Fifth Circuit: Barton Doctrine Precluded Litigation by Chapter 7 Debtor Against Bankruptcy Trustee and Counsel
To shield bankruptcy trustees and certain other entities from litigation arising from actions taken in their official capacity, the "Barton doctrine"—now more than a century old—provides that such litigation may be commenced only with the authority of the appointing court. The doctrine has certain exceptions, one of which—the "ultra vires exception"—was recently examined by the U.S. Court of Appeals for the Fifth Circuit as an apparent matter of first impression.
In Matter of Foster, 2023 WL 20872 (5th Cir. Jan. 3, 2023), the Fifth Circuit, in a nonprecedential opinion, affirmed lower court rulings dismissing litigation brought by an individual debtor after her chapter 7 case was closed against her chapter 7 trustee and her lawyers without the bankruptcy court's permission. According to the Fifth Circuit (and the lower courts), all of the actions about which the debtor complained were performed in furtherance of the defendants' statutory or court-approved duties. In so ruling, the Fifth Circuit distanced itself from certain other courts that have concluded that the Barton doctrine's qualified immunity from suit expires when a bankruptcy case has been closed.
The Barton Doctrine
Named for the decision in Barton v. Barbour, 104 U.S. 126 (1881), the Barton doctrine requires that "leave of the appointing forum must be obtained by any party wishing to institute an action in a non-appointing forum against a trustee for the acts done in the trustee's official capacity and within the trustee's authority as an officer of the court." ACE Insurance Co., Ltd. v. Smith (In re BCE West, L.P.), 2006 WL 8422206, *2 (D. Ariz. Sept. 20, 2006) (quoting In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993)).
Although originally applicable to litigation against receivers, the doctrine has long been applied to bankruptcy trustees as well. See Lebovits v. Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272, 276 (2d Cir. 1996)) (describing the "well-recognized line of cases" extending the Barton doctrine to bankruptcy trustees, and its application in the post-receivership context); accord In re VistaCare Grp., LLC, 678 F.3d 218, 224 (3d Cir. 2012) (citing cases).
"In addition to protecting a court-appointed receiver from personal liability, the Barton doctrine is intended to protect the receivership court's 'overriding interest in [the] administration of the estate.'" McIntire v. China MediaExpress Holdings, Inc., 113 F.Supp.3d 769, 773 (S.D.N.Y. 2015) (citation omitted); see also In re Qimonda AG, 482 B.R. 879, 896 (Bankr. E.D. Va. 2012) ("[T]he Court serves as a gatekeeper under the Barton doctrine, protecting its appointed professionals from frivolous lawsuits that would interfere with the administration of the estate."). The doctrine can also serve to "centralize bankruptcy litigation" and "keep a watchful eye" on court-appointed officers. In re Yellowstone Mountain Club, LLC, 841 F.3d 1090, 1094 (9th Cir. 2016) (citation omitted).
The Barton doctrine has been applied to bar litigation against not only receivers and bankruptcy trustees but also lawsuits against other persons or entities acting as the "functional equivalent," including members of an official unsecured creditor's committee, trustee's counsel, officers appointed by a trustee and approved by the bankruptcy court to sell estate assets, other professionals retained by a trustee to assist in discharging the trustee's duties and creditors who financed the trustee's efforts, and trustees of litigation or other trusts established pursuant to a chapter 11 plan. See, e.g., In re Cir. City Stores, Inc., 557 B.R. 443, 447 (Bankr. E.D. Va. 2016) (observing that the Barton doctrine has long applied to other types of court-appointed parties in bankruptcy, including liquidating trusts, trustees, and counsel for trustees, with the purpose being to "prevent trustees from being subject to legal proceedings that interfere with their ability to administer the estate"); see generally Collier on Bankruptcy ¶ 10.01 (16th ed. 2023) (citing and discussing cases).
There are two recognized exceptions to the Barton doctrine—the "business exception" and the "ultra vires exception." The first is based on 28 U.S.C. § 959(a), which provides in relevant part that "[t]rustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property."
The ultra vires exception applies when a trustee's actions exceed the bounds of his or her official duties. See In re Ondova Ltd. Co., 914 F.3d 990, 993 (5th Cir. 2019); In re Christensen, 598 B.R. 658, 665 (Bankr. D. Utah 2019); Phoenician Mediterranean Villa, LLC v. Swope (In re J & S Props., LLC), 545 B.R. 91, 105 (Bankr. W.D. Pa. 2015). A typical example is litigation against a receiver who seizes or otherwise attempts to administer property that is not receivership property, but actually belongs to a third party. See In re DMW Marine, LLC, 509 B.R. 497, 506 (Bankr. E.D. Pa. 2014) (citations omitted).
Generally, the ultra vires exception is narrowly applied. For example, the Sixth Circuit has held that the exception applies only "to the actual wrongful seizure of property by a trustee." In re McKenzie, 716 F.3d 404, 415 (6th Cir. 2013). Similarly, the Tenth Circuit has ruled that the ultra vires exception can be invoked only by independent third parties. See Teton Millwork Sales v. Schlossberg, 311 F. App'x 145, 148-49 (10th Cir. 2009) (unpublished opinion). In another case, the Tenth Circuit noted that "claims based on acts that are related to the official duties of the trustee are barred by the Barton doctrine even if the debtor alleges such acts were taken with improper motives." Satterfield v. Malloy, 700 F.3d 1231, 1236 (10th Cir. 2012).
Some courts, including the Eleventh Circuit, have concluded that, because a bankruptcy court's jurisdiction is solely in rem, immunity from suit under the Barton doctrine terminates once a bankruptcy case is closed and there are no remaining estate assets to administer. See Tufts v. Hay, 977 F.3d 1204, 1209-10 (11th Cir. 2020) (stating that "the Barton doctrine has no application when jurisdiction over a matter no longer exists in the bankruptcy court" and that, although there is "no categorical rule that the Barton doctrine can never apply once a bankruptcy case ends," in cases where any decision by a district court would have "no conceivable effect" on a bankruptcy estate, the Barton doctrine does not deprive the district court of subject matter jurisdiction); accord Chua v. Ekonomou, 1 F.4th 948, 953-54 (11th Cir. 2021); In re Keitel, 636 B.R. 845, 850 (Bankr. S.D. Fla. 2022).
Foster
Regina Foster (the "debtor") filed a chapter 7 petition in 2012 in the Northern District of Texas. She listed three parcels of real property (the "properties") in her schedule of assets.
The debtor filed for divorce four days after filing for bankruptcy. In the subsequent Texas family court divorce proceeding, she asserted that the properties belonged to her. Her husband, however, claimed that the properties belonged solely to him, leading the chapter 7 trustee to sue the husband and his company, seeking a determination by the bankruptcy court of who owned the properties. The chapter 7 trustee also intervened in the divorce proceeding to protect the estate's purported ownership. In connection with the dispute, the trustee was assisted by special counsel retained with court approval.
The chapter 7 trustee and the debtor's husband reached a settlement whereby the husband agreed to relinquish any ownership interest in the properties. However, the bankruptcy court declined to approve the settlement. Instead, the court abstained from resolving the ownership dispute and modified the automatic stay so that the Texas family court could adjudicate it.
In 2014, the debtor filed a motion in the bankruptcy court to remove the trustee. She alleged that the trustee and her husband were conspiring, among other things, to deprive her of the revenues generated by the properties. The bankruptcy court denied the motion as being meritless.
In March 2017, after the divorce proceeding was dismissed for lack of prosecution, the trustee asked the bankruptcy court to vacate its earlier abstention order and to adjudicate the ownership dispute. In June 2017, the court issued a judgment that the properties were part of the debtor's bankruptcy estate.
In August and December 2017, the trustee filed motions to sell the properties free and clear of all liens, claims, and encumbrances. The debtor objected, claiming that the properties were not part of her bankruptcy estate and, consequently, the bankruptcy court lacked subject matter jurisdiction to approve the sales. The bankruptcy court overruled the debtor's objection and approved the sales.
In 2018, the chapter 7 trustee and her counsel filed separate applications for compensation and reimbursement of expenses. The debtor objected to counsel's application, arguing, among other things, that the lawyers had engaged in wrongdoing in connection with the property ownership dispute. The debtor did not object to the trustee's application. The bankruptcy court approved both applications, and after the trustee issued her final report, the court entered an order approving the report, closing the case, and discharging the trustee.
Ten months later, the debtor sought to reopen the chapter 7 case so that she could sue the trustee and ask the court, due to its lack of subject matter jurisdiction, to vacate the judgment determining that the properties were part of the estate, and to vacate the orders approving the fees of the trustee and her special counsel. The bankruptcy court denied the motion.
In November 2019, the debtor sued the trustee, her counsel, the debtor's husband, and certain other defendants in Texas state court, seeking to invalidate the sale of the properties and to impose liability upon the defendants under Texas law for various misdeeds allegedly committed in connection with the property ownership dispute and the bankruptcy sales. The debtor did not seek bankruptcy court approval to bring the litigation.
The trustee filed a motion with the bankruptcy court to reopen the debtor's chapter 7 case and remove the state court litigation to the bankruptcy court. The bankruptcy court granted that motion in December 2019.
In the removed litigation—now an adversary proceeding—the bankruptcy court ruled that: (i) it had either "core" or "related to" subject matter jurisdiction over all but one of the claims asserted by the debtor because the claims represented challenges to the sale of the properties, the compensation orders, and the conduct of an estate fiduciary and her court-approved counsel; (ii) it would not abstain from adjudicating the claims or remand the litigation to the state court because, among other things, the Barton doctrine barred the debtor from suing the trustee and her counsel without bankruptcy court permission; and (iii) it would dismiss the adversary proceeding for the same reason.
The district court affirmed, and the debtor appealed to the Fifth Circuit.
The Fifth Circuit's Ruling
A three-judge panel of the Fifth Circuit affirmed the rulings below in a per curiam unpublished opinion.
Initially, the Fifth Circuit explained, in rejecting the debtor's argument that the bankruptcy court could not have jurisdiction over purely state-law claims, the bankruptcy court had subject matter jurisdiction to resolve the dispute as a "core" or "related to" proceeding because the claims stated in the debtor's complaint against the trustee and her counsel "all arise from their roles as trustee and counsel for the trustee in the underlying bankruptcy case and involve claims [the debtor] raised during the underlying bankruptcy case." Foster, 2023 WL 20872, at *3.
The Fifth Circuit found no error in the lower courts' determination that the adversary proceeding should be dismissed under the Barton doctrine. In so ruling, the Fifth Circuit rejected the debtor's argument that the doctrine should not apply because the trustee and her counsel acted ultra vires. The Fifth Circuit acknowledged that "this court has not yet addressed the breadth of the ultra vires exception to the Barton doctrine." Id. at *5. However, the Fifth Circuit agreed with other circuits that have applied the exception narrowly:
The Trustee and her counsel did not plausibly act "outside the scope of their duties" in seeking compensation for their work from assets that [the debtor] claimed were part of her bankruptcy estate. Similarly, they did not plausibly wrongfully take property belonging to another by pursuing and selling assets with permission from the bankruptcy court, especially given that [the debtor] claimed the Properties as part of her bankruptcy estate. While this may have been a closer case had the claim been brought by an independent third party or had the Trustee not acted pursuant to court orders, we need not address such a scenario here. [The debtor's] complaint falls short of plausibly demonstrating that the [trustee and her counsel] acted ultra vires.
Id. at *6.
Outlook
There are a number of key takeaways from the Fifth Circuit's ruling in Foster.
First, although the Fifth Circuit previously held that the Barton doctrine precludes litigation against a bankruptcy trustee or other bankruptcy court-appointed officers without the permission of the appointing court (see Villegas v. Schmidt, 788 F.3d 156, 158-59 (5th Cir. 2015)), Foster is significant because the Fifth Circuit, albeit it in a nonprecedential opinion, held as a matter of first impression that the ultra vires exception to the Barton doctrine should be construed narrowly to permit litigation against a bankruptcy trustee and its counsel only in cases where they acted outside the scope of their statutory or court-approved duties.
Second, in applying the Barton doctrine to dismiss litigation against the trustee and her counsel even after the bankruptcy case had been closed, the Fifth Circuit did not appear to be troubled by the post-case closing jurisdictional limitations imposed on the doctrine by the Eleventh Circuit in Tufts and Chua. In fact, in its opinion, the Fifth Circuit did not even mention the Eleventh Circuit's rulings on this point or the bankruptcy court's ruling in Keitel, which was arguably factually similar.
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