Pursuant to the Supreme Court opinions in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) and Langenkamp v. Culp, 498 U.S. 42 (1990), the filing of a proof of claim in a bankruptcy proceeding gives rise to a waiver of one’s Seventh Amendment right to a jury trial.
In Schmidt v. AAF Players LLC (In re Legendary Field Exhibitions LLC), No. 19-05053 (Bankr. W.D. Tex. Jan. 10, 2020), the Bankruptcy Court for the Western District of Texas was faced with an issue as to whether the creditors could preserve their right to a jury trial by reserving their right in their proof of claim in order to avoid the effects of Langenkamp and Granfinanciera.
Even though the court recognized that the creditors faced a Hobson’s choice, i.e. losing the right to collect on their claims or waive their right to a jury trial, it ultimately ruled that the reservation of rights had no effect and thus by filing the proof of claim, the creditors waived their right to a jury trial.
In doing so, the Court noted that the Seventh Amendment protects a litigant’s right to jury trial “only if a cause of action is legal in nature and involves a matter of private right.” Granfinanciera, 492 U.S. at 42 n.4. In this regard, the court noted that Bankruptcy is an example of an area involving ‘public rights’. It further noted that
By filing a claim against the bankruptcy estate, “a creditor triggers the process of ‘allowance and disallowance of claims,’ thereby subjecting himself to the bankruptcy court’s equitable power.” Id. at 373 (citing Granfinanciera, 492 U.S. at 58). Moreover, by “[triggering] the process of ‘allowance and disallowance of claims’ [through filing] a claim against the bankruptcy estate,” the creditor then becomes “[subjected] to the equitable power of the bankruptcy court.” U.S. Bank Nat. Ass’n, 761 F.3d at 417 (citing Granfinanciera, 492 U.S. at 58–59). Disputes that are integrally related to allowance or disallowance of a filed claim are equitable in nature. Granfinanciera, 492 U.S. at 58.
Schmidt v. AAF Players LLC (In re Legendary Field Exhibitions LLC), No. 19-05053, slip op. at 7.
For these reasons, the court found that by filing a proof of claim, the creditors “effectively converted their legal dispute to an equitable dispute” and therefore waived their right to a jury trial notwithstanding their reservation of rights to a jury trial.
Here, the creditors had no choice. Either they would waive their claim against the debtor by not filing a claim or waive their right to a jury trial by filing a proof of claim. Some may find this choice extremely unfair, but bankruptcy is a unique process that requires the disposition of all claims against the debtor in a timely and orderly fashion that requires the Bankruptcy Judge to control the process.