The Barton doctrine, established by the U.S. Supreme Court over a century ago, provides that "before a lawsuit is brought against a receiver[,] leave of the court by which he was appointed must be obtained." Barton v. Barbour, 104 U.S. 126, 128 (1881). At least six federal circuits have recognized and ruled that the Barton doctrine is still valid in holding that leave of the bankruptcy court is required before instituting an action against a bankruptcy trustee in the trustee's official capacity. The Third Circuit so ruled in In re VistaCare Group, 678 F.3d 218 (3d Cir. 2012). Likewise, in a series of recent holdings, other federal courts have decided that the Barton doctrine has continued validity.
Villegas v. Schmidt
In Villegas, et al. v. Schmidt, 788 F.3d 156 (5th Cir. 2015), cert. denied, No. 15-407, (U.S. Dec. 7, 2015), BFG Investments, through its president John Villegas, filed for bankruptcy and Schmidt was appointed as the trustee to liquidate BFG's estate. The case was later closed and Schmidt's fees were approved. Four years later, Villegas and BFG sued Schmidt under 28 U.S.C. §1334(c), which allows district courts to hear proceedings arising under Title 11. Villegas and BFG alleged that Schmidt committed gross negligence and breached his fiduciary duty while acting as BFG's trustee. The district court dismissed the case, and the plaintiffs appealed.
The Fifth Circuit affirmed the district court's dismissal based on the Barton doctrine. It rejected the plaintiffs' argument that the U.S. Supreme Court's recent decision in Stern v. Marshall limited theBarton doctrine by implication. Nor did the Fifth Circuit accept the plaintiffs' argument that theBarton doctrine does not apply when a party sues in a court exercising supervisory authority over the bankruptcy court that appointed the trustee. Every other circuit addressing the issue has held that the debtor must obtain leave of the bankruptcy court before initiating an action in the district court against a trustee. The U.S. Supreme Court denied the plaintiffs' Petition for Writ of Certiorari,Villegas v. Schmidt, 2015 U.S. LEXIS 7787; 84 U.S.L.W. 3320 (2015).
Carroll v. Abide
In Carroll v. Abide, 788 F.3d 502 (5th Cir. 2015), the Fifth Circuit had an opportunity to clarify its holding in Villegas as it pertains to Barton. In Carroll v. Abide, a married couple filed for personal bankruptcy, as well as filing a bankruptcy case for their closely held corporation. The bankruptcy court appointed a trustee to serve for both the personal and company bankruptcy estates. Following a dispute between the debtors' children and the trustee over who owned certain movable property, the district court withdrew the reference on the case from the bankruptcy court, prompted by jurisdictional concerns as a result of Stern v. Marshall. The district court then issued an order for the debtors and their children to deliver all of the records and computers of the debtor company's estate to the trustee. The trustee searched the debtors' home and confiscated multiple items, including a computer, which the debtors claimed were personal property. The district court issued another order permitting the trustee to keep the computer for forensic examination. When the computer was returned to the debtors, they determined that the trustee had accessed the computer several times. The debtors sued the trustee in the district court, contending that she had violated their Fourth Amendment rights by seizing the debtors' computer and searching the debtors' home. The district court dismissed the action under Barton, holding that the debtors were required to seek leave of the bankruptcy court to sue the trustee.
The Fifth Circuit Court of Appeals disagreed, finding a limited exception to the Barton doctrine where the action arose from actions taken by the trustee pursuant to the district court's own order. Although the district court had not appointed the trustee, it had authorized the trustee to take the actions at issue. Thus, according to the Fifth Circuit, the district court had the same "strong interest in protecting Abide from personal liability for acts taken within the scope of official duties under the supervision of the district court" as the appointing bankruptcy court.
The Fifth Circuit distinguished its decision in Villegas. Villegas held that the Barton doctrine applies even when a bankruptcy court lacks jurisdiction under Stern, and the doctrine is not altered or limited merely because a district court has supervisory authority over the bankruptcy court. According to the Fifth Circuit, this is not inconsistent with its holding in Abide, in which it held that, where a trustee acts pursuant to a district court's order, and such actions become the basis of a claim, Barton does not prevent that district court from entertaining a suit without leave of the bankruptcy court below.
Third Circuit Analysis: In re VistaCare
There has been some uncertainty in recent years as to the continued relevance and operation of theBarton doctrine, in light of significant changes in bankruptcy law that have occurred since Bartonwas decided in 1881. However, as the above cases show, that uncertainty has mostly been resolved in favor of the doctrine's continued applicability in the Fifth Circuit and elsewhere. This is also the case in the Third Circuit.
In In re VistaCare Group, 678 F.3d 218 (3d Cir. 2012), a purchaser of land from a bankruptcy estate tried to sue the Chapter 7 trustee who sold the property. The estate had owned 45 real property lots, 44 of which had mobile homes on them, and the 45th of which was the site of a retirement home. The subdivision plan stated that title to the 44 lots could not be transferred to the individual lots' residents but must remain with the developer. CGL purchased the retirement home lot from the Chapter 7 trustee believing that the sale restriction would remain in place. However, the Chapter 7 trustee subsequently convinced the township to remove the sale restriction, allowing the trustee to sell certain lots to individual mobile home residents. CGL was not happy about this and sought permission from the bankruptcy court to sue the trustee in state court. The trustee asserted that, under Barton, the suit could not go forward without the bankruptcy court's express permission, which the trustee urged the bankruptcy court to withhold. Calling the Barton doctrine "antiquated and probably not controlling," the bankruptcy court granted CGL's motion and the district court thereafter affirmed.
On appeal by the trustee, the Third Circuit held that Barton was still applicable, and that certain changes in bankruptcy law, such as the addition of section 959(a), merely created statutory exceptions to Barton in limited circumstances, rather than rendering the doctrine obsolete. Likewise, the Third Circuit rejected the bankruptcy court's argument that Barton was no longer a valid doctrine because trustees are now appointed by the United States Trustee, rather than by any "appointing court" under Barton. The Third Circuit also disagreed with the bankruptcy court that the existence of the automatic stay, under Section 362, rendered Barton unnecessary from a policy standpoint. Instead, according to the Third Circuit, Barton serves more specific policy concerns than does the automatic stay, such as protecting trustees from frivolous litigation and thereby ensuring that qualified individuals will be willing to serve as trustees.
ABI Commission Notes
In addition to the federal circuits, the American Bankruptcy Institute (ABI) has supported the ongoing relevance of the Barton doctrine. The ABI's Commission to Study the Reform of Chapter 11 issued its final report on Dec. 8, 2014, in which it recommended clarifying and codifying the Bartondoctrine, including extending it to any professionals retained by a bankruptcy trustee, estate or statutory committee, to the extent the litigation involves such professionals' representation of such parties in a fiduciary capacity.
Greenhalgh is the managing partner of Duane Morris' Newark office. He practices in the areas of commercial litigation and bankruptcy law. Odhner is an associate in the firm's Philadelphia office, practicing in the area of financial restructuring and bankruptcy law.
Reprinted with permission from New Jersey Law Journal, © ALM Media Properties LLC. All rights reserved.