The Barton doctrine, which has been imposed in “an unbroken line of cases … as a matter of federal common law,” In re Linton, 136 F.3d 544, 545 (7th Cir. 1998) (Posner, J.), requires that plaintiffs “obtain authorization from the bankruptcy court before initiating an action in another forum against certain officers appointed by the bankruptcy court for actions the officers have taken in their official capacities.” In re Yellowstone Mountain Club, LLC, No. 14-35363, ___ F.3d ___, 2016 WL 6936595, at *2 (9th Cir. Nov. 28, 2016) (internal quotations omitted). In Yellowstone, the Ninth Circuit (Judge Kozinski writing on behalf of a unanimous panel) became the first Circuit Court to hold that the Barton doctrine applied to claims against a member of the Official Committee of Unsecured Creditors (the “Committee”). This blog post examines Yellowstone and the status of the Barton doctrine in the Third Circuit, with a focus on a potentially significantly difference in how the doctrine is applied in the two circuits.
In Barton v. Barbour, 104 U.S. 126, 128 (1881), the Supreme Court held that “before suit is brought against a receiver leave of the court by which he was appointed must be obtained,” because “[t]he evident purpose of a suitor who brings his action without leave is to obtain some advantage over the other claimants upon the assets in the receiver’s hands.” The Court further held that it was irrelevant that the receiver was “conducting the business of, a railroad as a common carrier,” id. at 131, and that, without leave, the court in which the claims were brought lacked jurisdiction to hear the claims. Id. The Court’s second holding was superseded by statute in 28 U.S.C. § 959(a), which states that “[t]rustees, receivers or managers of any property, including debtors in possession, may be sued, without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 Barton doctrine, however, has remained part of federal common law. It was expanded to include bankruptcy trustees in Vass v. Conron Bros. Co., 59 F.2d 969 (2d Cir. 1932) (Learned Hand, J.) (applying doctrine to trustee because the “trustee is equally an officer of the court,” and bringing claims against him will equally interfere with his duties to the court as trustee). Multiple circuits have since expanded the doctrine to include officers appointed by the bankruptcy court and their functional equivalents. See, e.g., Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314, 321 (6th Cir. 2006) (applying doctrine to suit against trustee’s counsel); Lawrence v. Goldberg, 573 F.3d 1265, 1270 (11th Cir. 2009) (applying doctrine to suit against creditors and their counsel who advanced funds to the estate to fund estate litigation, because they “functioned as the equivalent of court appointed officers”).
As the Ninth Circuit described it, their decision was “but the latest chapter in the long-running saga of the Yellowstone Mountain Club bankruptcy litigation.” 2016 WL 6936595, at *1. The bankruptcy court had confirmed a plan of liquidation in the case on March 12, 2012; that confirmation was appealed by Blixseth, the Club’s former co-founder, and affirmed by the Ninth Circuit in In re BLX Grp., Inc., 584 F. App’x 684 (9th Cir. 2014). Blixseth, however, did not give up; in 2015, he sued his former counsel, Brown, who was “[o]ne of the UCC members—the chairman, no less” in the district court, alleging that Brown used confidential information in the bankruptcy proceedings to Blixseth’s detriment. 2016 WL 6936595, at *2. The district court, applying Barton, held that Blixseth was required to request leave from the bankruptcy and dismissed his claims without prejudice. Id. Blixseth appealed that decision and the Ninth Circuit dismissed his appeal because it was not based on a final order. Id. Finally, Blixseth went before the bankruptcy court for permission to bring his claims in the district court. Id. The bankruptcy court denied permission and dismissed the claims on the merits. Id. The district court affirmed and, in Yellowstone, the Ninth Circuit held that the Barton doctrine applied to Blixseth’s post-petition claims. Id. at *3-5.
Ultimately, the Court in Yellowstone found three reasons for applying the Barton doctrine to claims against a Committee member. First, the Court found that the Committee’s interests align with the estates’ interests because the Committee “can only maximize recovery for the creditors by increasing the size of the estate.” 2016 WL 6936595, at *3. Second, Committee members “are statutorily obliged to perform tasks related to the administration of the estate.” Id. Finally, lawsuits challenging actions taken in furtherance of those statutory obligations “could seriously interfere with already complicated bankruptcy proceedings.” Id. The Court noted that “[e]ven the fear that such a lawsuit could be filed… may cause UCC members to be timid in discharging their duties.” Id.
The Barton doctrine was only officially embraced by the Third Circuit in In re VistaCare Grp., LLC, 678 F.3d 218, 232 (3d Cir. 2012). Despite embracing the doctrine far later than other circuits, the Third Circuit’s holding in VistaCare fully endorsed the Barton doctrine. Id. at 228-232 (holding that the Barton doctrine applied to state law claims against a Chapter 7 trustee, but affirming the bankruptcy court’s decision to allow the claims to be brought in state court). The VistaCare Court rejected multiple statutory and policy arguments for finding that the Barton doctrine was no longer good law, and specifically overturned In re Lambert, 438 B.R. 523 (Bankr. M.D. Pa. 2010), in which the bankruptcy court held that the Bankruptcy Code had superseded the common law Barton doctrine. Finally, the only reported case in the Bankruptcy Court for the District of Delaware applying the Barton doctrine is In re Summit Metals, Inc., 477 B.R. 484 (Bankr. D. Del. 2012), in which Judge Carey held that the Barton doctrine applied to a suit brought by the former chairman of the committee against the Chapter 11 trustee of Summit Metals, Inc., and the Trustee’s counsel.
Neither Vistacare or Summit contain language that expresses reservation about extending the Barton doctrine beyond bankruptcy trustees—and in fact, Summit held that the doctrine covered a chapter 11 trustee, his former counsel and his current counsel. Summit, however, applied a harsher version of the doctrine than Yellowstone, and held that a plaintiff’s failure to request leave from the bankruptcy court warranted dismissal with prejudice of the plaintiff’s claims. Whether this reflects a circuit split is unclear, but practitioners should certainly be aware of how Summit applied the Barton doctrine.
The Court in Summit held that the committee member’s failure to request leave of the bankruptcy court prior to bringing his claims in New York state court warranted dismissal of the claims. 477 B.R. at 497-98. As the Court saw it, “[a]llowing the unauthorized case to proceed would be contrary to the policies that the Barton doctrine is intended to advance.” Id. at 497. Quoting from In re Herrera, 472 B.R. 839, 853–54 (Bankr. D. N.M. 2012), the Court explained that removal to the bankruptcy court cannot cure all problems under the Barton doctrine—when the doctrine is violated, the Trustee is forced to expend resources to remove the action and to demonstrate the applicability of the Barton doctrine to the non-bankruptcy forum. Moreover, if the Trustee is not properly served but the action moves forward, the Trustee might be found liable and be forced to later defend against that liability.
On the other hand, although the district court in Yellowstone dismissed Blixseth’s claims because of his failure to first request leave from the bankruptcy court, it did so without prejudice, despite the fact that Brown, the Committee chairman, had been forced to expend resources defending himself in the non-bankruptcy forum. 2016 WL 6936595, at *2. And after Blixseth refiled his claims with the bankruptcy court and requested leave to bring those claims in the district court, the bankruptcy court merely refused leave and adjudicated Blixseth’s claims on the merit. Id. The Ninth Circuit’s decision in Yellowstone, however, does not indicate whether Brown had requested dismissal with prejudice based on the Barton doctrine.
The outcome in Yellowstone may have resulted from a circuit split or from Brown sleeping on his rights. The bankruptcy court, cognizant that it was applying the doctrine to a Committee member for the first time, may have felt that dismissal with prejudice was unwarranted under those circumstances. Regardless, it is clear that practitioners should be cognizant of the holding in Summit. In Delaware, failure to first request leave from the bankruptcy court may result in final dismissal of the plaintiff’s claims. Parties should carefully examine whether the Barton doctrine applies to their claims, and if uncertain, err on the side of caution and request leave from the bankruptcy court. And parties defending against claims relating to their actions in a bankruptcy case should keep the doctrine in mind; the Barton doctrine may provide a quick resolution in their favor.