The Ninth Circuit became the first appeals court to hold that the Supreme Court’s Barton doctrine, barring suits against receivers and trustees without permission from the appointing court, also protects creditors’ committee members from claims based on actions taken within the scope of authority.
The appeal involved Timothy Blixseth, former owner of the bankrupt Yellowstone Mountain Club LLC, who used some proceeds from a loan to the club to pay personal debts. The same lawyer who advised Blixseth about the loan was also his divorce lawyer before the club’s bankruptcy.
The lawyer emerged as chairman of the club’s creditors’ committee. Long after the club was sold and a chapter 11 plan confirmed, Blixseth sued the lawyer in district court for malpractice and fraud, covering actions taken both before and after the club’s bankruptcy. The district judge dismissed the suit, finding no jurisdiction for a suit against the creditors’ committee chairman as a result of the Barton doctrine. Because it was not taken from a final order, the Ninth Circuit dismissed Blixseth’s first appeal.
Blixseth then sought permission from the bankruptcy court to sue the lawyer in district court. The bankruptcy judge denied permission to sue and dismissed the claims on the merits. Blixseth appealed again, this time with some success.
In his Nov. 28 opinion, Circuit Judge Alex Kozinski noted that no court of appeals has granted Barton protection to creditors’ committee members. He said that the Sixth and Eleventh Circuits had extended Barton to cover counsel for a trustee and individuals authorized to sell estate property, respectively.
Because “creditors have interests that are closely aligned with those of a bankruptcy trustee,” Judge Kozinski extended Barton to protect creditors’ committee members “who are sued for acts performed in their official capacities.” He approvingly cited the ABI Commission report on chapter 11, which recommended expanding Barton to protect “statutory committees and their members.”
Because some pre-bankruptcy claims had nothing to do with the lawyer’s position on the committee, Judge Kozinski held that Blixseth did not need permission from the bankruptcy court to sue in district court on those claims.
Blixseth contended that the bankruptcy court lacked jurisdiction under Stern v. Marshall to rule on the merits of his claims. Judge Kozinski disagreed, saying that Stern deprives the bankruptcy court of power to render final judgment on common law claims with no connection to the bankruptcy estate “other than that they happened to be assets of the estate.” Barton claims, he said, are different because “they concern actions taken in a trustee’s or officer’s official capacity” and would not “exist independently of a bankruptcy case.”
The bankruptcy court had dismissed Blixseth’s claims on the merits, finding that the lawyer was entitled to derivative judicial immunity. The Ninth Circuit remanded the case to the bankruptcy court because the lawyer would not be entitled to immunity for all actions taken as the committee’s chairman, only those within the scope of his authority where the debtor “had notice of his proposed acts” and the bankruptcy court “approved these acts.”