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Peter J. Benvenutti
 On CREDITORS' RIGHTSWhen the other party to contemplated litigation files for bankruptcy, should your client file a claim in the Chapter 11 case? This can be a surprisingly difficult question. uppose each party asserts state law claims for substantial money damages against the other, but no litigation has been initiated when the bankruptcy case is filed. At some point, usually fairly early in the bankruptcy case, a claims bar date will be set by bankruptcy court order or local rule. Your client must file a claim by the bar date or lose, probably irretrievably, the right to obtain any payment from the debtor. Although the magnitude of that payment is highly uncertain, the adversary is continuing to operate its business and is making optimistic pronouncements about its prospects for recovery. So, your client asks, what's to lose by filing a claim? The answer, sometimes, is plenty. Much depends on where you think your client is better off defending the debtor's action Ñ the bankruptcy court or somewhere else. If your client files a bankruptcy claim, it has probably agreed to have the bankruptcy judge in the adversary's Chapter 11 case decide all disputes between your client and the debtor, and has waived its jury trial right in the bargain. The reasons lie in the uneasy interplay between the bankruptcy jurisdictional statutes and rules, on the one hand, and several Supreme Court decisions construing the powers of the bankruptcy courts, on the other. By statute Ñ the 1978 Bankruptcy Reform Act Ñ bankruptcy courts have jurisdiction over virtually all matters germane to a bankruptcy case, including disputes that are "related to" the bankruptcy case. This "related to" jurisdiction is almost universally construed to encompass pre-bankruptcy claims asserted by the debtor in possession against third parties. Enter the Supreme Court. In Northern Pipeline Constr. Co. V. Marathon Pipe Line Co., 458 U.S. 50 (1982), the Supreme Court held, as a matter of constitutional law, that non-life-tenured, non-Article III bankruptcy judges could not, absent the consent of the litigants, decide state law claims asserted by a bankruptcy debtor against third parties. Consequently, the bankruptcy jurisdictional structure was revamped to provide that, while the bankruptcy court can hear these "related to" cases and propose findings and a decision, the non-debtor party retains a right to de novo review by the federal district court. A non-debtor party sued by the debtor on a state law claim also has an enhanced basis to ask the bankruptcy court to abstain in favor of, or remand a removed action to, state court. In practice, bankruptcy judges tend to be willing to send "related-to" litigation to a state court forum if the non-debtor party so requests. Another relevant limitation on the bankruptcy court's jurisdiction concerns the parties' right to a jury trial. Bankruptcy administration Ñ including the allowance of claims Ñ is an equitable process, with no jury trial right; but there are situations in bankruptcy in which a jury right is preserved, most specifically including suits by the debtor in possession to recover money. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). Because the bankruptcy court can conduct a jury trial only if all parties affirmatively consent [28 USC §157(e)], absent such consent the case must be tried in the federal district court [In re Cinematronics, Inc., 916 F.2d 1444 (1990)] or an appropriate state court. Hence, a party sued by the bankruptcy debtor can, by asserting its right to a jury trial, veto the bankruptcy court as a forum for the litigation. What does this have to do with filing a claim? Filing a claim can change everything. Under the post-Marathon Pipe Line jurisdictional statute, a counterclaim by the debtor against a creditor which has filed a claim is no longer a "related to" matter, but rather part of the bankruptcy court's "core" jurisdiction. 28 USC §157(b)(1)(C). As such, the bankruptcy court can hear and decide the dispute, subject only to regular appellate review. The rationale is that, in order to determine whether and for how much to allow the creditor's claim, the bankruptcy court must also be able to resolve any setoffs or counterclaims by the trustee against the claimant. Under a similar logic, the creditor filing a claim loses its right to demand a jury on the debtor's counterclaim. What would otherwise have been a "legal" dispute subject to jury trial right (the debtor's claim for money damages) has become part of the "equitable" process of allowance and disallowance of claims in bankruptcy, to which no jury trial right pertains. See Langenkamp v. Culp, 498 U.S. 42 (1990). Sometimes the bankruptcy court will be an attractive forum for the non-debtor party to litigate its business dispute with the debtor, and sometimes not. There is no hard and fast rule. The point here is that a non-debtor party, confronted by the prospect of a lawsuit by the debtor in possession, often has the right to require a non-bankruptcy forum for the litigation. It should not lose that right by filing a claim in the bankruptcy case without being aware of, and carefully considering, the consequences. Mr. Benvenutti is a partner in the firm of Heller Erhman White & McAuliffe. Email: pbenvenutti@hewm.com |