Ordinarily, the Barton doctrine protects bankruptcy trustees. It works the other way around, too.

A district judge in Houston invoked Barton to protect a receiver from a chapter 11 automatic stay violation.

A state court entered a judgment for almost $175,000 against two defendants. Later, the state court appointed a receiver to collect the judgment on behalf of the plaintiffs. Later still, the state court entered an order specifically directing the receiver to seize the property of a third-party, nondefendant corporation.

The receiver immediately seized the third party’s personal property. Two weeks later, the third-party corporation filed a chapter 11 petition and demanded that the receiver turn over the seized property immediately. The receiver agreed to return the property, but only after payment of administrative expenses.

On its own, the debtor recovered its property. Four months later, the debtor sued the receiver in bankruptcy court for an automatic stay violation. Finding that the receiver had held the estate property hostage, the bankruptcy court found a stay violation and ordered the receiver to pay the debtor $45,000.

The Barton Defense

The receiver won an appeal in a March 31 decision by District Judge Drew B. Tipton of Houston, who based his decision on Barton v. Barbour, 104 U.S. 126 (1881). There, 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 and 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.

Among other things, the receiver argued on appeal that the bankruptcy court lacked subject matter jurisdiction as a result of Barton. Conceding that it had not obtained leave to sue from the state court, the debtor contended that the bankruptcy court’s actions were permissible given two exceptions to the Barton doctrine.

Judge Tipton quickly dispensed with the so-called business exception, which permits suits when a receiver or trustee has injured a stranger in the operation of the business. See, e.g., 28 U.S.C. § 959(a). Without elaboration, he said that the exception was “inapplicable.”

The ultra vires exception was more complex. Generally, it permits suit without leave from the appointing court for actions beyond the scope of a receiver’s official duties.

Judge Tipton said that the ultra vires exception has been “interpreted narrowly” and “aims to exclude a very specific scenario — i.e., a third party complaining that a receiver took property it had no authority to take.” He found only two cases in which the exception had been applied to permit suit.

Both cases, Judge Tipton said, “consisted of seizing the wrong person’s property.” By way of contrast, he said that the case on appeal involved a receiver who failed “to immediately turn over the property that the appointing court expressly instructed him to seize and maintain.” He declined to “stretch the ultra vires exception to a place where it has not gone before.”

The debtor contended that the ultra vires exception nonetheless applied because the seized property did not belong to the judgment debtors. “Even if true,” Judge Tipton said, the “ultra vires argument fails,” because the receiver was seizing property that he had been directed to seize by the state court. Whether the state court made the right decision, he said, “is a separate question for the state courts and has no bearing on whether [the receiver] was acting within the scope of his official duties.”

Because the ultra vires exception is “exceptionally narrow,” Judge Tipton held that “the Barton doctrine applies.” He vacated the bankruptcy court order and remanded with instructions to dismiss the suit in bankruptcy court without prejudice.

Observations

Judge Tipton could have vacated the sanctions on an alternative basis by referencing two Supreme Court decisions of recent vintage, Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), and City of Chicago v. Fulton, 141 S. Ct. 585, 591 (2021).

In Fulton, the Court held that maintenance of the status quo is no stay violation and that someone holding estate property is not required to turn over the property simply on notification of the bankruptcy filing.

In Taggart, the Court ruled that contempt may not be imposed unless there is “no objectively reasonable basis” to believe that the stay did not apply.

Alone or together, Taggart and Fulton were grounds to vacate the $45,000 in sanctions.

However, Judge Tipton was correct in ruling on Barton, because Barton goes to the court’s subject matter jurisdiction. Courts should not rule on the merits when there is no subject matter jurisdiction.