By: Sandford L. Frey, Esq.
The “Barton Doctrine” initially arose from a U.S. Supreme Court decision in Barton v. Barbour, 104 U.S. 126 (1881) barring suits against court-appointed trustees and other estate fiduciaries absent the appointing court’s authorization. The Barton Doctrine holds that leave to sue a fiduciary must be received from “the court by which [the fiduciary] was appointed.” Id. at 128.
At first glance, adversary proceedings containing post-petition claims for malpractice against an estate employed professional acting in that capacity do not appear to arise under Title 11 as the claims do not depend upon a substantive provision of bankruptcy law. See, Battleground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1130 (9th Cir. 2010). Nevertheless, the Ninth Circuit and other circuits have held that some claims for professional malpractice based on services rendered in a bankruptcy case may be considered core proceedings because they arose during the administration of a bankruptcy case. Schultze v. Chandler, 765 F.3d 945 (9th Cir. 2014). In Schultze, members of an unsecured creditors’ committee sued their court-appointed attorney for allegedly committing legal malpractice while representing them in a business bankruptcy proceeding. Id. at 947.
But does the Barton Doctrine apply to suits commenced after the bankruptcy case is closed? The circuits are split on application of the Barton Doctrine after conclusion of the case and its application is often factually driven. The Fifth, Seventh, Ninth, and Tenth Circuits generally apply the Barton Doctrine even after a bankruptcy trusteeship has ended because it protects the court-appointed trustee from suit.
In the Matter of Foster
A 2023 Fifth Circuit decision applied the Barton Doctrine by dismissing claims against the court-appointed fiduciaries when the plaintiffs failed to obtain bankruptcy court permission before commencing suit. In In the Matter of Foster, No. 22-10310, 2023 WL 20872 (5th Cir. Jan. 3, 2023), a former chapter 7 debtor sued the bankruptcy trustee and counsel for the trustee in state court after the bankruptcy case as closed. The debtor alleged that the defendants exceeded their legal authority by intervening in the debtor’s divorce proceedings and then selling certain properties. The debtor in Foster listed three properties as assets in her bankruptcy. Four days after filing for bankruptcy, the debtor filed for divorce. The debtor’s husband claimed that the subject properties were his separate property. The trustee initiated an action against the debtor’s husband and his company to determine whether the subject properties were part of the bankruptcy estate. The trustee also intervened in the divorce proceeding to protect the bankruptcy estate’s interest in the subject properties. Ultimately, the bankruptcy court determined that the subject properties were part of the debtor’s bankruptcy estate and entered orders authorizing the sale of all three of the properties by the trustee.
In 2018, counsel for the trustee filed an application for compensation and reimbursement of expenses. Although the debtor objected, the bankruptcy court approved the application. In 2018, the trustee also filed an application for compensation and expenses, which the debtor did not oppose. The bankruptcy court granted that application as well. Thereafter, the trustee filed her final report and final account and distribution report certification with the bankruptcy court; and, the bankruptcy court entered an order approving the report and discharging the trustee. The court then closed the case.
Almost ten months later, the debtor filed a motion with the bankruptcy court requesting that the case be reopened so that the debtor could sue the trustee and vacate the judgment for lack of subject matter jurisdiction. The trustee objected. The bankruptcy court denied the motion. Thereafter, the debtor commenced an action in another forum against the trustee, her counsel and others without bankruptcy court authorization. In response, the defendants sought to reopen the bankruptcy case, which was granted; and, thereafter, removed the action to the bankruptcy court. The defendants also moved to dismiss the lawsuit pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”) made applicable to bankruptcy under Rule 7014 of the Federal Rules of Bankruptcy Procedure. In response, the debtor moved for remand on various grounds including lack of subject matter jurisdiction. The bankruptcy court denied the debtor’s motion to remand; and, with respect to subject matter jurisdiction, the bankruptcy court ruled that it had subject matter jurisdiction over the action because the debtor’s case “related to” the bankruptcy and “could not arise outside of the context of the underlying bankruptcy case.” The bankruptcy court then granted the motion to dismiss in reliance upon the Barton Doctrine.
The debtor appealed the bankruptcy court’s judgment as to the timeliness motion, the jurisdictional motion, and the motion to dismiss to the district court. The district court affirmed the bankruptcy court’s judgments. The debtor next timely appealed the district court’s ruling to the Fifth Circuit Court of Appeals.
On appeal to the Fifth Circuit, the debtor contended, among other things, that (1) the lawsuit was not a core bankruptcy proceeding and thus the bankruptcy court could not enter final judgment, (2) the defendants acted ultra vires, and (3) the debtor only brought state law claims and that the removal was improperly based on a federal defense. The debtor also asserted on appeal that the bankruptcy court erred by denying her jurisdictional motion and that the bankruptcy court did not have jurisdiction to dismiss her complaint.
The Fifth Circuit affirmed the district court and the bankruptcy court’s ruling on subject matter jurisdiction. Additionally, the Fifth Circuit affirmed the bankruptcy court’s decision to grant the defendants’ motion to dismiss under the Barton Doctrine. The Fifth Circuit explained that “[u]nder that doctrine, before a plaintiff can sue a bankruptcy trustee, or a court-approved professional employed by a bankruptcy trustee . . . , in a forum other than the appointing court, leave of the appointing court must be obtained.” Id. at *5.
The Barton Doctrine does have limitations, including that it does not apply to ultra vires acts. While the debtor in Foster argued that the trustee’s sale of the properties was ultra vires, and that such sale was unnecessary due to the funds available to pay outstanding debts, the bankruptcy court, district court and the Fifth Circuit rejected that argument. The Fifth Circuit concluded that the defendants “did not plausibly act outside the scope of their duties.” Thus, the debtor’s claims were barred by the Barton Doctrine. Id. at *5-6.
Chua v. Ekonomou
Contrariwise, the Eleventh Circuit has held that the Barton Doctrine does not apply when jurisdiction over a matter no longer exists in the bankruptcy court. Although the Eleventh Circuit did not create a definitive rule that the Barton Doctrine may never apply once a bankruptcy case ends, it concluded that where any decision would have no conceivable effect on a bankruptcy estate, the Barton Doctrine does not deprive another court of subject-matter jurisdiction. See, Chua v. Ekonomou, 1 F.4th 948, 953 (11th Cir. 2021).
In re Holcomb
Even in those circuits applying the Barton Doctrine to suits commenced after the bankruptcy, a court may refuse to apply the Barton Doctrine where the suit has no conceivable effect on the estate and creditors. For example, even in the Ninth Circuit, the Ninth Circuit BAP refused to apply the Barton Doctrine in an unpublished decision based on the unique facts of a particular case. In In re Holcomb, 2018 WL 1976526 (BAP 9th Cir. 2018) (unreported), the Ninth Circuit BAP vacated the bankruptcy court’s order dismissing the debtor’s adversary complaint with prejudice and remanded the matter with instructions to dismiss the adversary proceeding without prejudice for lack of subject matter jurisdiction.
In Holcomb, after the debtor’s surplus bankruptcy estate was fully administered and closed, the debtor filed a malpractice action in state court against her former bankruptcy attorney. The state court dismissed the action for lack of subject matter jurisdiction because the debtor had failed to seek leave from the bankruptcy court before bringing suit. The bankruptcy court reopened the bankruptcy case, and the debtor later sought leave from the bankruptcy court, which the court denied on the basis that it had jurisdiction over the matter. Thereafter, the debtor filed an adversary proceeding against the former bankruptcy attorney. The bankruptcy attorney moved to dismiss the complaint under FRCP 12(b)(6). Taking judicial notice of its prior rulings in the bankruptcy case, the bankruptcy court granted the motion to dismiss the complaint with prejudice.
In reversing the bankruptcy court and remanding, the Ninth Circuit BAP determined that the bankruptcy court lacked jurisdiction with respect to the facts of this particular case. The Ninth Circuit BAP concluded that the claims belonged to debtor personally and were not property of her estate on the basis that creditors had been paid in full from liquidation of the property by the trustee; the debtor received her discharge; the estate was a surplus estate; and the chapter 7 estate had been fully administered and closed. In other words, the BAP noted that the estate would receive no assets regardless of whether the debtor was successful or not with her claims against her former counsel. No administration would occur, and no distributions would be made. Thus, the BAP concluded that the bankruptcy court lacked subject matter jurisdiction over the underlying adversary proceeding because the adversary proceeding had no effect on the estate.
Interestingly, the BAP concluded that the ruling is not appropriate for publication and has no precedential value. One might assume under the principle that bad facts make bad law. Regardless, it is interesting to consider whether the Fifth Circuit would have reached the same conclusion if presented with facts similar to those before the Ninth Circuit BAP in Holcomb.
Leech Tishman’s Business Restructuring & Insolvency Practice Group regularly assists clients in bankruptcy and bankruptcy litigation matters. If you have any questions about the Barton Doctrine, or what it might mean for bankruptcy proceedings, please contact Sandford L. Frey.
Sandy is a Partner with Leech Tishman and Co-Chair of the Business Restructuring & Insolvency Practice Group, where he co-leads the Bankruptcy Chapter 11 Debtor and Bankruptcy Chapter 11 Subchapter V Debtor Groups. Sandy is based in the Los Angeles office and can be reached at 626.796.4000 or email@example.com.
Leech Tishman’s Facebook Page: https://www.facebook.com/leechtishman
Leech Tishman’s Twitter: https://twitter.com/LeechTishman
Leech Tishman’s Company Page on LinkedIn: https://www.linkedin.com/company/leech-tishman
Leech Tishman Fuscaldo & Lampl, Inc. is a national, full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, construction, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, emerging cyber technologies, energy & natural resources, entertainment, healthcare, hospitality, and life sciences industries. With offices in Los Angeles, Leech Tishman also has offices in Chicago, Philadelphia, Pittsburgh, Sarasota, Washington, D.C., and Wilmington, DE.
 The author was retained as special counsel by plaintiff’s counsel in Holcomb for purposes of opposing the defendants’ motion to dismiss based on the Barton Doctrine and the subsequent argument before the bankruptcy court. Although the California superior court and bankruptcy court granted defendants’ motions, the Ninth Circuit BAP eventually reversed based on the unique facts of the case.