Presenting Bankruptcy Concepts to Juries

More Common Than You Think

This should not be dismissed as an anomaly. Traditionally, juries have always played a role in bankruptcy in certain instances. The 1989 United States Supreme Court case, Granfinanciera, S.A. v. Norberg, established a bankruptcy trustee's right to a jury trial in fraudulent conveyance actions. Similarly, in at least some instances, courts have found that creditors retain the right to jury trial in certain preference actions, and in adversary proceedings, the parties can agree to try the case to a jury. And, of course, the Supreme Court's recent decision in Stern v. Marshall, No. 10-179, establishes that bankruptcy courts cannot adjudicate certain state law counterclaims.

In addition, a party in bankruptcy may, as the FDIC did in the AmFin case, move to withdraw the reference from the bankruptcy court to the district court if the dispute involves consideration of “other laws of the United States regulating organizations or activities affecting interstate commerce.” And once in district court, the court may on its own and in the absence of a jury right invoke Civil Rule 39(c) to empanel an advisory jury to assist in the adjudication of some or all of the issues in dispute ' and some judges do this regularly.

These developments increase a bankruptcy practitioner's chances of having to present bankruptcy-related disputes to a jury. They also raise the questions, “Should the specter of a jury in a bankruptcy action be a cause for alarm for the bankruptcy practitioner?” “Are bankruptcy matters too highly technical for trial by jury to be a practical method of adjudication?”

The answer to both questions is no. Bankruptcy practitioners are correct in believing that bankruptcy courts are inherently courts of equity. Far from making bankruptcy-related disputes unpresentable to a jury, however, it is precisely this characteristic that makes bankruptcy issues accessible to juries. Ask any seasoned trial attorney: Juries excel at achieving equity.

Of course, certain aspects of bankruptcy matters are cumbersome and difficult to present ' such as expert financial testimony. A bankruptcy practitioner who does not carefully limit and streamline such evidence does so at his or her peril, and risks not only boring, but irritating the audience he or she seeks to persuade. The trial lawyer's rule, that one must develop a single, easily accessible theme of the case, and eliminate any evidence that does not relate to that theme, applies doubly in highly technical bankruptcy cases. This requires discipline, as it can be difficult for bankruptcy attorneys, even those who litigate frequently, to abandon extraneous facts and theories; indeed, day-to-day bankruptcy practice necessarily involves arduous attention to small uncontested facts and details. That practice can never be carried on in front of a jury, however. The cardinal rule for jury trials in bankruptcy matters is the same as the cardinal rule for jury trials everywhere: Choose one jury-accessible theme and make sure all of your evidence and theories relate to it.

Fortunately, the general principles of bankruptcy easily lend themselves to developing jury-accessible themes. And each of them starts with the principle that bankruptcy is about making the best of a bad situation. The very nature of bankruptcy often dictates that something unfair has already happened: Creditors who are legitimately owed money may not recover 100 cents on the dollar. But juries can easily grasp that their role is to ensure that the value of the debtor's estate is maximized, creditors all play by the same rules, and claims are processed in an orderly fashion. The remainder of this article will discuss how some of the basic principles of bankruptcy might be presented to a jury.

The Principle Governing the Automatic Stay: Stop Right There!

Bankruptcy litigation often involves disputes concerning the automatic stay provision of the Bankruptcy Code and its effect of ceasing all attempts ' no matter how legitimate ' to obtain property from an estate. For those seeking to enforce the stay, convincing jurors of its appropriateness involves presenting it as a rule of fairness, emphasizing the rule's basic principle: Creditors must “Stop Right There!” so that an estate administration plan can be put in place and so other creditors have the same opportunity to pursue their claims. The equitable principle to sell to the jury is that there must be a freeze to allow a reasoned determination of the claims on the estate, which are legitimate, and how each can best be paid. Any other rule would allow powerful or cunning creditors to lay claim to the estate's property disproportionate to their entitlement.

A jury should be introduced to the “Stop Right There!” rule during voir dire, with questions directed at conditioning their agreement that allowing some creditors to go before others constitutes an unfair false start. The theme must be further emphasized in opening, and the first witness on direct might be the estate trustee or administrator who can explain his or her role in putting together a comprehensive plan that deals with all creditors, and which solicits all of their input.

A creditor attempting to assert a claim over the automatic stay, on the other hand, will portray the dispute as involving a (worthy) creditor against an (unworthy) debtor refusing to pay its debts, which also involves fairness principles. The jury-suitable rejoinder is that bankruptcy involves more than just a single creditor; it involves the orderly administration of multiple debts and claims, and fairness dictates that in the initial states of the bankruptcy, all creditors must Stop Right There! to facilitate a solution that is fair to everybody.

The Principle Governing Pro Rata Distribution:
Get in Line!

The corollary to the Stop Right There! rule is “Get in Line!” ' the principle that, in bankruptcy a creditor can only expect to recover in the same proportion as other creditors of the same class. This is also a rule of fairness. Because many creditors have legitimate claims against an estate, each claim must be treated equitably, and no creditor may receive preferential treatment.

Again, juries must be conditioned to this theory early and often. An effective voir dire might seek to identify those jurors who think that some claims (namely, whatever is being asserted in the litigation at issue) are more important than others. In the AmFin case, for instance, a ripe area for jury questioning sought to discover whether the jurors thought the FDIC had a greater right to its claims, either because it was an agency of the federal government, or because federal agencies such as the FDIC should be given greater funding as a result (and to combat) the economic downturn. We emphasized this point further in our opening, arguing that in bankruptcy, there was no “easy pass” available to allow the FDIC to skip to the front of the line, and that it must receive the same treatment as the other creditors.

The FDIC, on the other hand, presented a needlessly complex case involving the bank's financial condition over a two-year period of time, the relevant regulatory practices at issue, endless government submissions and communications, and so forth ' all for the purpose of establishing that the bank was in trouble, and as such the government had every reason to seek a financial commitment from its parent. At the conclusion of the FDIC's presentation, however, the jury was hopelessly lost.

In response, we stuck with our theory: The FDIC, like any other creditor, has to Get in Line. In fact, we felt we had emphasized this theme during the FDIC's case so consistently and so well that, after the FDIC rested, we decided not to put in any further evidence of our own. We felt the jury had already heard as much detailed evidence as they could handle, and that nothing would be gained by exposing our witnesses (the former leaders of the bank) to potentially damaging cross-examination about the bank's practices (not even relevant in any event). The jury rewarded us by concluding ' unanimously ' that no capital maintenance commitment had been made.

The Principle Against Preference Payments and Fraudulent Conveyances: Take a Hard Look!

In bankruptcy law, some transactions are considered to be presumptively suspicious ' namely, preferential payments and (fraudulent) conveyances to insiders. In such cases, counsel wishing to unwind the transaction should urge the jury to “Take a Hard Look!” to facilitate the fair and equitable treatment among and between creditors, and to ensure the orderly administration of the debts of a bankrupt estate. The jury-accessible principle is cynicism: Creditors have every incentive in the world to exact as much of value as possible from an entity they detect is in financial trouble. Similarly, it is not unusual for debtors to try to hide and protect their assets from liquidation if they sense bankruptcy is coming. Again, the appeal is to fairness, and juries can be made to understand that their role is, in some cases, as guardian against the dark side of human nature. While juries are naturally creatures of equity, many jurors also have a healthy distrust of nearly anything presented in an adversarial setting. It is not difficult to persuade them to look for ' and find ' financial malfeasance. Allowing them to Take A Hard Look! capitalizes on inclinations they already have.

The optimal jurors in Take A Hard Look! cases are those who, perhaps ironically, look like they hate you ' as long as they look like they hate the other side too. They can be identified during voir dire with questions that ask for agreement with generically idealist statements. A juror who is reluctant to agree that “trials generally produce fair results,” or that “people under oath generally tell the truth,” may be what you are looking for. These jurors may not trust you, and they may not trust your client either, but as long as they do not trust the other side, they will have done their job.

Conclusion

The basic concepts at play in bankruptcy proceedings are straightforward, but not necessarily obvious. It is important to translate these concepts into language that a jury (or a non-bankruptcy judge) is likely to understand. It is even more important to convey the fundamental fairness of protections such as the automatic stay, and to educate jurors that what is good for the debtor is often good for the creditors as a group, and what is good for one creditor may be very bad for other creditors further back in line. The concepts can be conveyed clearly to non-denizens of the bankruptcy world, as the likelihood that bankruptcy practitioners will find themselves talking to strangers to the Code seems to be on the rise.

Philip Oliss and Sarah K. Rathke are partners with Squire, Sanders & Dempsey. Oliss is a trial lawyer whose practice is focused on complex litigation and business restructuring-related litigation. Rathke is a trial lawyer who focuses on commercial and civil matters, product liability defense and international disputes. Both are based in the firm's Cleveland, OH, office and may be reached at [email protected] and [email protected], respectively.

Bankruptcy attorneys may conceive of their field as being a highly specialized and insulated world. Until recently at least, these practitioners tended to practice in bankruptcy courts only; those courts conveniently specialized in bankruptcy, and everyone gathered in those courts spoke essentially the same language. A common belief among bankruptcy practitioners has been that disputed matters invariably sound in equity, thus posing very little danger that an attorney would ever encounter a jury. Moreover, bankruptcy-related issues are sometimes thought to be highly technical, often involving complex accounting or sometimes regulatory or tax principles, such that adjudication by a jury is undesirable in any event.

But juries can appear where one least expects them. Our firm, Squire, Sanders & Dempsey, recently won a defense verdict in a jury trial involving claims by the Federal Deposit Insurance Corporation (FDIC) against a Chapter 11 debtor and former savings and loan holding company, AmFin Financial Corporation. The FDIC had placed AmFin's subsidiary, AmTrust Bank, into receivership and was seeking to recover at least some of its receivership costs from the bank's parent. Although the full explanation of the bank's deterioration is complicated, as a savings and loan specializing in residential mortgage lending, AmTrust Bank was hit particularly hard by the 2008 (and onward) financial crisis, when its customers began defaulting on their mortgages at record levels.

The FDIC asserted a $500 million “capital maintenance claim” under 11 U.S.C. ' 365(o), and moved to withdraw the reference to the district court on the ground that the case involved substantial issues under Title 12, the United States Code chapter governing banking regulation. Under ' 365(o), if a financial institution holding company makes a “commitment” to its regulator that it will maintain the capital of its subsidiary, the amount of the commitment must be paid “immediately” upon the filing of a Chapter 11 petition. In our case, the district court sua sponte empanelled a 12-member advisory jury for the trial. And, just like that, a motion unique to the Bankruptcy Code ended up in district court being tried to a jury.

More Common Than You Think

This should not be dismissed as an anomaly. Traditionally, juries have always played a role in bankruptcy in certain instances. The 1989 United States Supreme Court case, Granfinanciera, S.A. v. Norberg, established a bankruptcy trustee's right to a jury trial in fraudulent conveyance actions. Similarly, in at least some instances, courts have found that creditors retain the right to jury trial in certain preference actions, and in adversary proceedings, the parties can agree to try the case to a jury. And, of course, the Supreme Court's recent decision in Stern v. Marshall, No. 10-179, establishes that bankruptcy courts cannot adjudicate certain state law counterclaims.

In addition, a party in bankruptcy may, as the FDIC did in the AmFin case, move to withdraw the reference from the bankruptcy court to the district court if the dispute involves consideration of “other laws of the United States regulating organizations or activities affecting interstate commerce.” And once in district court, the court may on its own and in the absence of a jury right invoke Civil Rule 39(c) to empanel an advisory jury to assist in the adjudication of some or all of the issues in dispute ' and some judges do this regularly.

These developments increase a bankruptcy practitioner's chances of having to present bankruptcy-related disputes to a jury. They also raise the questions, “Should the specter of a jury in a bankruptcy action be a cause for alarm for the bankruptcy practitioner?” “Are bankruptcy matters too highly technical for trial by jury to be a practical method of adjudication?”

The answer to both questions is no. Bankruptcy practitioners are correct in believing that bankruptcy courts are inherently courts of equity. Far from making bankruptcy-related disputes unpresentable to a jury, however, it is precisely this characteristic that makes bankruptcy issues accessible to juries. Ask any seasoned trial attorney: Juries excel at achieving equity.

Of course, certain aspects of bankruptcy matters are cumbersome and difficult to present ' such as expert financial testimony. A bankruptcy practitioner who does not carefully limit and streamline such evidence does so at his or her peril, and risks not only boring, but irritating the audience he or she seeks to persuade. The trial lawyer's rule, that one must develop a single, easily accessible theme of the case, and eliminate any evidence that does not relate to that theme, applies doubly in highly technical bankruptcy cases. This requires discipline, as it can be difficult for bankruptcy attorneys, even those who litigate frequently, to abandon extraneous facts and theories; indeed, day-to-day bankruptcy practice necessarily involves arduous attention to small uncontested facts and details. That practice can never be carried on in front of a jury, however. The cardinal rule for jury trials in bankruptcy matters is the same as the cardinal rule for jury trials everywhere: Choose one jury-accessible theme and make sure all of your evidence and theories relate to it.

Fortunately, the general principles of bankruptcy easily lend themselves to developing jury-accessible themes. And each of them starts with the principle that bankruptcy is about making the best of a bad situation. The very nature of bankruptcy often dictates that something unfair has already happened: Creditors who are legitimately owed money may not recover 100 cents on the dollar. But juries can easily grasp that their role is to ensure that the value of the debtor's estate is maximized, creditors all play by the same rules, and claims are processed in an orderly fashion. The remainder of this article will discuss how some of the basic principles of bankruptcy might be presented to a jury.

The Principle Governing the Automatic Stay: Stop Right There!

Bankruptcy litigation often involves disputes concerning the automatic stay provision of the Bankruptcy Code and its effect of ceasing all attempts ' no matter how legitimate ' to obtain property from an estate. For those seeking to enforce the stay, convincing jurors of its appropriateness involves presenting it as a rule of fairness, emphasizing the rule's basic principle: Creditors must “Stop Right There!” so that an estate administration plan can be put in place and so other creditors have the same opportunity to pursue their claims. The equitable principle to sell to the jury is that there must be a freeze to allow a reasoned determination of the claims on the estate, which are legitimate, and how each can best be paid. Any other rule would allow powerful or cunning creditors to lay claim to the estate's property disproportionate to their entitlement.

A jury should be introduced to the “Stop Right There!” rule during voir dire, with questions directed at conditioning their agreement that allowing some creditors to go before others constitutes an unfair false start. The theme must be further emphasized in opening, and the first witness on direct might be the estate trustee or administrator who can explain his or her role in putting together a comprehensive plan that deals with all creditors, and which solicits all of their input.

A creditor attempting to assert a claim over the automatic stay, on the other hand, will portray the dispute as involving a (worthy) creditor against an (unworthy) debtor refusing to pay its debts, which also involves fairness principles. The jury-suitable rejoinder is that bankruptcy involves more than just a single creditor; it involves the orderly administration of multiple debts and claims, and fairness dictates that in the initial states of the bankruptcy, all creditors must Stop Right There! to facilitate a solution that is fair to everybody.

The Principle Governing Pro Rata Distribution:
Get in Line!

The corollary to the Stop Right There! rule is “Get in Line!” ' the principle that, in bankruptcy a creditor can only expect to recover in the same proportion as other creditors of the same class. This is also a rule of fairness. Because many creditors have legitimate claims against an estate, each claim must be treated equitably, and no creditor may receive preferential treatment.

Again, juries must be conditioned to this theory early and often. An effective voir dire might seek to identify those jurors who think that some claims (namely, whatever is being asserted in the litigation at issue) are more important than others. In the AmFin case, for instance, a ripe area for jury questioning sought to discover whether the jurors thought the FDIC had a greater right to its claims, either because it was an agency of the federal government, or because federal agencies such as the FDIC should be given greater funding as a result (and to combat) the economic downturn. We emphasized this point further in our opening, arguing that in bankruptcy, there was no “easy pass” available to allow the FDIC to skip to the front of the line, and that it must receive the same treatment as the other creditors.

The FDIC, on the other hand, presented a needlessly complex case involving the bank's financial condition over a two-year period of time, the relevant regulatory practices at issue, endless government submissions and communications, and so forth ' all for the purpose of establishing that the bank was in trouble, and as such the government had every reason to seek a financial commitment from its parent. At the conclusion of the FDIC's presentation, however, the jury was hopelessly lost.

In response, we stuck with our theory: The FDIC, like any other creditor, has to Get in Line. In fact, we felt we had emphasized this theme during the FDIC's case so consistently and so well that, after the FDIC rested, we decided not to put in any further evidence of our own. We felt the jury had already heard as much detailed evidence as they could handle, and that nothing would be gained by exposing our witnesses (the former leaders of the bank) to potentially damaging cross-examination about the bank's practices (not even relevant in any event). The jury rewarded us by concluding ' unanimously ' that no capital maintenance commitment had been made.

The Principle Against Preference Payments and Fraudulent Conveyances: Take a Hard Look!

In bankruptcy law, some transactions are considered to be presumptively suspicious ' namely, preferential payments and (fraudulent) conveyances to insiders. In such cases, counsel wishing to unwind the transaction should urge the jury to “Take a Hard Look!” to facilitate the fair and equitable treatment among and between creditors, and to ensure the orderly administration of the debts of a bankrupt estate. The jury-accessible principle is cynicism: Creditors have every incentive in the world to exact as much of value as possible from an entity they detect is in financial trouble. Similarly, it is not unusual for debtors to try to hide and protect their assets from liquidation if they sense bankruptcy is coming. Again, the appeal is to fairness, and juries can be made to understand that their role is, in some cases, as guardian against the dark side of human nature. While juries are naturally creatures of equity, many jurors also have a healthy distrust of nearly anything presented in an adversarial setting. It is not difficult to persuade them to look for ' and find ' financial malfeasance. Allowing them to Take A Hard Look! capitalizes on inclinations they already have.

The optimal jurors in Take A Hard Look! cases are those who, perhaps ironically, look like they hate you ' as long as they look like they hate the other side too. They can be identified during voir dire with questions that ask for agreement with generically idealist statements. A juror who is reluctant to agree that “trials generally produce fair results,” or that “people under oath generally tell the truth,” may be what you are looking for. These jurors may not trust you, and they may not trust your client either, but as long as they do not trust the other side, they will have done their job.

Conclusion

The basic concepts at play in bankruptcy proceedings are straightforward, but not necessarily obvious. It is important to translate these concepts into language that a jury (or a non-bankruptcy judge) is likely to understand. It is even more important to convey the fundamental fairness of protections such as the automatic stay, and to educate jurors that what is good for the debtor is often good for the creditors as a group, and what is good for one creditor may be very bad for other creditors further back in line. The concepts can be conveyed clearly to non-denizens of the bankruptcy world, as the likelihood that bankruptcy practitioners will find themselves talking to strangers to the Code seems to be on the rise.

Philip Oliss and Sarah K. Rathke are partners with Squire, Sanders & Dempsey. Oliss is a trial lawyer whose practice is focused on complex litigation and business restructuring-related litigation. Rathke is a trial lawyer who focuses on commercial and civil matters, product liability defense and international disputes. Both are based in the firm's Cleveland, OH, office and may be reached at [email protected] and [email protected], respectively.