Will law in the Second Circuit move in the direction of the Ninth Circuit by holding that the Supreme Court’s Barton doctrine not only bars suits against trustees but also against other important players in bankruptcy cases such as creditors’ committees and plan administrators?
Litigation arising from the chapter 11 liquidation of commodities broker MF Global Inc. is raising the issue in the Second Circuit, based on four decisions handed down by Bankruptcy Judge Martin Glenn in New York since October. Relying on the Barton doctrine, he has now enjoined Bermudian insurers from suing in Bermuda to enforce an arbitration clause in an insurance policy. The insurance companies are already appealing to district court, and the appeals likely won’t stop there.
The result on appeal is not a foregone conclusion because Judge Glenn said that the Second Circuit has not developed a test for deciding when Barton protects someone other than a receiver or trustee.
As a creature of federal common law, the Supreme Court decided Barton v. Barbour in 1881 and held that receivers cannot be sued without permission from the appointing court. In the Second Circuit and elsewhere, the doctrine has been expanded to protect bankruptcy trustees.
In Blixseth v. Brown (In re Yellowstone Mountain Club LLC), the Ninth Circuit expanded the Barton doctrine in November to protect creditors’ committee members from claims based on actions taken within the scope of authority. To read ABI’s discussion of Blixseth, click here.
The MF Global appeals will raise a tougher issue for expanding Barton because the case entails an injunction effectively barring a foreign court from ruling on issues involving insurance companies domiciled in Bermuda.
The dispute arose following the confirmation of the chapter 11 plan for MF Global Holdings Ltd. The plan gave the debtor the responsibility of plan administrator to prosecute suits for the benefit of creditors. Later, the company created a subsidiary to prosecute claims that were assigned to it by the brokerage affiliate, which was in a parallel liquidation under the Securities Investor Protection Act.
In bankruptcy court, the plan administrator and its subsidiary sued several Bermudian insurance companies that provided coverage for MF Global officers and directors. The suit is intended to compel the insurance companies to pay the full policy limits pursuant to a global settlement by the directors and officers in a federal district court.
Because the insurance policies contained arbitration clauses, the Bermudian insurers filed suit in a court in Bermuda and obtained an injunction barring the MF Global companies from proceeding with the suit in bankruptcy court. They claimed that their liability could be determined only in arbitration, not by the bankruptcy court in New York.
Judge Glenn first issued a temporary restraining order, followed by a preliminary injunction and a finding of contempt. On Jan. 31, Judge Glenn issued his opinion explaining why the Barton doctrine authorized him to order the Bermudian insurers to terminate litigation in Bermuda, which they have now done.
The insurance companies argued that Barton does not apply because they were not suing a court-appointed official acting in its official capacity. In his 19-page opinion, Judge Glenn rejected the argument, taking an expansive view of Barton.
Judge Glenn cited the Ninth Circuit’s Blixseth opinion for the proposition that Barton is designed to “centralize bankruptcy litigation.” He also cited an Arizona district judge who held that Barton can apply to bar suits abroad.
Similar to Blixseth, Judge Glenn found support from the Sixth Circuit’s DeLorean decision, which halted suit against a trustee’s counsel on the theory that the lawyer was the “functional equivalent” of the trustee.
Judge Glenn found grounds for enjoining the insurance companies from suing in Bermuda because the plan administrator and its subsidiary were tasked by the plan “with marshaling and liquidating assets.” He said that the suits in Bermuda were designed to “circumvent the adjudication of issues properly before this Court, and abruptly halted the plaintiffs’ efforts to carry out their official responsibilities.”
The Barton doctrine, he said, was intended “to prevent this very type of interference.”
The decision does mean that the arbitration agreements are unenforceable. Instead, Judge Glenn said that he, not the court in Bermuda, is the proper forum to decide about compelling arbitration.