Contributed by Alana Katz.
It has been a few years since we at the Blog have discussed the Barton doctrine, the common law bankruptcy rule requiring a party to seek leave from the appointing court before suing a court-appointed receiver (see here and here), but it appears as though it is making a comeback. In fact, as we noted previously, the recent ABI Commission Report supports codifying the Barton doctrine to clarify its scope and application.
Stemming from the 1881 Supreme Court case of Barton v. Barbour, which held that leave of the appointing court must be obtained before bringing suit against a receiver, many courts have since extended the Barton rule to apply to other officers of the court, including trustees in bankruptcy. Recently, on the same day, two circuit courts analyzed the Barton doctrine as applied to bankruptcy trustees—the Eleventh Circuit held that the rule applied while the Fifth Circuit decline to extend the doctrine—showing that continuing analysis of the Barton doctrine is indeed alive and well.
The Eleventh Circuit Says Yea
In Coen v. Stutz (In re CDC Corporation), the Eleventh Circuit held that the Barton doctrine applied to a suit against a debtor’s general counsel. In 2011, the debtor, CDC Corporation, filed a chapter 11 bankruptcy petition. The bankruptcy court appointed a chief restructuring officer, with the understanding that he would wield the same authority and responsibility of a chapter 11 trustee. The court also approved an executive service agreement between the debtor and its general counsel, who had agreed to continue to serve in that position at the request of the chief restructuring officer. The chief restructuring officer determined that it would be in the debtor’s best interest to sell its most valuable asset—ownership shares in an affiliated company. To sell this asset, the debtor altered the board of directors of the affiliated company and installed the debtor’s general counsel as a new member of the board.
Unhappy with an allegedly defamatory 6-K report filed by the affiliated company, the plaintiff filed a complaint against the debtor’s general counsel in the district court alleging defamation and tortious interference, and moved for permission from the bankruptcy court to sue. The bankruptcy court denied the plaintiff this permission, finding that the Barton doctrine barred the plaintiff’s suit. On appeal, the district court similarly concluded that the Barton doctrine was applicable.
On appeal to the Eleventh Circuit, the plaintiff argued that the Barton doctrine did not apply to his suit against the debtor’s general counsel, arguing that the general counsel was not a court-approved officer and because his suit was not related to the bankruptcy estate. The Eleventh Circuit, however, had previously applied the Barton doctrine to attorneys and investigators hired by a trustee, holding that those actors similarly cannot be sued without the plaintiff first obtaining leave from the bankruptcy court. The court also stated that Barton applies whenever a plaintiff’s suit is “related to” the bankruptcy proceeding using the “conceivable effect” test.
The court concluded that the plaintiff’s suit fell within the bounds of Barton, because (1) the bankruptcy court approved the executive service agreement confirming the general counsel’s position with the debtor, making him at least as connected to the estate as attorneys or investigators hired by a trustee, and (2) the plaintiff’s suit was “related to” the bankruptcy proceeding, as the general counsel’s actions were in furtherance of the administration of the debtor’s bankruptcy estate. Therefore, the plaintiff was required to obtain permission from the bankruptcy court before bringing his suit against the debtor’s general counsel in district court.
But the Fifth Circuit Says Nay
The Fifth Circuit, in Carroll v. Abide, came to the opposite conclusion, holding that the Barton doctrine did not apply to a lawsuit against a bankruptcy trustee under the circumstances of that case.
In 2008, the debtors, a married couple, filed for personal bankruptcy, then subsequently filed a bankruptcy case for their closely held corporation. The bankruptcy court appointed a trustee to serve for both the debtors’ and their corporation’s bankrupt estates. After the debtors’ children filed an adversary proceeding seeking a bankruptcy court determination regarding certain prepetition transfers made to them by the debtors, the trustee filed counterclaims, stating that the transfers were void under Louisiana state law. Due to jurisdictional concerns under Stern v. Marshall, the United States District Court for the Middle District of Louisiana withdrew the reference of the dispute.
The district court then ordered the trustee to collect items from the debtors’ corporation, including documents, records, and computers found in the debtors’ home. The trustee removed one such computer that the debtors claimed as personal property, and the debtors then filed a motion with the district court requesting its release. Over a year later, the trustee returned the computer to the debtors pursuant to a district court order. The debtors then brought an action for damages against the trustee alleging a violation of their Fourth Amendment rights due to the trustee’s seizing and accessing their personal computer. The district court dismissed this suit, holding that the Barton doctrine applied, and the debtors were therefore required to seek leave of the bankruptcy court before bringing a tort action against the bankruptcy trustee.
The Fifth Circuit reversed the district court’s decision, holding that Barton did not apply because: (1) the original adversary proceeding between the debtors’ children and the trustee was withdrawn from the bankruptcy court to the district court due to Stern concerns; (2) the trustee conducted the seizure of property pursuant to an order of the district court, not the bankruptcy court; and (3) the debtors filed their tort suit in the same district court that issued such order.
The court concluded that the trustee was an officer of the district court at the time of the seizure. Therefore, the Barton court’s primary concern of usurpation of powers and duties belonging to the appointing court were not at issue here, as the debtors filed the tort suit in the same court that presided over the adversary proceeding.
The critical difference between these two cases hinges on which court’s order a trustee is acting under. Under the Fifth Circuit’s rationale, when a bankruptcy trustee acts pursuant to an order by the district court, and the trustee’s actions pursuant to that order are the basis of the claim, the district court will have jurisdiction to entertain a suit with respect to that conduct. Under the Eleventh Circuit’s rationale, however, the Barton doctrine will apply if the bankruptcy trustee is acting pursuant to an order of the bankruptcy court, and the plaintiff seeks to sue the trustee in a district court that did not issue that order. Perhaps the ABI is correct in suggesting that Barton be codified for clarification. As we have seen many times, though, codification of a doctrine may still leave plenty of room for interpretation.
104 U.S. 126 (1881)
The “conceivable effect” test states that a bankruptcy court will have jurisdiction over a civil proceeding when “the outcome of the proceeding could conceivably have an effect on the estate being administered in bankruptcy.” Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir. 1990) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)).
No. 14-31230 (5th Cir. June 11, 2015)
131 S. Ct. 2594 (2011). For a thorough discussion of Stern’s jurisdictional implications, please see The Stern Files, located at http://business-finance-restructuring.weil.com/category/stern-files/.