Facts
- Uninsured, nonbank financial institutions issued thrift and passbook savings certificates to investors, promising repayment.
- Within 90 days before the Chapter 11 filing, the investors redeemed some (but not all) of their certificates and received payments.
- After the bankruptcy filing, the investors filed proofs of claim for their remaining interests in the estates.
- The bankruptcy trustee brought adversary proceedings under 11 U.S.C. § 547(b) to avoid and recover the prepetition payments as preferential transfers.
- After a bench trial, the bankruptcy court found the payments avoidable preferences, and the district court affirmed.
- The court of appeals affirmed liability but held the investors were entitled to a Seventh Amendment jury trial on the trustee’s preference claims.
Issues
- Whether creditors who file proofs of claim against a bankruptcy estate are entitled to a Seventh Amendment jury trial when the trustee later sues them to recover allegedly preferential transfers under 11 U.S.C. § 547(b).
Decision
- The Supreme Court reversed and remanded.
- By filing proofs of claim, the investors invoked the bankruptcy court’s equitable jurisdiction and the claims-allowance process.
- In that posture, the trustee’s preference actions against those creditors became part of the claims-allowance process, triable only in equity.
- Because the preference litigation was integrated with claims allowance and disallowance, there was no Seventh Amendment right to a jury trial.
Legal Principles
- A creditor’s entitlement to a jury trial on a trustee’s preference claim turns on whether the creditor has submitted a proof of claim against the estate.
- Filing a proof of claim triggers the equitable process of allowance and disallowance of claims and subjects the creditor to the bankruptcy court’s equitable power.
- When a creditor has filed a claim, avoidance litigation (including preference recovery) concerning that creditor is treated as part of claims allowance and is resolved in equity without a jury.
- If a defendant has not filed a claim against the estate, a trustee’s action to recover a preferential transfer is treated as a legal action for money, for which the Seventh Amendment jury right applies.
Conclusion
The Court held that creditors who file proofs of claim against a bankruptcy estate are not entitled to a Seventh Amendment jury trial in a trustee’s preference action because the dispute is part of the equitable claims-allowance process.