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There Is a Jury Trial for that Proof of Claim

By Bob Lawless

Imagine the following. A debtor files bankruptcy and schedules a $10,000 bill owing to a credit card company. The credit card company files a proof of claim, saying the debt is $20,000. The debtor objects. OK, at that point, the dispute sounds like a pretty routine procedural matter requiring a hearing before the bankruptcy judge to resolve the disputed claim. Bankruptcy mavens would call it a "contested matter" under Federal Rule of Bankruptcy Procedure 9014.

Suppose the credit card company objects to this procedure and instead insists on a jury trial to resolve the disputed claim, arguing the Seventh Amendment requires a jury trial unless the parties waive it. Well, that's just crazy talk.

A creditor who has submitted a proof of claim has voluntary participated in the statutory mechanism for the payment of claims to the debtor's assets and thereby has submitted to the bankruptcy court's jurisdiction. The credit card company's Seventh Amendment argument seems obviously wrong.

My colleague, Suja Thomas, has a paper on SSRN ("The Unconstitutionality of Administrative and Bankruptcy Adjudication of Damage Claims") that suggests the argument may not be so obviously wrong. The U.S. Supreme Court has held that a jury trial right exists for any cause of action for which a jury trial right existed in England at the time of the Seventh Amendment's adoption in 1791. Because the basis for a jury trial in England in 1791 depended on the nature of the relief sought, "with damages being heard by juries," Thomas argues the Supreme Court has been inappropriately deferential to Congress in placing certain causes of action beyond Seventh Amendment protection. Specifically, Thomas states, "The inquiry as to whether a jury trial right exists under the Seventh Amendment should be based only on the relief sought and a jury trial right exists for Congressionally-created causes of action with damages remedies, including ones that Congress has relegated to administrative agencies and bankruptcy courts."

The upshot of this analysis is that the right to a jury trial would be much broader than bankruptcy practitioners generally assume. Thomas's paper is careful. The paper only lays out a general theory about the interplay of the Seventh Amendment and Congressional powers. Thomas mentions some possible implications in the areas of bankruptcy and administrative law but concedes the resolution of specific issues could depend on contextual information and concepts outside the scope of this paper.

As applied to bankruptcy, I'm somewhat skeptical of these arguments given other Supreme Court cases holding creditors waive jury trial rights by participating in a bankruptcy case. Bankruptcy mavens will be thinking about cases like Katchen v. Landy and Langenkamp v. Culp. I spoke to Thomas about this, and as I understand her response, she sees these cases as sitting uncomfortably with the Supreme Court's general approach to Seventh Amendment issues.

I am not yet convinced that Thomas's general theory has much specific application that wouuld change the jury trial rights in bankruptcy (at least not without overturning a whole slew of cases). But, I am persuaded that an expansive view of Seventh Amendent rights in bankruptcy is at least not obviously wrong. As a statutory matter, 28 U.S.C. § 1411 perserves a jury trial right in bankruptcy for personal injury or wrongful death claims, so we'll have to stick to contract or other tort claims as an example. Consider that I started this post with the jury trial right asserted by a credit card company, figuring it would be a rather unsympathetic claimant to most of our readers. If the claimant was instead a class of consumers who were asserting warranty claims against a bankrupt corporation, would that make you more inclined to accept an argument that they have a Seventh Amendment right to a jury trial on objections to the claims? If so, then maybe the argument is not so obviously wrong to you either. If so, the full paper might be worth a read.

Full post as published by Credit Slips on August 24, 2010 (boomark / email).