Morreale et al v. Palmer et al
ORDER DENYING 2 Defendant's Motion for Withdrawal of the Reference, by Judge William J. Martinez on 10/26/2015.(cthom, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 15-cv-02236-WJM-CBS
Bankruptcy Case No. 13-27310-TBM
Adversary Proceeding No. 15-01240-TBM
SAMUEL JESSE CHRISTIAN MORREALE
TOM H. CONNOLLY, Chapter 7 Trustee,
CARRIE PALMER, and
SKETCH RESTAURANT, LLC,
ORDER DENYING DEFENDANT’S MOTION FOR WITHDRAWAL
OF THE REFERENCE
Before the Court is a Motion for Withdrawal of the Reference (ECF No. 2) filed
by Carrie Palmer (“Palmer”), who is the defendant in a recently filed Bankruptcy Court
adversary proceeding. Palmer argues that the causes of action asserted against her in
the adversary proceeding are those for which a jury trial is guaranteed under the
Seventh Amendment. The adversary proceeding plaintiff, Tom H. Connolly
(“Connolly”), opposes Palmer’s motion. (ECF No. 4.) Connolly is the Chapter 7 trustee
for the bankruptcy estate of Samuel Jesse Christian Morreale (“Morreale”), and the
adversary proceeding seeks to recover assets for that estate. On October 23, 2015,
Palmer’s co-defendant in the adversary proceeding, Sketch Restaurant, LLC, joined in
the motion. (ECF No. 9.)
For the reasons stated below, Palmer’s motion is denied.
Connolly’s adversary proceeding complaint revolves around Sketch Restaurant,
LLC (“Sketch”), a business entity that operated two restaurants in Denver. (ECF No. 2
at 7.) According to Connolly, Sketch was formed and 100% owned by Morreale. (Id.)
On October 9, 2013, however, Morreale’s attorney prepared “draft documents for the
purpose of admitting Palmer [Morreale’s then-fiancée] as a member of Sketch.” (Id. at
6–7.) Morreale’s attorney “mailed the draft documents to Morreale” on the same day
but “does not know if the documents were ever signed.” (Id. at 7.)
Morreale filed his personal bankruptcy case on October 15, 2013. (Id.) On his
bankruptcy schedules, Morreale stated that his Sketch ownership interest was 70.13%,
rather than 100%. (Id.) Connolly asserts that one of two things must have happened:
(1) Morreale never actually transferred Sketch membership interests to Palmer,
meaning that his bankruptcy estate “remains and is the 100% equity owner of Sketch”;
or (2) Morreale indeed transferred a 29.87% interest to Palmer, and that transfer is
invalid as actually or constructively fraudulent under the Bankruptcy Code. (Id. at 8.)
Connolly’s claims for relief against Palmer are as follows:
declaratory judgment that the Morreale bankruptcy estate is Sketch’s
100% equity owner;
actual fraudulent transfer under the Bankruptcy Code, 11 U.S.C.
constructive fraudulent transfer under the Bankruptcy Code, 11 U.S.C.
actual fraudulent transfer under the Colorado Uniform Fraudulent Transfer
Act (“UFTA”), Colo. Rev. Stat. § 38-8-105(1)(a); and
constructive fraudulent transfer under the UFTA, Colo. Rev. Stat. § 38-8105(1)(b).
(Id. at 8–11.) For each of the fraudulent transfer claims, Connolly requests a judgment:
(a) declaring the transfer null and void under 11 U.S.C. § 548(a)(1)(B),which permits a
trustee to avoid certain transfers made within two years before the filing of the
bankruptcy petition; and (b) authorizing Connolly to recover the membership interests
transferred to Palmer under 11 U.S.C. § 550(a), which permits a trustee to recover
transferred property when the transfer is avoided under § 548.
Pursuant to 28 U.S.C. § 157 and D.C.COLO.LCivR 84.1(a), bankruptcy cases
(including adversary proceedings) are automatically referred to the Bankruptcy Court.
But, for cause shown in a timely motion, this Court may withdraw that reference. 28
U.S.C. § 157(d). The “cause” Palmer asserts here is that she never filed a claim
against the Morreale bankruptcy estate and never otherwise consented to the
Bankruptcy Court’s jurisdiction, so she claims a Seventh Amendment right to a jury trial
on Connolly’s fraudulent transfer causes of action. (ECF No. 2 at 1–2.) See also U.S.
Const. amend. VII (“In Suits at common law, where the value in controversy shall
exceed twenty dollars, the right of trial by jury shall be preserved . . . .”). Because the
Bankruptcy Court cannot hold a jury trial, see In re Kaiser Steel Corp., 911 F.2d 380,
392 (10th Cir. 1990), Palmer argues that this Court must withdraw the reference and
assume traditional jurisdiction over Connolly’s adversary proceeding. (Id.)1
Palmer’s argument and Connolly’s response both turn on Granfinanciera, S.A. v.
Nordberg, 492 U.S. 33 (1989). Granfinanciera, like this case, involved an adversary
proceeding alleging fraudulent transfer. Id. at 36. Unlike this case, however, the
allegedly fraudulently transferred asset was cash, not shares of a business. Id. The
primary question facing the Supreme Court was whether the Seventh Amendment
guaranteed a jury trial to the adversary proceeding defendant on the fraudulent transfer
claim. Id. at 37–38.
The Supreme Court set forth a three-part test for answering that question. First,
a court must “compare the statutory action to 18th-century actions brought in the courts
of England prior to the merger of the courts of law and equity.” Id. at 42 (internal
quotation marks omitted). Second, the court must “examine the remedy sought and
determine whether it is legal or equitable in nature.” Id. “If, on balance, these two
factors indicate that a party is entitled to a jury trial under the Seventh Amendment,”
then the court “must decide whether Congress may assign and has assigned resolution
of the relevant claim to a non-Article III adjudicative body that does not use a jury as a
Palmer does not argue that Connolly’s state-law fraudulent transfer claims require this
Court to withdraw the reference even if Connolly’s Bankruptcy Code fraudulent transfer claims
do not. Palmer argues only that fraudulent transfer claims, of whatever variety, must be tried to
a jury if the defendant so demands and has not consented to Bankruptcy Court jurisdiction.
(See generally ECF No. 5.)
Applying the first part of this test, the Supreme Court found “no dispute that
actions to recover preferential or fraudulent transfers were often brought at law in late
18th-century England.” Id. at 43. The Court agreed with the adversary proceeding
plaintiff’s “assertion that courts of equity sometimes provided relief and fraudulent
conveyance actions,” but that “hardly suffice[d] to undermine [the defendants’]
submission that the present action for monetary relief would not have sounded in equity
200 years ago in England.” Id. (emphasis in original).
The Supreme Court elaborated on this distinction (monetary versus equitable
relief) at some length. The Court particularly emphasized the following passage from a
“[W]hether the trustee’s suit should be at law or in equity is
to be judged by the same standards that are applied to any
other owner of property which is wrongfully withheld. If the
subject matter is a chattel, and is still in the grantee’s
possession, an action in trover or replevin would be the
trustee’s remedy; and if the fraudulent transfer was of cash,
the trustee’s action would be for money had and received.
Such actions at law are as available to the trustee to-day as
they were in the English courts of long ago. If, on the other
hand, the subject matter is land or an intangible, or the
trustee needs equitable aid for an accounting or the like, he
may invoke the equitable process, and that also is beyond
dispute.” 1 G. Glenn, Fraudulent Conveyances and
Preferences § 98, pp. 183–184 (rev. ed. 1940) (footnotes
Id. at 44. The Court characterized this summary as “compel[ling] the . . . conclusion”
that “suits to recover an allegedly fraudulent transfer of money” were never considered
appropriate for courts of equity. Id.; see also id. at 44–47 (discussing cases in which
the English Court of Chancery refused to exercise jurisdiction over fraudulent transfer
claims where the plaintiff sought to recover money).
Moving on to the second part of the three-part test, the Supreme Court
concluded that the adversary proceeding plaintiff was seeking a legal rather than an
equitable remedy. Id. at 47–49. The Court was particularly persuaded by one of its
prior decisions holding that a bankruptcy trustee seeking to recover preferential
payments could not sue in equity because the trustee had a complete remedy at law.
Id. at 48–49 (analyzing Schoenthal v. Irving Trust Co., 287 U.S. 92 (1932)).
The Supreme Court then went on to the third part of its test, but this Court need
not recount that analysis because Connolly’s and Palmer’s respective arguments turn
exclusively on parts one and two. Connolly points out that his adversary proceeding
complaint does not seek money damages, but rather a return of whatever Sketch
membership interests were transferred to Palmer. (ECF No. 4 ¶¶ 1, 9.) Connolly
further notes the above-quoted passage from the Glenn treatise cited in Granfinanciera,
and particularly the final sentence: “If, on the other hand, the subject matter is land
or an intangible, or the trustee needs equitable aid for an accounting or the like, he
may invoke the equitable process, and that also is beyond dispute.” (Id. ¶ 8
(emphasis added by Connolly).)
Connolly then cites several cases analyzing Granfinanciera and concluding that
the right to a jury trial on a fraudulent transfer claim brought in Bankruptcy Court turns
on whether the plaintiff seeks monetary or equitable relief. See In re Palm Beach Fin.
Partners, L.P., 501 B.R. 792, 798 (Bankr. S.D. Fla. 2013) (“[T]he Granfinanciera Court
noted that although courts of equity sometimes had concurrent jurisdiction with courts
of law over fraudulent transfer actions in 18th century England, when the relief sought
by the plaintiff in a fraudulent transfer action was solely monetary, courts of equity never
had jurisdiction over the action. . . . [¶] Here, all four of the Plaintiff’s causes of action
are fraudulent transfer actions which seek purely monetary relief.”); In re Term Indus.,
Inc., 181 B.R. 31, 32 (Bankr. S.D.N.Y. 1995) (“In Granfinanciera, however, the Supreme
Court made it quite clear that whether an action for fraudulent conveyance requires a
jury trial depends upon the subject matter of the action.”); In re Stocks, 137 B.R. 516,
521 (Bankr. N.D. Fla. 1991) (“The opinion in Granfinanciera is abundantly clear that the
Court focused on the fact that the remedy sought the recovery of money.”); In re
Aichinger, 2015 WL 790536, at *1 (D. Colo. Feb. 23, 2015) (“In this case, the Sev enth
through Tenth claims for relief all seek the recovery of a definite sum of money:
$523,892.47. Therefore, these claims are legal in nature and give rise to the Seventh
Amendment right to a jury trial.” (citation omitted)); In re Babcock & Wilcox Co., 2001
WL 725318, at *4 (E.D. La. June 26, 2001) (“Granfinanciera dealt with a fraudulent
conveyance claim involving transfers of specific and determinate amounts of money.
The Court found that such an action would have been an action at law in eighteenth
century England. Notably, the Court distinguished actions to recover fraudulent
transfers of tangible property from those to recover intangible property . . . .” (citations
Finally, Connolly emphasizes that the decisions which have addressed
fraudulent transfer of corporate membership interests (such as the LLC membership
interests Connolly seeks from Palmer) have all held that the action was equitable, not
legal. Term Indus., 181 B.R. at 33 (“[The] Committee’s fraudulent conveyance action is
an equitable action because its subject matter is shares of stock, an intangible.”);
Stocks, 137 B.R. at 522 (“Sunset prays for this court to enter an order determining that
the 40% interest in Sunset was the property of Stocks on the date of the filing of the
petition and, therefore, is property of the bankruptcy estate . . . . Additionally, Sunset
asks this court to set aside and declare null and void the transfer, by Stocks to SFT, of
Stocks’ interest in Sunset. Sunset seeks an equitable remedy, therefore, SFT is not
entitled to a jury trial.”); Babcock & Wilcox, 2001 WL 725318, at *5 (“The assets at
issue are the stock of B & W’s former subsidiaries . . . and a promissory note . . . .
Stock and notes are intangibles. Hence, this is the type of fraudulent conveyance
action that would have required a court of equity in eighteenth century England.”).
Thus, says Connolly, his action against Palmer is equitable and not within the Seventh
Amendment jury trial right.
Palmer responds that these cases “were wrongly decided.” (ECF No. 5 at 2.)
But Palmer does not cite any contrary authority. She argues only that “[t]here is no
logical or reasonable distinction, for the purpose of determining one’s right to a jury trial,
between an action for the fraudulent conveyance of dollar bills and an action for the
fraudulent conveyance of stock certificates.” (Id.) However, given that Granfinanciera
specifically requires courts to determine whether an action was considered legal or
equitable in nature in 18th-century England, as well as traditionally in the United States,
the relevant inquiry is historical, not logical—however odd the history may be. Palmer
has not offered any history to undermine Granfinanciera’s distinction between the
treatment of monetary claims versus other claims.2
Given this, and given the many as-yet-uncontradicted authorities concluding that
non-monetary claims such as Connolly’s were traditionally considered equitable, the
Court holds that Palmer has no right to a jury trial on Connolly’s fraudulent transfer
For the reason stated set forth above, Palmer’s Motion for Withdrawal of the
Reference (ECF No. 2) is DENIED. The Clerk shall terminate this case.
Dated this 26th day of October, 2015.
BY THE COURT:
William J. Martínez
United States District Judge
In truth, neither Palmer nor Connolly offers any real historical analysis. The cases
cited by Connolly assume that Granfinanciera established as a matter of historical fact that nonmonetary fraudulent transfer claims were considered equitable in 18th-century England.
Granfinanciera actually held that monetary claims were not equitable, which does not compel
the conclusion that all non-monetary claims were equitable. Nonetheless, Granfinanciera’s
historical analysis strongly suggests that this monetary/non-monetary distinction is highly
relevant. Absent anything more from the parties, this Court must assume, as in the decisions
Connolly cites, that Granfinanciera provides sufficient historical background to conclude that
fraudulent transfer claims for non-monetary assets should be considered equitable.
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