The Barton doctrine can raise its head unexpectedly, as shown in a decision by Bankruptcy Judge Robert E. Nugent of Wichita, Kan.
Named for Barton v. Barbour, an 1881 Supreme Court decision, the doctrine is interpreted by the Tenth Circuit to mean that permission from “the appointing bankruptcy court” is required before filing suit “based on alleged misconduct in the discharge of a trustee’s official duties,” Judge Nugent said.
A debtor who got his chapter 13 discharge years before wanted Judge Nugent to reopen the case and declare that a subordinate mortgage had been stripped off. The respondent was a mortgage servicer attempting to foreclosure the debtor’s home. Ordinarily, simply reopening the case would not have been a big deal.
As it turned out, the servicer was the liquidating agent for a mortgage pool owned by a chapter 7 estate. The servicer’s efforts to foreclosure the mortgage, Judge Nugent said, “fell within its duties as an agent of the chapter 7 trustee.” Because the debtor had not secured permission from the chapter 7 court as required by Barton, Judge Nugent said he lacked subject matter jurisdiction to reopen the chapter 13 case.
In his Feb. 2 opinion, Judge Nugent held that the exception to Barton contained in 28 U.S.C. § 959(a) did not apply. Adopted by Congress to narrow the scope of Barton, the section provides that trustees can be sued, “without leave of the court appointing them,” with respect to “any of their acts or transactions in carrying on business connected with any” property of the estate.
Since foreclosing a defaulted home mortgage seems like the ordinary conduct of business, Section 959(a) would appear at first blush to permit reopening.
In line with cases that interpret Section 959(a) narrowly, Judge Nugent said that the servicer was not conducting business. Instead, the servicer was liquidating the chapter 7 debtor’s estate, thus making Section 959(a) inapplicable.
An important case is currently working its way up in the Second Circuit where the bankruptcy judge, in the liquidation of MF Global Holdings Ltd., enjoined a lawsuit filed abroad by Bermudian insurance companies suing to enforce an arbitration agreement. To see ABI’s discussion, click here. Also recently, the Ninth Circuit interpreted Barton broadly to bar suits against individual creditors’ committee members. For ABI’s discussion, click here.