The Bankruptcy Court for the Southern District of Florida recently held that a chapter 7 trustee is not bound by a debtor’s pre-bankruptcy waiver of its jury rights for fraudulent transfer claims brought by the trustee under Section 548 of the Bankruptcy Code. In Bakst v. Bank Leumi, USA (In re DIT, Inc.), 575 B.R. 534 (Bankr. S.D. Fla. 2017), the chapter 7 trustee sued to recover alleged fraudulent transfers related to certain payments by a corporate debtor to its lender and included a jury demand. The lender moved to strike the trustee’s jury trial demand, claiming that the debtor had waived the right to a jury in certain contracts entered by the debtor before it filed for bankruptcy.
The Bankruptcy Court for the Southern District of Florida considered a variety of arguments made by the lender but ultimately found that the even if the face of a pre-petition contractual jury waiver by the debtor, the trustee still retained the right to a jury. The Court explained that there is an important distinction between litigation claims “owned by the debtor prior to the bankruptcy and that became property of the estate under section 541” of the Bankruptcy Code and litigation claims “that may only be brought by the estate under the avoidance provisions of the Bankruptcy Code, such as the fraudulent transfer claims presented here under section 548” of the Bankruptcy Code. Id. at 536.
Under Section 541 of the Bankruptcy Code, the bankruptcy estate created by the filing of bankruptcy includes “all legal and equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). These pre-existing litigation claims owned by the debtor under Section 541 are subject to all the defenses that would have otherwise been available pre-petition. Bakst, 575 B.R. at 536. However, for claims created by the Bankruptcy Code – such as fraudulent transfer avoidance actions – the Bankruptcy Court for the Southern District of Florida held that the trustee is not bound by the debtor’s contractual jury waiver that occurred prior to bankruptcy. Id.
This may also arise with respect to agreements to arbitrate, for which the Court explained that “a debtor’s pre-bankruptcy agreement to arbitrate disputes with a particular creditor is binding on the estate with regard to claims held by the debtor that are later pursued by the estate representative, as such claims become part of the estate under section 541. But, the estate is not bound by a debtor’s pre-bankruptcy arbitration agreement when the estate seeks relief under the Bankruptcy Code itself.” Id. (citing Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1155 (3d Cir. 1989), among other cases).