial exists. Other issues such as timing (jury trials often take longer to get to trial), the cost of delay in resolution, and the particular judge presiding over the trial may also factor into the decision to request a jury trial.

Contractual Waiver of The Right to Trial By Jury

Even if the parties to a suit are entitled to a jury trial, most courts have concluded that this right can be waived—either at the beginning of the proceedings, or in advance of the dispute. See Smith, 2004 U.S. Dist. LEXIS 4074 at *59, but see Grafton Partners L.P. v. Superior Court, Cal. Sup. Ct. No. S123344 (Aug. 4, 2005) (California case not allowing waiver in advance). Perhaps the most common way in which a party can waive its right to a jury trial is by contract. When one party to the contract tries to enforce the waiver against another party, federal courts undertake an analysis to determine whether the waiver provision is enforceable. Federal courts have held that “[w]aiver requires only that the party waiving such right do so ‘voluntarily’ and ‘knowingly’ based on the facts of the case.” Smith, 2004 U.S. Dist. LEXIS 4074 at *59. The burden of proving a voluntary and knowing waiver is on the party seeking to enforce the waiver. Timber Doodle Glade Equity Venture LLC v. D.E. Shaw Laminar Lending Inc., No. 06-CV-00799, 2007 U.S. Dist. LEXIS 92109, *4 (D. Colo., Dec. 4, 2007).

Jury waivers are to be narrowly construed, and any ambiguity should be decided against the waiver. Phoenix Leasing Inc. v. Sure Broadcasting Inc., 843 F. Supp. 1379, 1388 (D. Nev. 1994). This is because a presumption exists against waiver. Solutia Inc. v. FMC Corp., 456 F. Supp. 2d 429, 454 (S.D.N.Y. 2006). The factors a court must consider in determining whether a contractual waiver of a right to a jury trial was made knowingly and voluntarily include:

(1)        the negotiability of contract terms and negotiations between the parties concerning the waiver provision;

(2)        the conspicuousness of the waiver provision in the contract;

(3)        the relative bargaining power of the parties; and

(4)        the business acumen of the party opposing the waiver.

Id. Additionally, several courts have incorporated an analysis of the scope of the waiver as an unofficial fifth factor. See, e.g., Boyd v. U.S. Bank National Association, No. 06-2115, 2007 U.S. Dist. LEXIS 72455 (D. Kan. Sept. 26, 2007)

In Boyd and in Phoenix Leasing Inc., the courts analyzed each of the factors.

Negotiability

With regard to the negotiability of the contract terms, the court in Boyd first looked at whether the party against whom the waiver was being enforced attempted to negotiate the waiver out of the contract. Boyd, 2007 U.S. Dist. LEXIS 72455 at *66. If parties did not attempt to negotiate the removal of the waiver provision, the Boyd court was unsympathetic to the party against whom enforcement of the waiver is sought. Id. Furthermore, if the party against whom the waiver is sought to be enforced was able to successfully negotiate any other term of the contract, this is further evidence that the party bound by the waiver provision could have attempted to negotiate it out of the contract. Phoenix Leasing, 843 F. Supp. at 1384.

Conspicuousness

When analyzing the conspicuousness requirement, the Boyd court implied that “unambiguousness” and “understandability” are tied in with conspicuousness. Boyd, 2007 U.S. Dist. LEXIS 72455 at *62. Is the waiver capable of being understood by the party being bound by it? Is the waiver clearly written? The court also examined the position and font of the waiver in the contract. Id. In Boyd, the waiver provision at issue was in all capital letters and in bold font, and therefore met the conspicuousness test. Id. Lastly, the waiver was not buried in the document. Id. In another case, the court found that the waiver was conspicuous because it was placed right above the signature line and was the only other thing on the signature page. See Phoenix Leasing, 843 F. Supp. at 1384.

Bargaining Power

The Boyd court held that this factor includes consideration of whether the parties entered into the transaction on “relatively even footing.” Boyd, 2007 U.S. Dist. LEXIS 72455 at *62. To make this determination, the court examined whether there was evidence that either party was in financial difficulty or under duress. Id. at *63. Without the presence of difficulty or duress, the Boyd court implied that the disparity in bargaining power would not be sufficient to constitute the necessary gross disparity. Id. Furthermore, the court in Phoenix Leasing held that the ability to take out a loan, which was integral to the facts of that case, is not a necessity of life such that the party was compelled to accept the loan terms as they were offered. Phoenix Leasing, 843 F. Supp. at 1385. Thus, there was no difficulty or duress present. The Phoenix Leasing court also ruled that this factor alone should not invalidate an otherwise valid contractual waiver of the right to a jury trial. Id.

Business Experience

The court in Boyd stated that “large disparities in education and familiarity with the commercial process can permit an overreaching party to turn the other party’s lack of knowledge into an unfair advantage.” Boyd, 2007 U.S. Dist. LEXIS 72455 at *65. However, if the parties are represented by counsel during the contract negotiations or if the parties have had previous business experience, the court in Phoenix Leasing made it clear that this is sufficient to constitute the requisite business experience or acumen to allow the waiver provision to be enforced. Phoenix Leasing, 843 F. Supp. at 1385.

In In re Southern Industrial Mechanical Corp., 266 B.R. 827 (W.D. Tenn. 2001), the court ruled that the bank extending the loan to the debtor had allowed the debtor to borrow several million dollars over the prior two years. Id. at 832. The court viewed this as proof that the debtor has sufficient business experience to satisfy the requirement. Id.

Scope

Lastly, the court in Boyd held that in order for the waiver provision to apply, the current dispute before the court must fall within the scope of the waiver provision. Boyd, 2007 U.S. Dist. LEXIS 72455 at *66-67. Courts are divided as to how narrowly to construe this “scope” requirement. Some courts have held that the claim at issue in the case must be related to the subject matter of the contract and arise out of the contract. Id. at *68. Other courts have held that it is sufficient that the claims arose out of the same transaction or occurrence. Id. at *69.

Waiver of The Right to Trial By Jury By Filing a Proof of Claim

Besides a contractual waiver, a creditor can waive its right to a jury trial by filing a proof of claim. In Granfinanciera S.A., et al. vs. Nordberg, the U.S. Supreme Court held that if a creditor submits a proof of claim against the bankruptcy estate, it waives its right to a jury trial, at least with respect to counterclaims based on one of the avoiding powers. Id. at 59. This is because a creditor who files a proof of claim “triggers the process of ‘allowance and disallowance of claims,’ thereby subjecting himself to the bankruptcy court’s equitable power.” Langenkamp v. Culp, 498 U.S. 42, 44 (1990). As stated above, a party bringing a claim that is equitable in nature is not entitled to a trial by jury.

Many parties are not aware that the filing of a proof of claim triggers waiver of the right to a jury trial (as well as waiver of most jurisdictional defenses). Thus, parties should carefully consider whether they want to waive their right to a jury trial before hastily filing a proof of claim.

Conclusion

It is clear from the Supreme Court’s decision in Granfinanciera that, under certain circumstances, district courts can hold jury trials in bankruptcy proceedings. Furthermore, 28 U.S.C. §157(e) explicitly allows bankruptcy courts to conduct jury trials so long as the statutory requirements are met. Since the right to a jury trial is available in some cases, all lawyers, future debtors and future creditors should be very careful before waiving their right to have a jury hear and decide their case. Parties should pay particular attention to waivers contained in contracts or agreements, but should also be aware that the Supreme Court has decided that a creditor who submits a proof of claim to the bankruptcy court thereby waives his or her right to then request a trial by jury. From the discussion above, it is clear that unless a party can prove that it did not waive its right voluntarily and knowingly, it will be bound by its actions.