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Facts: Endeavor Highrise, L.P. (the "debtor") is a developer of high-rise condominiums. In July 2008, pre-petition, the debtor and Kenneth Zimmern entered into an Earnest Money Contract (the "Contract") under which Endeavor agreed to sell and Zimmern agreed to buy a condo. Pursuant to the Contract, Zimmern deposited $44,000 (the "Earnest Money") with a title company (the "Title Company"), who still holds the Earnest Money. Under the Contract, if the sale does not close because of Endeavor, Zimmern gets the Earnest Money back and if the sale does not close because of Zimmern, Endeavor keeps the Earnest Money. The sale did not close and, in May 2009, the debtor filed for chapter 11 bankruptcy. In June 2009, a chapter 11 trustee (the "Trustee") was appointed. In August 2009, the Title Company filed an interpleader action asking for, inter alia, permission to interplead the Earnest Money into the court's registry and that the Title Company be discharged from all claims. In September 2009, the Trustee filed his answer and a cross-claim against Zimmern. The Trustee supported the Title Company's relief and alleged that Zimmern defaulted under the Contract, and, thus, the Earnest Money belonged to the estate. In October 2009, Zimmern filed an answer to the interpleader complaint, an answer and cross-claim against the Trustee and a counterclaim against the Trustee. Zimmern argued that Endeavor breached the Contract and, as a result, Zimmern is entitled to the Earnest Money. Zimmern expressly requested a jury trial. Additionally, Zimmern filed a motion for withdrawal of the reference. In November 2009, the Trustee filed a motion to strike the jury demand and an objection to the motion for withdrawal of the reference. In December 2009, Zimmern filed a response. In January 2010, the court held a hearing on the matters.
Issue: Whether Zimmern who has not filed a proof of claim against the estate and is a named defendant in a complaint filed by the bankruptcy trustee and then counter-claimed against the trustee is entitled to a jury trial. In other words "when a party is dragged into a bankruptcy court against its will (rather than voluntarily filing a claim as in the Trilogy fact pattern), should that party lose his right to a jury trial if he responds with a counterclaim against the estate?"
Holding: By filing the cross-complaint and counterclaim, Zimmern waived his right to a jury trial.
Rule: Three Supreme Court cases have been written as to when a party in a bankruptcy dispute has a right to a jury trial: Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), and Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (together, the "Trilogy holding"). Together, the Trilogy holding "indicate[s] that a creditor or party-in-interest who voluntarily files a claim against the bankruptcy estate thereby loses the Seventh Amendment right to a jury trial if the trustee subsequently objects to the claim or seeks some other affirmative relief relating to the claim."
Reasoning: The court recognized that there is a split in the case law on this issue. The court discussed both lines of cases at length. Ultimately, however, the court held that "in filing his Counter-Cross-Claim [Zimmern] has waived his right to a jury trial by filing a claim against Endeavour's estate." The court relied on the Trilogy holding as well as the Fifth Circuit's doctrine of 'arguable property' of the bankruptcy estate to reach its conclusion. The doctrine of 'arguable property' of the bankruptcy estate was set forth by the Fifth Circuit in In re Chestnut, 422 F.3d 298 (5th Cir. 2005) and encompasses "property in 'which the debtor has only an arguable claim of right.'" When property is 'arguable property' of the estate, it is presumed to belong to the estate. The Earnest Money is 'arguable property' of the estate because both the Trustee and Zimmern have asserted rights in the funds. Thus, the Earnest Money is presumed to be property of the estate. "Because the Earnest Money, as 'arguable property,' is presumed to be property of Endeavour's estate, it logically follows that a counterclaim seeking title to and possession of the Earnest Money constitutes a counterclaim against Endeavour's estate. As indicated in the analysis above, the majority of the cases applying the Trilogy holding have held that filing a
©2010 Leif M. Clark
