Wilkey v. Inter-Trade, Inc. (In Re Owensboro Distilling Co.)

108 B.R. 572 (1989)

In re OWENSBORO DISTILLING COMPANY Debtor.
Russ WILKEY, Trustee, Plaintiff,
v.
INTER-TRADE, INC.; Dorn Case, Inc., Mojik Investments, Inc.; and Kijom Investments, Inc. Defendants.

Bankruptcy No. 4-88-00498, Adv. No. 4-89-0055.

United States Bankruptcy Court, W.D. Kentucky.

December 1, 1989.

J. Christopher Kohn, Tracy J. Whitaker, John T. Stemplewicz, Washington, D.C., for Department of Justice.

Russell Wilkey, Owensboro, Ky., Trustee.

Merritt S. Deitz, Jr., Sebree, Ky., for debtor.

Timothy Feeley, Louisville, Ky., Asst. U.S. Atty.

Joseph J. Golden, Louisville, Ky., Asst. U.S. Trustee.

Charles L. Lamar, Owensboro, Ky., for defendants.

MEMORANDUM-OPINION

DAVID T. STOSBERG, Bankruptcy Judge.

The Court today addresses multiple jurisdictional issues raised by motions to dismiss filed by the three defendants. Undoubtedly, the cloud of jurisdictional uncertainty created by the recent decision of the Supreme Court of the United States in Granfinanciera, S.A. v. Nordberg, ___ U.S. ___, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989) served as the catalyst for the motions. Unfortunately, the Supreme Court merely perpetuated the perplexing problem by deliberately declining to offer a scintilla of specific guidance.

Sufficiently troubled by the constitutional challenge presented, the Justice Department intervened in this action and actively participated in oral arguments to the court. In light of the elusive nature of the issues raised by the motion, all parties submitted thorough briefs. We conclude our introductory remarks by complimenting the parties for supplying an almost exhaustive amount of authoritative material.

SCOPE OF ISSUES PRESENTED

Initially the defendants offered a broad, sweeping challenge to the constitutionality of 28 U.S.C. § 157, the source of the bankruptcy courts' jurisdiction, and only casually touched on the narrower issue of jury trials in Bankruptcy Court. In a supplemental memorandum, and during oral argument, the defendants subtlely shifted their emphasis to the jury trial issue. Secondarily, the defendants compounded the complexity by casting doubt on this court's power based on an allegedly defective appointment process for Bankruptcy Judges. For a fledgling Bankruptcy Judge, sitting less than six months, the challenges posed create an almost incurable identity crisis. Nonetheless, the Court, with some temerity, now analyses the arguments and issues which nearly escape delineation.

RIGHT TO A JURY TRIAL

With an abundance of reluctance we apply the principle that a court should always utilize a narrow approach in disposing of the motion and avoid addressing any broader issues raised. We express our reluctance because we feel that ultimately the precedents flowing from over 280 different Bankruptcy Judges will produce a crazy quilt pattern of law inapposite to the desired goal of uniform laws on bankruptcy.

Apparently, to determine whether the defendants deserve a jury trial, the Supreme Court intends that Bankruptcy Courts employ an arcane analytic technique:

The form of our analysis is familiar. `First, we 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, we examine the remedy sought and determine whether it is legal or equitable in nature.' Tull v. United States, 481 U.S. 412, 417-418, 107 S. Ct. 1831, 1835, 95 L. Ed. 2d 365 (1987) (citation omitted). The second stage of this analysis is more important than the first. Id., at 421, 107 S.Ct. at 1837. If, on balance, these two factors indicate that a party is entitled to a jury trial under the Seventh Amendment, we must decide whether 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, 109 S.Ct. at p. 2790.

Thus, instead of relying on specific bankruptcy provisions, we enjoy a brief sojourn back in time to Eighteenth Century British Law to decipher the history of 11 U.S.C. § 723 and determine whether it rests in law or equity.

Adopting this analysis we conclude that Section 723 falls within the category of a "wolf in sheep's clothing". As the parties to this adversary proceeding are already aware, Section 723 simply empowers the bankruptcy trustee to recover personal assets of general partners when it is apparent that partnership assets will be insufficient to fully satisfy all claims. Though 11 U.S.C. § 723 falls squarely within the core proceeding confines of 28 U.S.C. § 157(b)(2)(O), it still does scarcely more than create a conduit for the trustee to serve as the plaintiff in a contract action. Significantly, this non exclusive cause of action does not deprive any creditor of the right to act individually. Rather it provides relief that only parallels the individual creditor's right. To characterize Section 723 as a public right in face of an already existing (parallel) private right would require this Court to ignore the underlying nature of the contract action the trustee pursues. While that characterization might serve as a feeble justification for skillfully skirting the jury trial issue, we resist the temptation to use the faint-hearted approach, as we are mindful of the admonition in Granfinanciera:

Congress may devise novel causes of action involving public rights free from the strictures of the Seventh Amendment if it assigns their adjudication to tribunals without statutory authority to employ juries as factfinders. But it lacks the power to strip parties contesting matters of private right of their constitutional right to a trial by jury. (Footnote omitted). Granfinanciera, at p. 2795.

Having resolved that the type of claims involved mandate a jury trial, we now undertake the arduous task of determining whether a Bankruptcy Judge can conduct a jury trial.

JURY TRIALS IN BANKRUPTCY COURT

Like Freddy Krueger or Jason^[1], the issue of whether a Bankruptcy Judge can conduct a jury trial refuses to die. In Granfinanciera the Supreme Court breathed new life into the jurisdictional monster, yet declined to assist in dealing with the havoc it wreaks. Thus, for guidance this Court relies heavily on the following persuasive authorities:

(a) Ferriell, Constitutionality of the Bankruptcy Amendments and Federal Judgeship Act of 1987, 63 Am.Bankr.L.J. 110 (1989).

(b) Gibson, Jury Trials in Bankruptcy: Obeying The Commands of Article III and the Seventh Amendment, 72 Minn.L.Rev. 967 (1988).

(c) In re G. Weeks Securities, 89 B.R. 697 (Bankr.W.D.Tn.1988).

We supplemented these authorities with the principles of Morrison v. Olson, 487 U.S. 654, 108 S. Ct. 2597, 101 L. Ed. 2d 569 and the Sixth Circuit viewpoint of 1984 Amendments expressed by the Honorable Boyce F. Martin, Jr. in In re Salem Mortgage Company, 783 F.2d 626 (6th Cir., 1986).

Congress, prodded by the Supreme Court mandate in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L.Ed.2d. 598 (1982), attempted to stuff a square peg (Article I Court) into a round hole (Article III Court). 28 U.S.C. § 151 states:

In each judicial district, the bankruptcy judge in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.

We harbor little doubt that Congress intended to expand the powers of an Article I Bankruptcy Court to the broadest extent possible — without conferring bankruptcy judges with Article III powers. In 1978 Congress recognized the enormous impact Bankruptcy Courts exercised on the economy, and revamped the Bankruptcy Code complete with a grant of broad jurisdictional powers. Shot down by the Supreme Court in Marathon in 1984, Congress adopted the core/noncore dichotomy to hopefully allay the jurisdictional concerns. For the second time Congress granted some well deserved recognition of the impact of Bankruptcy Courts and their need for broad equitable powers, and attempted "to fashion a modern bankruptcy system which places the basic rudiments of the bankruptcy process in the hands of an expert equitable tribunal". Granfinanciera, Blackmun, J. dissenting, 109 S.Ct. at 2818. Anyone doubting the evolution of the power of Bankruptcy Judges must read Covey, "Being A Judge Is Better", Conference News (Nat'l Conference of Bankr. Judges) 11 (Oct.1989). In his graphic depiction of the old days of 1959, Judge Covey notes that his 10 × 20 "closet" office also served as his courtroom and that he conducted court with one clerk, no secretary and no library. He expended a great deal of his time presiding over first meetings and hearing minor litigation with the major litigation being handled in State Court or District Court.

We digressed about the evolution of the court to present some perspective on how far Bankruptcy Courts have progressed. We believe that the Sixth Circuit recognized and applauded this evolutionary development when it expressed its viewpoint "that a broader interpretation of the statute more closely reflects the Congressional intent in adopting the new Bankruptcy laws." Salem Mortgage at p. 634. Nevertheless, while acknowledging the Sixth Circuit view, we do not view it as ample authority for this Court to conduct a jury trial.

To the contrary, the Court adopts compelling logic found in the excellent analysis by Judge William H. Brown in Weeks, supra, at 709-710:

"The reality is that there is no statutory right to a jury trial in bankruptcy proceedings except for those limited areas provided for under 28 U.S.C. Section 1411:

(a) Except as provided in subsection (b) of this section, this chapter and title 11 do not affect any right to trial by jury that an individual has under applicable nonbankruptcy law with regard to a personal injury or wrongful death tort claim.

(b) The district court may order the issues arising under section 303 of title 11 to be tried without a jury.

28 U.S.C. Section 959(a) does not grant an independent right for jury trial in suits against trustees; it merely preserves those rights that may otherwise exist. The same is true, for example, of Bankruptcy Rule 9020(d) in reference contempt proceedings and Bankruptcy Rule 7055, incorporating Federal Rule of Civil Procedure 55(b)(2) on default judgment hearings. The simple fact is that jury trials are statutorily authorized only in personal injury or wrongful death claims and possibly in 11 U.S.C. Section 303 issues. 28 U.S.C. Section 1411; see, e.g., Matter of Hendon Pools of Michigan, Inc., 57 B.R. 801, 802 (E.D.Mich. 1986).

The absence of statutory authority does not deprive a litigant to a jury trial right if that right is Constitutionally guaranteed under the Seventh Amendment. In re Beugen, 81 B.R. 994, 997 (Bankr.N.D.Cal.1988). But, presence of a Constitutional right to jury trial does not then equate to the ability of the bankruptcy court to conduct that trial — it simply means that the bankruptcy court will need to determine if such a right exists. The litigants would then resort to another appropriate court — either state court or federal — for the jury trial. This Court is persuaded that one may have a Constitutional right to a jury trial but the Constitution does not specify the forum. `[A]ny rights to a jury trial in the bankruptcy court are not constitutional in origin but must be created by statute.' In re D.H. Overmyer Telecasting Co., Inc., 53 B.R. 963, 979 (N.D.Ohio 1984). Even in the Section 1411(a) jury issues, the bankruptcy court is not authorized to conduct the jury trial. 28 U.S.C. Section 157(b)(5). Rather, personal injury and wrongful death actions are tried in the federal district court, which is `a court of law, and not only a court of equity.' King, `Jurisdiction and Procedure Under the Bankruptcy Amendments of 1984', supra at 704.

This Court does not lack the desire to conduct a jury trial nor does the Court wish to tax the parties with the burden of finding another court. The parties are entitled to a prompt trial but one in the proper court. This Court has not been persuaded that there is an inherent jury trial power in the bankruptcy court. Inherent power connotes essential power. Unlike such arguably necessary judicial powers as contempt or sanction, this Court does not need jury trial authority.

There are practical reasons why jury trials are not compatible with this Court's normal judicial activity. The Court does not suggest that it is too busy to conduct jury trials, but jury trials are, by nature, more time consuming then (sic) bench trials, and one could conclude that the Court's docket and case pace demands do not accommodate jury trials. In re Southern Industrial Banking Corp., 66 B.R. 370, 375, 15 B.C.D. 249 (Bankr.E.D.Tenn.1986), quoting from In re Best Pack Seafood, Inc., 45 B.R. 194, 195 (Bankr.D.Me.1984). This Court is not `physically equipped nor staffed to' properly and efficiently handle jury panels and trials. In re Astrocade, 79 B.R. 983, 991, 16 B.C.D. 1306, 1312 (Bankr.S. D.Ohio 1987). The rapid pace of bankruptcy cases and proceedings do not mesh with jury procedures. `Congress enacted the Bankruptcy Code to provide a prompt resolution of all bankruptcy causes of action in order to expedite the settlement of the debtor's estate. Jury trials would "dismember" the statutory scheme.' In re Chase & Sanborn Corp., 835 F.2d 1341, 1350 (11th Cir.1988), cert granted, [486] U.S. [1054], 108 S. Ct. 2818, 100 L. Ed. 2d 920 (1988). Taken in isolation, this adversary proceeding would not destroy this Court's functions. To permit jury trials as a general concept is another issue.

However, more importantly, the expertise of this Court does not fit easily into jury trials. This is a specialized court, and it is a court which historically and inherently is one of equity in nature. See, e.g., Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S. Ct. 695, 697, 78 L. Ed. 1230 (1934); see generally, King, `Jurisdiction and Procedure under the Bankruptcy Amendments of 1984,', supra at 703-704. As such, the judicial experience of the bankruptcy court does not include juries. To permit the conducting of jury trials in the bankruptcy court on an occasional basis may breed trial error through judicial inexperience. It would seem that the bankruptcy court either needs to regularly conduct jury trials or to never conduct them."

(Footnote omitted).

For emphasis, we repeat the comment of the Sixth Circuit in Overmyer that: "rights to a jury trial in the Bankruptcy Court are not constitutional in origin but must be created by statute". Overmyer at 979. Moreover, this Court feels that if Congress had granted the right to conduct jury trials, it would have essentially created a specialized Article III Judge with close to a lifetime tenure. Certainly a judge enjoying such status satisfies the principal officer test enunciated in Morrison v. Olson, supra. In Morrison the Supreme Court admitted:

The line between `inferior' and `principal' officers is one that is far from clear, and the Framers provided little guidance into where it should be drawn. Morrison, 108 S.Ct. p. 2608.

The Court then enumerated a four-pronged test based on:

(1) removability from office;

(2) performance of limited duties;

(3) limited jurisdiction; and

(4) limited in tenure.

Rather than dwell on the topic, we merely observe that by applying this test to determine whether sitting Bankruptcy Judges are inferior officers, we stretch the definition of inferior officer to its broadest boundaries. We believe that application of the Morrison rationale confronts the appellate courts with a "Catch 22": a holding that Bankruptcy Judges can conduct jury trials would serve as the same rationale for a holding that such power causes Bankruptcy Judges to transgress the line from an inferior officer (which can be appointed under the current procedure) to a principal officer which can only be appointed by the President! In other words, if Bankruptcy Courts have the right to conduct jury trials, then the appointing process is defective and they have no power at all!

For a simple solution to the dilemma, we incorporate the comments of Professor Gibson and note that she, like Mr. Ferriell, expressed her premonitive comments about the core/noncore dichotomy, prior to Granfinanciera:

Perhaps the most fundamental problem caused by authorizing bankruptcy judges to conduct jury trials in cases requiring an article III judge is that, in exercising this power, the bankruptcy judge crosses the hazy line separating adjunct and judge. No longer is the bankruptcy judge just an assistant acting under the close supervision of the district judge. Instead, the bankruptcy judge in effect exercises final, unreviewable authority over matters that may significantly affect the outcome of the case.

The premise of article III, according to Professor Resnik, is `that it matters that final decisions are made by specially empowered actors. If this is an accurate conclusion, then even if bankruptcy judges are constitutionally valid adjuncts to district court, they should not be permitted to conduct jury trials of noncore matters with the parties' consent. Allowing them to do so vests too much authority in these unprotected actors.

CONCLUSION

Critics of the seventh amendment complain about the cost, inefficiency, and unreliability of jury trials. Nevertheless, the seventh amendment remains a vital part of the Constitution. Its commands may not be ignored just because a matter happens to fall within the jurisdiction of the bankruptcy court. Viewing bankruptcy courts as courts of equity operating outside the scope of the seventh amendment is no longer accurate. Instead, bankruptcy courts are courts of law and equity authorized to hear matters retaining their legal nature even though asserted in bankruptcy proceedings. Consequently, the Constitution requires that jury trial rights in these cases be recognized, whether or not Congress statutorily acknowledges the existence of such rights.

Although the understandable desire for efficiently adjudicating disputes cannot justify overriding the seventh amendment, it is relevant in determining how to implement the seventh amendment's commands. The present procedural structure of the bankruptcy courts is poorly suited for the efficient conduct of jury trials. Notwithstanding the seventh amendment's applicability to certain core proceedings, most cases in which parties are entitled to a jury trial are noncore. Without the parties' consent to entry of judgment by the bankruptcy judge, jury trials in noncore cases must be conducted by a district judge to avoid an unconstitutional de novo review of the jury's verdict.

The substantial delay in the underlying bankruptcy proceedings that will inevitably result from bifurcating adjudications of bankruptcy matters demonstrates the need for article III bankruptcy judges. Congress's decision in 1984 to continue to staff the bankruptcy courts with fixed-term judges, while maintaining the broad scope of bankruptcy jurisdiction introduced by the 1978 Act, invites uncertainty and constitutional challenge. The core-noncore scheme itself is difficult to apply, and its validity under article III is arguable. Assuming it is constitutional, however, the inefficient jury trial procedure will remain. Congress wisely decided in 1978 to consolidate all bankruptcy-related matters in the bankruptcy court. It should not undercut that policy by retaining a clumsy and inefficient court structure that requires some matters to be tried in the district court and forces the bankruptcy proceeding into abeyance while awaiting the district court's decision. Instead, in recognition of the need to execute the seventh amendment's requirements efficiently, Congress should reconstitute the bankruptcy courts as article III courts with full powers to conduct jury trials in all types of bankruptcy proceedings. Gibson, at pp. 1053-1054. (Footnotes Omitted).

We take no delight in posing this dilemma and appellate courts may view it more as perceived than real. Nor do we deem it our task to tame the jurisdictional monster. That burden ultimately will rest upon the shoulders of the Supreme Court which hopefully, in a sequel soon to be decided, will bury the monster it has resurrected.

Having decided that the litigants herein are entitled to trial by jury and having further decided that the bankruptcy court lacks authority to conduct such a trial, we must abstain from hearing the case and this day will enter an appropriate order transferring this case to the District Court.

NOTES

[1] In Halloween and Nightmare on Elm Street, these movie monsters manage to reincarnate themselves through various bizarre events. We hesitate to predict how many sequels of Jurisdictional Nightmare in Bankruptcy Court the Supreme Court will produce!