Reversing the district court, The Fifth Circuit arguably expanded the ultra vires exception to the Barton doctrine in a nonprecedential opinion, which means that receivers, without demanding payment, must immediately turn over property when the owner files a bankruptcy petition.

A plaintiff obtained a default judgment for more than $170,000. The state court appointed a receiver to collect the judgment on behalf of the plaintiff. Later, the state court entered an order specifically directing the receiver to seize the property of a third-party, nondefendant corporation.

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

According to the Fifth Circuit’s per curiam opinion on December 31, the debtor paid the fees, and the receiver turned over the property 10 days later.

In bankruptcy court, the debtor brought an adversary proceeding against the receiver, asserting claims including turnover and stay violation. Finding that the receiver had held estate property hostage, Bankruptcy Judge Jeffrey P. Norman found a stay violation and ordered the receiver to pay the debtor $45,000.

The receiver appealed and won a reversal in district court based on the Barton doctrine. See Berleth v. Preferred Ready-Mix LLC (In re Preferred Ready-Mix LLC), 660 B.R. 214 (S.D. Tex. March 31, 2024). To read ABI’s report, click here.

The district court narrowly interpreted the ultra vires exception to the Barton doctrine. Unwilling to “stretch the ultra vires exception to a place where it has not gone before” (Id. at 221), the district court decided that the bankruptcy court had no subject matter jurisdiction, vacated the bankruptcy court order and remanded with instructions to dismiss the suit in bankruptcy court without prejudice.

The debtor appealed to the Fifth Circuit and won, based on the appeals court’s more expansive understanding of the ultra vires exception.

The Ultra Vires Exception to the Barton Doctrine

Citing Barton v. Barbour, 104 U.S. 126, 128 (1881), the Fifth Circuit said that the “doctrine generally requires that a party seeking to sue a receiver must obtain leave from the court that appointed the receiver.” When the doctrine applies, the court lacks subject matter jurisdiction.

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.

“Importantly,” the Fifth Circuit said, the Barton doctrine is subject to the ultra vires exception, which applies to “actions taken by a receiver without appointing court authority.” Specifically, Barton said that the ultra vires exception applies “if, by mistake or wrongfully, the receiver takes possession of property belonging to another.” Id. at 134. 

Focusing on the case on appeal, the appeals court decided that “the ultra vires exception to the Barton doctrine applies because [the receiver] only had appointing court authority to seize and maintain [the debtor’s] property, not property of the bankruptcy estate.” The circuit court held that the receiver “was without authority — and acted ultra vires — when he continued to seize and maintain possession of property of the bankruptcy estate despite receiving notice of the bankruptcy petition and a demand for turnover.”

The exception applicable, the appeals court ruled that the debtor “therefore did not need leave from the appointing court to sue [the receiver] in bankruptcy court for his belated return of property of the bankruptcy estate post-demand for turnover.” The court reversed and remanded “for further proceedings not inconsistent with this opinion.”

Observations

Take it as a given that the ultra vires exception did apply. Would the Supreme Court’s decisions in Fulton and Taggart alter the result?

Fulton tells us that maintaining the status quo does not violate the automatic stay. Standing alone, simply holding estate property was not a stay violation if there was no turnover order from the bankruptcy court. By demanding fees, however, the receiver did more than maintain the status quo. Thus, Fulton might not help the receiver.

Taggart could be more helpful for the receiver in terms of sanctions. The Supreme Court taught us in Taggart that the bankruptcy court “may impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019).

Under Taggart, was it “objectively reasonable” for the receiver to demand fees? That’s a close question.