Unlike in the Eleventh Circuit, Barton doctrine Is Alive and Well in the Fifth Circuit
In a case irreconcilable with two recent opinions from the Eleventh Circuit, the Fifth Circuit invokes Barton to bar a lawsuit against a trustee after the bankruptcy case had been closed.
A stalwart defender of the Barton doctrine (that bankruptcy trustees cannot be sued without permission of bankruptcy court that appointed the trustee), the US Fifth Circuit Court of Appeal parted company with the US Eleventh Circuit Court of Appeal, by permitting a bankruptcy trustee to invoke Barton v. Barbour, 104 U.S. 126 (1881), and prevail on the bankruptcy court to dismiss a suit brought against the trustee in state court.
In Barton, the Supreme Court held that receivers cannot be sued without permission from the appointing court. After adoption of the Bankruptcy Act of 1898, the doctrine was extended to cover bankruptcy trustees. Barton was subsequently broadened by many circuits to protect court-appointed officials and fiduciaries, such as trustees’ and debtors’ counsel, real estate brokers, accountants, and counsel for creditors’ committees.
In two recent cases, the Eleventh Circuit theorized (incorrectly?) that bankruptcy jurisdiction is solely in rem, meaning that Barton protection expires when the bankruptcy case has been closed and there are no more estate assets. See Tufts v. Hay, 977 F.3d 1204 (11th Cir. Oct. 20, 2020), and Chua v. Ekonomou, 1 F.4th 948 (11th Cir. 2021).
Bound by the two Eleventh Circuit cases, a bankruptcy court in Florida rebuffed a trustee’s invocation of Barton and subjected the trustee to the tender mercies of state court when the bankruptcy case had been closed. See In re Keitel, 636 B.R. 845 (Bankr. S.D. Fla. Jan. 28, 2022). To read ABI’s report, click here.
The Fifth Circuit didn’t let the same thing happen in a nonprecedential, per curiam opinion on January 3.
Similar Facts, Different Result
A wife filed a chapter 7 petition, listing three real properties among her assets. Three days later, she filed for divorce. Both by intervention in the matrimonial proceeding and by proceedings in bankruptcy court, the trustee contended that the properties belonged to the estate. Eventually, the bankruptcy court decided that the properties did belong to the estate and authorized a sale.
Years passed, the trustee filed a final report, and the bankruptcy court approved final fee allowances and the final report, discharged the trustee and closed the case. By definition, there were no remaining estate assets when the case closed. Under the Eleventh Circuit’s view, there could be no Barton protection.
Ten months later, the wife-debtor attempted to reopen the bankruptcy case to set aside the judgment regarding the properties. The bankruptcy court refused to reopen the case.
Without permission from the bankruptcy court, the wife-debtor filed suit in state court against the trustee, the trustee’s counsel and her (former) husband. The trustee reopened the bankruptcy case and, along with the other defendants, removed the suit to bankruptcy court.
The bankruptcy court disagreed with the wife, found jurisdiction, and dismissed the suit against the trustee and counsel. For lack of jurisdiction, the bankruptcy court remanded the suit to state court with respect to the husband. The district court affirmed.
Plentiful Jurisdiction
The Fifth Circuit panel said there was “related to” jurisdiction and that claims against the trustee and counsel were “core,” since they could not have arisen outside of bankruptcy. Because the claims by the wife arose from the trustee’s exercise of duties, the panel said it was “meritless” to argue that the bankruptcy court had no power to enter final judgment.
The wife contended that removal was untimely because the defendants did not file notices of removal within 30 days of the mailing of the state court complaint. The circuit panel rejected the argument, because removal occurred less than 30 days after receipt of the complaint, the deadline imposed by Bankruptcy Rule 9027(a)(3).
Applicability of Barton
The bankruptcy and district courts both concluded that Barton applied and that the defendants had immunity. The Fifth Circuit agreed about Barton — first, because the bankruptcy court had jurisdiction, and second, because the trustee’s actions were not ultra vires, given that they were part of the trustee’s official duties and were undertaken in accordance with court orders.
The panel affirmed, holding that dismissal was proper under Barton. Having dismissed, the panel saw no reason to analyze whether the trustee and counsel were entitled to immunity.
Observations
The Fifth Circuit’s opinion cited neither of the Barton-limiting decisions from the Eleventh Circuit. The results nonetheless seem irreconcilable, especially in view of Keitel, which declined to invoke Barton on similar facts.
The Fifth Circuit doesn’t merely apply Barton reverentially to cases factually on point. Indeed, the Fifth Circuit recently cited Barton as authority for a dramatic expansion of the bankruptcy court’s power to supervise and dismiss state court lawsuits after the conclusion of a chapter 11 case. See NexPoint Advisors LP v. Highland Capital Management LP (In re Highland Capital Management LP), 21-10449, 2022 BL 291525, 2022 US App Lexis 23237, 2022 WL 3571094 (5th Cir. Aug. 19, 2022).
In a circuit that does not permit nondebtor releases in chapter 11 plans, the Fifth Circuit in Highland Capital held that a chapter 11 plan may give the bankruptcy court a gating function to approve or disapprove the commencement of lawsuits against participants in the reorganization, even those not entitled to exculpation. Furthermore, Highland Capital said that the bankruptcy court has power, should there be jurisdiction, to pass on the merits of a suit someone would wish to bring outside of bankruptcy court.
As authority for gatekeeping, Highland Capital cited Barton, saying that “[c]ourts have long recognized [that] bankruptcy courts can perform a gatekeeping function.”