Memorandum of Decision Re: Rights to Jury Trial

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re FOODSOURCE SALES CORPORATION,                                       No. 1-84-00703      Debtor. ___________________________/ J. TAYLOR HALEY, Trustee,      Plaintiff,     v.                                                                                                   A.P. No. 1-89-0011 FORD C. ABBOTT, et al.,      Defendants. ______________________________/
Memorandum of Decision re Right to Jury
     The factual background to this adversary proceeding is contained in the Court's Memorandum of Decision dated July 15, 1989. The issue now before the Court is whether some or all of the defendants have a right to the jury trial they have demanded.
I. Nonbankruptcy Law
     The Trustee first argues that the defendants are not entitled to a jury under nonbankruptcy law because her action is in essence an action for specific performance of the settlement of the Budd litigation. She cites Adams, et al. v. Johns-Manville Corp. (9th Cir.1989) -- F.2d --, to support her argument that this action is in the nature of a specific performance proceeding, with no right to a jury.      The first problem the Court has with the Trustee's argument is that it is made to this court and not the court which approved the settlement. While nothing in Adams specifically limits its holding to a motion in the same court where the settled action was heard, the Court believes that summary proceedings to compel compliance with a settlement are extraordinary in nature and should therefore be strictly limited to situations where they are clearly appropriate.      More fundamentally, the Court should not apply the summary procedure approved in Adams to compel more than the settlement required. The Budd settlement did not require the defendants to pay on their notes. It merely declared the rights of the parties in relation to the notes and limited some defenses available to the investors. While some of the individual issues may be proper for summary adjudication because of the Budd settlement, defendants did not lose their overall right to a jury trial because of the settlement. In Adams, the settlement was not complete until the defendants paid the settlement amount. In the Budd litigation, the settlement was complete when approved. Nothing in the settlement specifically requires the investors to make good on their notes, so the right to receive payment is not one which can be specifically enforced.
II. Bankruptcy Law
     At the very heart of every bankruptcy proceeding is the bankruptcy estate. Even when the jurisdiction of the federal courts over bankruptcy matters was limited, the bankruptcy court exercised summary jurisdiction over any matter which involved a possible distribution from the debtor estate. 2 Collier on Bankruptcy (14th Ed.), section 23.08[6]. Moreover, the bankruptcy court's summary jurisdiction extends to any claims the estate has against the claimant, even when the estate's claims exceed the creditor's claim and when the estate's claims are based only on state law. Katchen v. Landy (1966) 382 U.S. 323; In re Beugen (Bkrtcy.N.D.Cal.1988) 81 B.R. 994, 998; In re Sun West Distributors, Inc. (Bkrtcy.S.D.Cal.1987) 69 B.R. 861, 865.      In the days before the Bankruptcy Code, the filing of a proof of claim did two things. First, it established the jurisdiction of the bankruptcy court over whatever disputes existed between the estate and the claimant. Second, it allowed the bankruptcy judge to hear the matters summarily, without a jury. Since enactment of the Code, jurisdiction is not a concern because 28 U.S.C. section 1334(b) has granted expansive jurisdiction to the federal courts. However, the Supreme Court has recently reaffirmed that filing a proof of claim still results in summary adjudication without a jury. Granfinanciera v. Nordberg (1989) -- U.S. --. In fact, the Supreme Court's decisions in Granfinanciera and Hoffman v. Connecticut Dept. of Income Maintenance (1989) -- U.S. --, have underscored the significant rights which are established and altered by filing a proof of claim.      It is clear from the foregoing that any defendant who has filed a proof of claim based on his purchase of a container has no right to a jury trial on the Trustee's action on the note. A thornier question is whether those defendants who have filed counterclaims in this adversary proceeding have likewise lost any right to a jury trial.      Before enactment of the Bankruptcy Code, any defendant who filed a counterclaim in a suit against him in bankruptcy court was deemed to have consented to the summary jurisdiction of the court. 2 Collier on Bankruptcy (14 Ed.), section 23.08[5], p. 551. However, in those days there was no such thing as a jury trial in bankruptcy court, so that consent to bankruptcy court jurisdiction was by definition consent to trial without a jury. The problem with applying the principle today is that the propriety of a jury trial in bankruptcy court is now an open question, as discussed in Granfinanciera. Since those defendants who filed counterclaims here also made timely requests for jury trials, the Court cannot find that they have waived their right to a jury merely by consenting to adjudication in the bankruptcy court. The foregoing analysis does not mean that any defendant who filed a counterclaim is entitled to a jury; the fact that affirmative relief is sought from the estate requires the court to decide the issue without a jury under Katchen. However, it does mean that those defendants who elect to drop their claims for affirmative relief, and instead argue their causes of action only as affirmative defenses, have not waived their right to a jury merely because they have consented to adjudication in the bankruptcy court.
III. Rulings
     Based on the foregoing analysis, the Court will order as follows:
     1. The jury demands of all defendants who have filed proofs of claim will be stricken. The Court will hear and decide their claims and the Trustee's claims against them without a jury.
     2. The jury demands of all defendants who have filed counterclaims against the Trustee in this adversary proceeding will be stricken unless within 20 days after the date of this memorandum such defendants have withdrawn their counterclaims and stated the issues raised in the counterclaims only as defenses, with no affirmative relief sought against the bankruptcy estate.
     3. Those persons who have neither filed a proof of claim nor seek affirmative relief in this adversary proceeding are entitled to a jury trial on those issues not subject to summary adjudication under nonbankruptcy law. Pursuant to Local Rule 700-7, the claims against such defendants will be severed and certified to the district court for jury trial unless the parties consent to a jury trial in the bankruptcy court. Referral back to this court of any pretrial motions is a matter for the sole discretion of the district court.
IV. Further Procedure
     The Court recognizes that severance of this case into jury and nonjury actions will cause some problems, not the least of which is the possible collateral estoppel effect of the first fact finder to render a decision. While the Court cannot force the parties to agreement as to how the matter shall be adjudicated, it can give each side some incentive towards an agreement which will resolve this matter as quickly and economically as possible, without compromising any rights. The Court will order as follows:
     1. If all parties agree that the jury trial will be held in bankruptcy court, the Court will hold a single trial on all issues at the same time, and give great weight to the jury verdict in rendering a decision on the nonjury issues. Such a trial would be held in January or February, 1990.
     2. If the Trustee consents to a jury trial in the bankruptcy court but defendants do not, or if neither side consents to a jury trial in bankruptcy court, then the Court will proceed to hold the nonjury trial without waiting for the outcome of the jury trial in district court.
     3. If defendants consent to a jury trial in the bankruptcy court but the Trustee does not, then the Court will stay the nonjury proceedings in the bankruptcy court until after the jury trial is held in district court.
     All parties shall file their consents within 30 days after entry of the order made pursuant to this decision. Any party not affirmatively consenting within that time will be deemed not to have consented to a jury trial in bankruptcy court.      Counsel for the Trustee shall submit an order conforming to the rulings made in this memorandum, which counsel for defendants shall approve as to form. The order shall identify which defendants have a right to a jury trial and which do not.
Dated: July 17, 1989                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy