CONTROL CENTER, L.L.C.

v.

LAUER

This case comes before the Court upon consideration of Defendant, Lawrence William Lauer, Ill’s (“Lauer”), Amended Motion to Withdraw Reference and for Transfer to District Court (Doc. No. 3). Lauer filed an Amended Motion to Withdraw Reference and for Transfer to District Court (Doc. No. 1) on November⁴, 2002.

1

The Plaintiff, Control Center, L.L.C. (“Control Center”), filed a Response (Doc. No. 2) on October¹⁵, 2002. Having reviewed the motion and memoranda, this Court GRANTS Lauer’s Amended Motion to Withdraw Reference and for Transfer to District Court.

II. BACKGROUND

Control Center is a highly specialized technology company with its principal place of business in Winter Park, Florida.

2

Lauer was an employee of Control Center from June of 1997 to May of 2002.

3

On June¹⁷, 1997, Control Center and Lauer entered into a Sales Representative Agreement prohibiting Lauer from soliciting suppliers represented by Control Center for two years following his termination

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or resignation.

4

On the same date, Lauer also executed a Confidentiality Policy, recognizing the value of the company’s sales methods, techniques, customer lists, and agreeing not to use or disclose any of the information within the scope of the Confidentiality. Policy.

5

According to Control Center, Lauer also agreed to additional terms and conditions of employment, including a covenant not to disclose Control Center’s proprietary information, a promise to hold the business information of Control Center in confidence, and an agreement not to take away employees or customers from the company.

6

The Complaint also states that Lauer agreed to subordinate his own personal interest to those of Control Center when dealing with Control Center suppliers, customers, creditors, and other persons doing business with, seeking to do business with, or in competition with, the company.

7

On April¹⁵, 2002, Control Center filed a petition for Chapter¹¹ bankruptcy in the United States Bankruptcy Court for the Middle District of Florida. Shortly thereafter, on or about May³¹, 2002, Lauer was terminated.

8

On June 5, 2002, Control Center, in its capacity as a debtor-in-possession, brought an adversary action against Lauer, requesting injunctive relief under the Florida Uniform Trade Secrets Act (Count I); injunctive relief enforcing the Sales Representative Agreement between Control Center and Lauer (Count II); injunctive relief upholding Control Center’s Confidentiality Policy (Count III); injunctive relief upholding Control Center’s employment terms and conditions (Count IV); damages for conversion (Count V); and damages under the Florida Uniform Trade Secrets Act. (Count VI).

9

This adversary action stems from Lauer’s alleged violations of agreements with Control Center.¹⁰

Specifically, Control Center contends that Lauer: (1) aligned himself with persons or entities in competition with Control Center;

11

(2) refused to deal with Control Center suppliers, customers, creditors, and other persons or entities in an impartial manner;

12

(3) delayed orders and intentionally failed to secure business for Control Center;

13

and (4) disclosed privileged and confidential information about Control Center.¹⁴

The Complaint also states that after his termination, Lauer improperly exercised dominion and control over a portable computer containing confidential and proprietary information belonging to Control Center.¹⁵

After receiving service of the Complaint, Lauer filed an answer, affirmative defenses, and a counterclaim

16

alleging that Control Center defamed him through releasing

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and disseminating false information concerning his employment at Control Center, including an allegation that he committed grand theft during his tenure.

17

Lauer has now filed this motion pursuant to Rule 5011(a) of the Federal Rules of Bankruptcy Procedure,

18

requesting that this Court withdraw reference of this adversary proceeding from the bankruptcy court, and transfer the matter to the district court.

19

Lauer’s primary argument in support of his motion is that he is entitled to a trial by jury in a U.S. District Court on all issues so triable.

20

III. STANDARD OF REVIEW

Article III, Section One, of the United States Constitution provides that the “judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish,” and that the “Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behavior, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.”

It is well established that while district courts are Article III courts, bankruptcy courts are not.

See In re Parklane/Atlanta Joint Venture,

927 F. 2d 532, 538 (11th Cir.1991) (“bankruptcy courts are not Article III courts and therefore may not exercise the judicial power of the United States”). Indeed, bankruptcy judges serve fourteen-year terms, are removable for cause, and enjoy no protection from salary cuts.

See

28 U.S.C. § 152(a)(1),(e). Consequently, in

Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.,

458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), a plurality of the United States Supreme Court concluded that the portion of the Bankruptcy Reform Act of 1978 conferring bankruptcy courts with jurisdiction over all cases arising under or related to the bankruptcy code was unconstitutional, insofar as such jurisdiction allowed a bankruptcy court to hear a debtor’s prepetition state law contract claim where the party against which the claim was asserted had not filed a claim in the proceeding.

See generally id.

The Court held that “the inexorable command of [Article III, § 1] is clear and definite: The Judicial Power of the United States must be exercised by courts having the attributes prescribed in Art. III.”

Id.

at 57-58, 102 S.Ct. 2858.

In response to the

Northern Pipeline

decision, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984.

See In re Parklane/Atlanta Joint Venture,

927 F. 2d 532, at 537. That Act amended the Bankruptcy Act of 1978 by vesting original jurisdiction over bankruptcy cases and proceedings in the district courts.

See

28 U.S.C. § 1334(a). Bankruptcy courts now obtain jurisdiction over cases and proceedings under the Bankruptcy Code only by referral at the discretion of the district courts.

See

28 U.S.C. 157(a). This statutory scheme ensures that “the judicial power of the United States will be ultimately exercised by an Article III Court.”

In re Parklane/Atlanta Joint Venture,

927 F. 2d 532, at 538.

Because the jurisdiction of a bankruptcy court is obtained only by referral, a district court may, for cause, withdraw the

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reference of a case or proceeding in bankruptcy under²⁸ U.S.C. § 157(d). That statute provides, in pertinent part:

The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown.

21

Although Congress has not provided a statutory definition of the word “cause”, the Eleventh Circuit has determined that is not “an empty requirement.”

In re Parklane/Atlanta Joint Venture,

927 F. 2d 532, at 536. Thus, when making a determination of whether sufficient cause exists, a district court should consider the advancement of uniformity in bankruptcy administration, decreasing forum shopping and confusion, promoting the economical use of the parties’ resources, and facilitating the bankruptcy process.

See Dionne v. Simmons (In re Simmons),

200 F. 3d 738, 742 (11th Cir.2000) (quoting

Holland Am. Ins. Co. v. Succession of Roy, 111

F. 2d 992 (5th Cir.1985)). Additional factors include: (1) whether the claim is core or non-core; (2) efficient use of judicial resources; (3) a jury demand; and (4) prevention of delay.

See Hvide Marine Towing, Inc. v. Kimbrell (In re Hvide Marine Towing, Inc.),

248 B.R. 841, 844 (M.D.Fla.2000);

TPI Int’l Airways v. FAA (In re TPI Int’l Airways),

222 B.R. 663, 668 (S.D.Ga.1998). While important, none of the aforementioned factors should prevent a district court “from properly withdrawing reference either to ensure that the judicial power of the United States is exercised by an Article III court or in order to fulfill its supervisor function over the bankruptcy courts.”

In re Park-lane/Atlanta Joint Venture,

927 F. 2d 532 at 538.

IV. LEGAL ANALYSIS

A. GENERALLY

In analyzing Lauer’s Motion to Withdraw Reference and for Transfer to District Court (Doc. No. 3), this Court will consider two factors: (1) whether the claims made in this adversary proceeding are core or non-core; and (2) whether Lauer is entitled to a jury trial pursuant to the Seventh Amendment of the United States Constitution on any of the claims asserted.

B. WHETHER THE CLAIMS IN THIS ADVERSARY PROCEEDING ARE CORE OR NON-CORE

1. GENERALLY

In order to avoid the constitutional problems discussed by the Supreme Court in

Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.,

458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), Congress created the distinction between core and non-core bankruptcy proceedings.

See Cont’l Nat’l Bank v. Sanchez (In re Toledo),

170 F. 3d 1340, 1347 (11th Cir.1999). If a proceeding is core, then the district court applies traditional standards of appellate review to the bankruptcy court’s findings.

See id.; see also

28 U.S.C. § 158(a); Fed. R. Bankr.P. 8013

22

. Conversely, if a proceeding is non-core, then the bankruptcy court is permitted only to submit proposed findings of facts and conclusions of law subject to de novo review by a district

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court.

See id.; see also

28 U.S.C. 157(c)(1); Fed. R. Bankr.P. 9033(d).

23

Since a district court is obligated to review de novo the findings of a bankruptcy court on non-core matters, a determination that a proceeding is non-core weighs in favor of transferring the matter to a district court.

S.

DISTINGUISHING BETWEEN CORE AND NON-CORE PROCEEDINGS

In order to determine if the claims made in this adversary proceeding are core or non-core, this Court must first look to²⁸ U.S.C. § 157

24

, the statute governing the judicial procedures of the bankruptcy courts.

28 U.S.C. § 157(b)(2) lists fourteen types of actions that Congress considers core proceedings.

25

Control Center argues that three of those actions are relevant: § 157(b)(2)(A) which incorporates “matters concerning the administration of the estate”; § 157(b)(2)(E) which incorporates “orders to turn over property of the estate”; and § 157(b)(2)(0), a catch-all provi

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sion incorporating “all other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.”

See

Doc. No. 2., ¶ 10, at 3.

After analyzing Control Center’s Complaint and Lauer’s Counterclaim, this Court finds that only Control Center’s claim for conversion (Count V) falls within the core actions delineated in²⁸ U.S.C. § 157(b)(2). To the extent that Control Center seeks a return of the company’s portable computer and the confidential information contained on that computer, this action is equivalent to an action to turn over property of the bankruptcy estate.

See

§ 157(b)(2)(E). Moreover, because the conversion claim seeks to obtain property of Control Center, the action necessarily involves a determination of the nature and extent of property in the company’s estate, a matter concerning the administration of the estate.

See

§ 157(b)(2)(A).

With respect to the catch-all provision cited by Control Center, while the claims in this adversary proceeding could conceivably result in a damage award affecting Control Center’s debtor-creditor relationships and the company’s reorganization plan, if this Court found core jurisdiction on that basis, then virtually any claim would entitle a bankruptcy court to enter final judgment.

See Marill Alarm Systems, Inc., v. Equity Funding Corp (In re Marill Alarm Systems, Inc.),

81 B.R. 119, 123 (S.D.Fla.1987)

aff&#x²⁷;d without opinion,

861 F. 2d 725 (11th Cir.1988). This Court finds that such a broad construction of § 157 would “ignore the constitutional proscription” limiting the jurisdiction of bankruptcy courts as set forth by the Supreme Court in

Northern Pipeline. Id.

Notwithstanding the aforementioned interpretation, because the list provided in § 157 is not all-encompassing, this Court’s inquiry does not end here.

See

28 U.S.C. § 157(b)(2) (“Core proceedings include, but are not limited to”). Instead, additional analysis is necessary to determine if the claims for breach of contract, defamation, and violations of Florida’s Uniform Trade Secrets Act are core or non-core.

Under²⁸ United States Code, Section 157, core proceedings are the equivalent to those “arising under title¹¹ or arising in a case under title¹¹,” while “non-core” proceedings are synonymous with those “otherwise related” to the bankruptcy estate.

Cont’l Natl Bank v. Sanchez (In re Toledo),

170 F. 3d 1340, 1349 (11th Cir.1999) (interpreting subsection (b)(1) and (c)(1) of²⁸ U.S.C. § 157).

The Eleventh Circuit has indicated that these phrases (“arising under” and “arising in”) are “helpful indicators” of what constitutes a core or non-core proceeding.

Id.

“ ‘Arising under’ means that a proceeding invokes a cause of action, or substantive right, created by a specific section of the Bankruptcy Code.”

Id.

“ ‘Arising in’ describes administrative matters unique to the management of a bankruptcy case.”

Id.

This being the case

[i]f the proceeding involves a right created by the federal bankruptcy law, it is a core proceeding; for example, an action by the trustee to avoid a preference. If the proceeding is one that would arise only in bankruptcy, it is also a core proceeding; for example, the filing of a proof of claim or an objection to the discharge of a particular debt. If the proceeding does not invoke a substantial right created by the federal bankruptcy law and is one that could exist outside of bankruptcy is not a core proceeding; it may be

related

to the bankruptcy because of its potential effect, but under

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157(c)(1) it is “otherwise related” or a non-core proceeding.

Id.

at 1348 (quoting

Wood v. Wood (In re Wood),

825 F. 2d 90, 97 (5th Cir.1987) and referring to the decision as the “most helpful explanation of what is a core proceeding”).

From the face of the pleadings, it is manifest that all of the remaining claims between Control Center and Lauer do not involve a substantial right created by federal bankruptcy law. Indeed, the actions for beach of contract, defamation, and trademark misappropriation under Florida’s Uniform Trade Secrets Act are independent of both the bankruptcy code any other federal law. Moreover, this proceeding is not one which could arise only in the context of a bankruptcy proceeding. Had there been no bankruptcy, this action could have proceeded in a state court, and would be virtually identical to this action despite Control Center’s reorganization. Accordingly, this Court finds that with the exception of the conversion claim, the adversary proceeding between Control Center and Lauer involves non-core claims, a factor that weighs in favor of transferring this action to the district court.

See Cmty. Bank v. Boone (In re Boone),

52 F. 3d 958, 961 (11th Cir.1995) (rejecting an argument that the plaintiffs’ role as debtors in a chapter⁷ case made their tortious interference claim against defendant-bank a core proceeding);

Key Bank, U.S.A. v. First Union Nat’l Bank,

234 B.R. 827, 832 (M.D.Fla.1999) (recognizing that suits based on Fla. Stat. ch. 673 and 674 are state created rights, and therefore, not core proceedings);

Marill Alarm Systems, Inc., v. Equity Funding Corporation (In re Marill Alarm Systems, Inc.),

81 B.R. 119, 122-123 (S.D.Fla.1987),

aff&#x²⁷;d without op.,

861 F. 2d 725 (11th Cir.1988) (finding that debtor’s lawsuit against defendant, alleging a scheme to collect usurious interest in violation of Fla. Stat. ch. 687 and a Florida RICO statute, was not a core proceeding under Title¹¹ of the bankruptcy code);

First Florida Building Corp. v. Employers Ins. of Wausau (In re Shafer & Miller Indus., Inc.),

66 B.R. 578, 580 (S.D.Fla.1986) (holding that debtors’ breach of contract action against defendant for failing to perform an electrical contract was a non-core proceeding because a “state-created right to recover damages for breach of contract, even though such damages would ultimately enhance the debtor’s estate, did not transform what is essentially a private right into a public right ... [Pjrivate rights must be finally adjudicated by Article III judges”);

Naturally Beautiful Nails, Inc. v. Wal-Mart Stores, Inc. (In re Naturally Beautiful Nails, Inc.),

252 B.R. 574 (Bankr.M.D.Fla. 2000) (recognizing that claims for breach of contract, fraud in the inducement, and conversion are non-core proceedings).

C. WHETHER THE PARTIES ARE ENTITLED TO A JURY TRIAL ON THEIR CLAIMS

1. GENERALLY

The right to a jury trial is governed by the Seventh Amendment of the United States Constitution, which provides, in pertinent part:

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.

Pursuant to the Seventh Amendment, the Supreme Court has formulated a two prong test for determining if a litigant is entitled to a jury trial.

Granfinanciera, S.A. v. Nordberg,

492 U.S.³³, 41, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). First, a district court must compare the “action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity.”

Id.

(quoting

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Tull v. United States,

481 U.S. 412, 417-418, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987)). Second, a court must “examine the remedy sought and determine whether it is legal or equitable in nature.”

Id.

“The second stage of this analysis is more important than the first.”

Id.

Since four of Control Center’s claims seek only equitable relief, no analysis is required with respect to the claims for injunctive relief under the Florida Uniform Trade Secrets Act (Count I); injunctive relief to enforce Control Center’s and Lauer’s Sales Representative Agreement (Count II); injunctive relief to uphold Control Center’s Confidentiality Policy (Count III); and injunctive relief to uphold Control Center’s employment terms and conditions (Count TV). This leaves the Court with Control Center’s claims for conversion (Count V) and damages under Florida’s Uniform Trade Secrets Act (Count VII), and Lauer’s counterclaim for defamation (Count I).

The United States Supreme Court has long recognized that, as a general rule, monetary relief is legal in nature, and that claims for such relief give rise to a right to trial by jury.

See Feltner v. Columbia Pictures Television, Inc.,

523 U.S. 340, 352, 118 S.Ct. 1279, 140 L.Ed.2d 438 (1998). Moreover, the Supreme Court has recognized that the Seventh Amendment entitles parties “to a jury trial in actions for damages to a person or property, for libel and slander, for recovery of land, and for conversion of personal property.”

Ross v. Bernhard,

396 U.S. 531, 533, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970). In this instance, all of the remaining claims seek monetary relief. In addition, two of the remaining claims (defamation and conversion) fall within the Supreme Court’s register of actions that traditionally entitle a party to a jury trial. Finally, the action seeking damages for the misappropriation of Control Center’s trade secrets is clearly legal in nature.

See LinkCo, Inc. v. Fujitsu, Ltd.,

232 F. Supp. 2d 182, 192 (S.D.N.Y. 2002) (“Where a plaintiff seeks damages for trade secret misappropriation, rather than equitable relief, the claim is essentially legal in nature”);

Softel, Inc. v. Dragon Med. & Scientific Communications, Inc.,

891 F.Supp. 935, 943 (S.D.N.Y.1995) (“plaintiffs claim for damages for trade secret misappropriation is essentially legal in nature”);

Nat’l Automatic Sprinkler Indus. Welfare and Pensions Fund v. Hopper,

1986 U.S. Dist. Lexis 15858, *9 (E.D.Mieh. Dec.³⁰, 1986) (“seeking damages for copyright infringement and misappropriation of trade secrets ... involve[s] legal issues triable by a jury”);

Inland Steel Products Co. v. MPH Mfg. Corp.,

25 F.R.D. 238, 243 (N.D.Ill.1959) (“The issues raised by the defendants’ counterclaim, which seeks damages for alleged appropriation of a trade secret ... are clearly legal in nature”). Thus, this Court finds that Lauer has a Seventh Amendment right to trial by jury on his defamation claim (Count I), Control Center’s claim for conversion (Count V) and Control Center’s claim for damages under Florida’s Uniform Trade Secrets Act (Count VI).

26

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*.

THE SIGNIFICANCE OF FINDING A RIGHT TO A JURY TRIAL

Pursuant to²⁸ U.S.C. § 157(e), jury trials are permitted in bankruptcy courts only where all of the parties in the matter have consented.

27

Therefore, unless Lauer consents to trial by jury before the bankruptcy court, or in the alternative, Lauer waived his right to a jury trial by filing a counterclaim, this matter must be transferred to the district court.

28

Additionally, regardless of whether this Court finds that the bankruptcy court has the authority to conduct a jury trial over this adversary proceeding, Lauer’s claim for defamation must be tried in a district court, since a district court is required to order that personal injury tort and wrongful death claims be tried in a district court.

See 28

U.S.C. § 157(b)(5).

S. WAIVING THE RIGHT TO A JURY TRIAL

(i) Generally

In

Granfinanciera v. Nordberg,

492 U.S.³³, 59, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), the United States Supreme Court restricted a party’s Seventh Amendment right to a jury trial in the

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context of a bankruptcy proceeding holding:

By submitting a claim

29

against the bankruptcy estate, creditors subject themselves to the [bankruptcy] court’s equitable power to disallow those claims, even though the debtor’s opposing counterclaims [asserted in response to an adversary proceeding initiated by a trustee] are legal in nature and the Seventh Amendment would have entitled creditors to a jury trial had they not tendered claims against the estate.

In

Langenkamp v. Culp,

498 U.S. 42, 44-45, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990), the Supreme Court reaffirmed this decision, stating:

In

Granfinanciera

we recognized that by filing a claim against a bankruptcy estate, the creditor triggers the process of allowance and disallowance of claims, thereby subjecting himself to the bankruptcy court’s equitable power. If the creditor is met, in turn, with a preference action from the trustee, the action becomes part of the claims-allowance process which is triable only in equity. In other words, the creditor’s claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy court’s

equity jurisdiction.

As such, there is no Seventh Amendment right to a jury trial. If a party does not submit a claim against the bankruptcy estate, however, the trustee can recover allegedly preferential transfers only by filing what amounts to a legal action to recover a monetary transfer. In those circumstances the preference defendant is entitled to a jury trial. Accordingly, a creditors right to a jury trial on a bankruptcy trustee’s preference claim depends upon whether the creditor has submitted a claim against the estate.

(internal citations and quotations omitted).

By virtue of these holdings, several district and bankruptcy courts have disagreed about whether parties who assert counterclaims against a debtor in bankruptcy court, without filing proofs of claim, waive their Seventh Amendment rights to a jury trial.

See NDEP Corp. v. Handlr-It, Inc. (In re NDEP Corp.),

203 B.R. 905, 911 (D.Del.1996).

To date, a small minority of courts have concluded that a defendant does not relinquish the Seventh Amendment right to a jury trial by submitting a counterclaim in a bankruptcy proceeding, unless the submission clearly evidences a voluntary and intentional relinquishment of that right.

See, e.g., Beard v. Braunstein,

914 F. 2d 434, 442 (3d Cir.1990) (holding that tenant’s compulsory counterclaim seeking relief for damages caused by poor condition of rental property, filed in response to an adversary proceeding brought to collect unpaid rent, should not effect a waiver of a right to a jury trial because filing was involuntary);

NDEP Corp. v. Handl-It, Inc. (In re NDEP Corp.),

203 B.R. 905, 913 (D.Del.1996) (holding that counterclaim for breach of contract and negligent misrepresentation filed in response to an adversary proceeding alleging breach of

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contract did not constitute a waiver because it “would not serve justice to find that even though a party has affirmatively and timely asserted its Seventh Amendment right to a trial by jury, it nevertheless implicitly waived that right by bringing counterclaims that arose out of the same occurrence or transaction as the claims asserted against it”);

Cf. Hays v. Equitex, Inc. (In re RDM Sports Group, Inc.),

260 B.R. 915, 924-25 (Bankr.N.D.Ga. 2001) (refusing to extend waiver principles articulated by the Supreme Court in

Langenkamp and Granfinanciera

to adversary proceeding alleging common law claims for breach of fiduciary duty, legal malpractice, negligence, and civil conspiracy because right to a jury trial on common law claims is constitutionally protected). These courts have adopted what has come to be referred to as the “waiver theory.”

See NDEP Corp. v. Handl-It, Inc. (In re NDEP Corp.),

203 B.R. 905, 910 (D.Del. 1996) (discussing “waiver theory”).

In the converse, an overwhelming majority of courts have determined that parties who file counterclaims, whether permissive or compulsory, trigger the bankruptcy court’s process of allowance and disallowance of claims, thereby subjecting themselves to the equitable power of a bankruptcy court, waiving their Seventh Amendment right to a jury trial.

See, e.g., Leshin v. Welt (In re Warmus),

276 B.R. 688, 693-94 (S.D.Fla.2002) (affirming decision to strike jury demand where defendant filed compulsory counterclaim in response to an adversary proceeding because counterclaim sought damages from the bankruptcy estate, and therefore, was akin to the filing of a claim);

Murray v. Richmond Steel & Welding Co. (In re Hudson),

170 B.R. 868, 874-875 (E.D.N.C.1994) (finding “the defendant’s filing of a counterclaim caused the defendant to lose its Seventh Amendment right to a jury trial” regardless of whether the counterclaim was compulsory or permissive because the waiver rationale is inapplicable in the context of a bankruptcy proceeding);

Segal v. Cal. Energy Dev. Corp.,

167 B.R. 667, 672 (D.Utah 1994) (holding that regardless of the compulsory nature of a counterclaim, a defendant loses its right to a jury trial by filing a counterclaim against an estate by virtue of the bankruptcy court’s possession of the estate and its equitable power to allow or disallow claims made against the estate);

Peachtree Lane Assocs., Ltd. v. Granader,

175 B.R. 232, 236-237 (N.D.Ill.1994) (joining other courts in consensus that filing a counterclaim in an adversary proceeding, whether it be permissive or compulsory, deprives a party of their right to a jury trial);

Allied Cos., Inc. v. Holly Farms Foods, Inc. (In re Allied Cos., Inc.)

137 B.R. 919, 924-25 (S.D.Ind.1991) (finding that mandatory nature of compulsory counterclaim is insignificant in analyzing whether or not a right to a jury trial exists because the claim invokes equitable jurisdiction of bankruptcy court, where no jury is required by the Seventh Amendment);

Schwinn Plan Committee v. AFS Cycle & Co. Ltd. (In re Schwinn Bicycle Co.),

184 B.R. 945, 953 (Bankr.N.D.Ill.1995) (holding that filing of compulsory counterclaim placed defendant in equitable jurisdiction of bankruptcy court, eliminating right to jury trial);

Cf. Georgia Neurosurgical Profit Sharing Plan v. Rudow (In re Robin Hood, Inc.),

192 B.R. 124 (W.D.N.C.1995) (recognizing that when “a creditor files a counterclaim against a debtor in response to an adversary proceeding brought in bankruptcy court, he has succumbed to the jurisdiction of that court and waived his right to a jury trial”);

Rushton v. Philadelphia Forest Prods., Inc. (In re Americana Express

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ways, Inc.),

161 B.R. 707, 714 n. 12 (D.Utah 1993) (holding that defendant’s filing of a permissive counterclaim in an adversary proceeding eliminated Seventh Amendment right to a jury trial);

Shields v. Ciccone (In re Lloyd Secs., Inc.),

156 B.R. 750, 755 (Bankr.E.D.Pa. 1993) (finding that a mere attempt to invoke a bankruptcy court’s “claims resolution process through assertion of a non-compulsory counterclaim, whether successful or not, is a sufficient act on the part of a creditor to eliminate its right to a jury trial, because no such right exists in that process”);

Bayless v. Crabtree,

108 B.R. 299, 305 (W.D.Okla.1989) (holding that by filing a permissive counterclaim, defendants submitted to equitable jurisdiction of the bankruptcy court, losing entitlement to jury trial);

Anderson v. Simchon (In re Southern Textile Knitters, Inc.),

236 B.R. 207, 210 (Bankr.S.C. 1999) (finding that filing a counterclaim in general is within the type of claims which eliminate the necessity for a jury trial under

Granfinanciera

and

Langen

kamp);

Beverage Enters, v. Homell Brewing Co., Inc. (In re Pocono Springs Co.),

1997 WL 695617, *2-*3, 1997 Bankr.Lexis 1750, *6-*8 (Bankr.E.D.Pa. Nov.⁶, 1997) (declining to recognize right to jury trial because filing a counterclaim that is permissive under the bankruptcy rules is the equivalent to filing a proof of claim).

These courts, for the most part, have adopted what has come to be referred to as the “conversion theory.”

NDEP Corp. v. Handl-It, Inc. (In re NDEP Corp.),

203 B.R. 905, 910 (D.Del.1996). Under the conversion theory, the concept of waiver is inapplicable, and instead the focus is on the disputed res to which the defendant lays claim.

See id.

When a counterclaim seeking monetary relief is entered in an adversary proceeding the claim is automatically converted from “a legal dispute over money into an equitable dispute over a share of the estate.”

Id.

Thus, the defendant does not “lose its right to a jury trial by filing a counterclaim and thereby waiving the right.”

Murray v. Richmond Steel and Welding Co. (In re Hudson),

170 B.R. 868, 875 (E.D.N.C.1994). Instead, the defendant loses “its right to a jury trial by filing a counterclaim and thereby seeking a piece of the disputed res, the debtors’ estate, which [is] subject to the bankruptcy court’s equitable power to allow and disallow claims.”

Id.

This is the result obtained regardless of whether the counterclaim is permissive or compulsory, because the defendant’s filing represents an “attempt to obtain a portion of the debtor’s estate,” triggering the non-jury, public rights “process of allowing and disallowing claims in bankruptcy court.”

Id.

at 875.

(ii) Analysis:

Regardless of whether the “waiver theory” or “conversion theory” applies, this Court finds that Lauer’s Seventh Amendment right to a jury trial remains intact.

(a) The Result Obtained Under the Waiver Theory:

Under the “waiver theory,” it is manifest that Lauer did not relinquish his Seventh Amendment right to trial by jury. This Court reaches this conclusion on account of three reasons.

Foremost, Lauer affirmatively and timely asserted his Seventh Amendment right to a jury trial in his motion to withdraw on September²⁰, 2002 (Doc. No. 1), the same day on which he filed his answer, affirmative defenses, and counterclaim. This assertion weighs against a finding of waiver in light of the Supreme Court’s indication that a waiver is ordinarily an intentional relinquishment of a known right or privi

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lege,

30

and the Eleventh Circuit’s recognition that “because the right to a jury is fundamental, courts must indulge every reasonable presumption against waiver.”

Burns v. Lawther,

53 F. 3d 1237, 1240 (11th Cir.1995). “The right to a jury trial ‘shall be preserved ... inviolate’, and a court’s discretion ‘is very narrowly limited and must, whenever possible be exercised to preserve jury trial.’”

Borgh v. Gentry,

953 F. 2d 1309, 1311 (11th Cir.1992).

In addition, in accordance with Bankruptcy Rule of Procedure 7008(a)

31

, Lauer made it clear that by filing an answer, affirmative defenses, and counterclaim in this non-core adversary proceeding, he is not consenting to the bankruptcy court’s issuance of final orders or judgments.

See

Answer, Affirmative Defenses, and Counterclaim, ¶ 4, at 2-3. This is significant because when a bankruptcy court lacks the authority to issue final orders or judgments,²⁸ U.S.C. § 157(c)(1) requires a district court to review de novo all objections to the proceedings. The requirement of de novo review is problematic in the context of a jury trial because the Seventh Amendment’s reexamination clause prohibits any fact found by a jury from being reviewed de novo.

See, e.g., Orion Pictures Corp. v. Showtime Networks (In re Orion Pictures, Corp.),⁴

F. 3d 1095, 1101 (2nd Cir.1993) (holding that the Seventh Amendment to the Constitution “prohibits bankruptcy courts from holding jury trials in non-core matters”);

Beard v. Braunstein,

914 F. 2d 434, 443 (3rd Cir.1990) (“By the Seventh Amendment, any fact found by a jury cannot be reviewed de novo. Accordingly, a bankruptcy court cannot conduct a jury trial in a non-core proceeding”);

Taxel v. Electronic Sports Research (In re Cinematronics),

916 F. 2d 1444, 1451 (9th Cir.1990) (finding that “grave Seventh Amendment problems would arise if a jury trial is conducted by the bankruptcy court [since] section 157(c)(1) requires

de novo

review by the district court of non-core matters”);

Ellenberg v. Bouldin (In re Bouldin),

125 B.R. 851, 855 (N.D.Ga.1991) (“the Seventh Amendment would be violated where a district court reviews de novo the verdict of a jury trial conduct by a bankruptcy court in a non-core proceeding”);

Naturally Beautiful Nails, Inc. v. Wal-Mart Stores, Inc. (In re Naturally Beautiful Nails, Inc.),

252 B.R. 574, 576 (Bankr.M.D.Fla.2000) (“the Constitution prohibits trial by jury in a non-core or related matters”);

Haile Co. v. R.J. Reynolds Tobacco Co. (In re Haile Co.),

132 B.R. 979, 980 (Bankr.S.D.Ga.1991) (“The Seventh Amendment’s prohibition against a de novo review of the jury’s findings and § 157(c)(1)’s requirement that the bankruptcy court’s findings in non-core proceedings be reviewed de novo by the district court are incompatible. Accordingly, the bankruptcy court, absent consent of the parties, may not conduct a jury trial in a non-core proceeding”).

Finally, this Court finds that Lauer’s

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counterclaim was compulsory in nature

32

, and therefore, not at all, indicative of Lauer’s desire to submit the equity jurisdiction of the bankruptcy court.

See Beard v. Braunstein,

914 F. 2d 434, 442 (3d Cir.1990) (holding that implying a waiver of the Seventh Amendment right to trial by jury where a defendant files a compulsory counterclaim in response to an adversary proceeding is something less than fair play). Indeed, if Lauer failed to assert his counterclaim in this action, he would later

*285

be barred from bringing the action.

See Nippon Credit Bank, Ltd. v. Matthews,

291 F. 3d 738, 755 (11th Cir.2002) (“Compulsory counterclaims which are not brought are ‘thereafter barred’ ”). For this reason, “it would not serve justice to find that even though a party has affirmatively and timely asserted its Seventh Amendment right to a trial by jury, it would nevertheless implicitly waive that right by bringing counterclaims that arose out of the same occurrence or transaction as the claims asserted against it. The constitutional right to a trial by jury is not so ephemeral”.

NDEP Corp. v. Handh-It, Inc. (In re NDEP Corp.),

203 B.R. 905, 913 (D.Del.1996).

Based on the foregoing, this Court finds that if the waiver theory is applicable to this proceeding, Lauer did not waive his Seventh Amendment right to trial by jury.

(b) The Result Obtained Under the Conversion Theory:

As previously discussed, the “conversion theory” is based on the

Granfinanciera

and

Langenkamp

decisions where the United States Supreme Court analyzed the elaims-allowance process conducted under the equitable jurisdiction of the bankruptcy courts. These decisions support the conclusion that when a defendant files a legal claim or counterclaim against a debt- or’s estate, the defendant subjects itself to the equitable power of the bankruptcy court, thereby losing the right to a jury trial.

The “conversion theory” has been adopted by the majority of courts, and has been expanded to cover a variety of claims and counterclaims, including counterclaims only incidentally related to a bankruptcy proceeding, such as fraud and breach of contract actions filed in response to an adversary proceeding.

See Leshin v. Welt (In re Warmus),

276 B.R. 688 (S.D.Fla. 2002) (divesting defendant of Seventh Amendment rights where, in response to trustee’s adversary proceeding to recover proceeds from the sale of an airplane that was transferred in violation of the bankruptcy code, defendant counterclaimed with an allegation of fraud);

Murray v. Richmond Steel and Welding Co. (In re Hudson),

170 B.R. 868 (E.D.N.C.1994) (divesting defendant of Seventh Amendment rights where, in response to Trustee’s breach of contract action brought on behalf of debtors to recover $67,000 owed to the debtors under a pre-petition school construction contract, defendant counterclaimed with breach of contract action);

Segal v. Cal. Energy Dev. Corp.,

167 B.R. 667, 672 (D.Utah 1994) (divesting defendant of Seventh Amendment right where, in response to Trustee’s action alleging breach of a court approved post-petition agreement to purchase the debtors rights to develop a power project, defendant counterclaimed alleging breach of contract, fraud, negligent misrepresentation, and violations of § 10(b) and Rule 10b-5 of the Securities Exchange Act);

Peachtree Lane

Assocs.,

Ltd. v. Granader,

175 B.R. 232, 236-237 (N.D.Ill.1994) (divesting defendants of Seventh Amendment rights where, in response to action brought by debtors seeking a declaratory judgment determining the parties’s rights under a grant of easement and seeking injunctive relief against the defendants, enjoining them from encroaching upon the debtor’s property, defendant counterclaimed alleging slander of title, commercial disparagement, tortious interference, breach of easement, unfair enrichment, and violation of Texas Deceptive Trade Practices — Consumer Protection Act);

Schwinn Plan Committee v. AFS Cycle & Co. Ltd. (In re Schmnn Bicycle Co.),

184 B.R. 945, 953 (Bankr.N.D.Ill.1995) (divesting defendant of Seventh Amendment rights where defendant, in response to an adversary action

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to avoid and recover preferential transfers made pursuant to a pre-petition settlement agreement, counterclaimed alleging breach of settlement agreement).

Despite this widespread application, this Court finds that the “conversion theory” does not extend to Lauer’s counterclaim for defamation. This Court reaches this conclusion for several reasons. Foremost, pursuant to²⁸ U.S.C. § 157(b)(2)(B), core proceedings under the bankruptcy court’s jurisdiction include the “allowance and dis-allowance of claims against the estate or exemptions from property of the estate and estimation of claims or interests for the purposes of confirming a plan under chapter¹¹ ...

but not the liquidation or estimation of contingent or unliquidated ;personal injury tort or wrongful death claims

against the estate for purposes of distribution in a cause under title 11.” (emphasis added).

In addition, § 157(b)(5) provides that a “district court

shall

order that personal injury tort and wrongful death claims

shall

be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy case is pending.” (emphasis added).

Defamation is a personal injury tort.

33

Accordingly, since bankruptcy courts are prohibited from trying actions involving personal injury torts, this Court finds that Lauer’s counterclaim alleging defamation was never subjected to the bankruptcy court’s equitable claims-allowanee process.

See Busch-Provo, Ltd. v. Sloan (In re Larsen),

172 B.R. 988, 993 (D.Utah 1993) (finding that right to a jury trial remains in tact where the claims-allowance process is never triggered). In other words, Lauer’s legal claim for defamation was never converted into equitable claim. Thus, if the conversion theory is applicable, Lauer was not divested of his Seventh Amendment right to a jury trial.

V. CONCLUSION

Based on the foregoing, it is ORDERED that:

1. Defendant’s November 4, 2002 Amended Motion to Withdraw Reference and

for

Transfer to District Court (Doc. No. 3) is GRANTED.

2. The adversary proceeding (Adv. No. 02-173) between Control Center, L.L.C. and Lauer shall be transferred from the United States Bankruptcy Court for the Middle District of Florida to the United States District Court for the Middle District of Florida.