Barton Also Protects Asbestos Trusts, Delaware Judge Says

If a lawsuit filed in state court against a trustee in violation of the Barton doctrine ends up in bankruptcy court, is the bankruptcy judge still required to dismiss the suit?

The courts are split on the answer, but Bankruptcy Judge Brendan Linehan Shannon of Delaware found a practical answer allowing him to supervise the trustee.

Named for Barton v. Barbour, an 1881 Supreme Court decision, the doctrine originally meant that receivers cannot be sued without permission from the appointing court. The doctrine was expanded to protect bankruptcy trustees and has since been further expanded. For example, in Blixseth v. Brown (In re Yellowstone Mountain Club LLC), 841 F.3d 1090 (9th Cir. 2016), the Ninth Circuit extended Barton to protect creditors’ committee members from claims based on actions taken within the scope of authority. To read ABI’s discussion of the Blixseth decision, click here.

In his November 16 decision, Judge Shannon probed the limits of the Barton doctrine and the relief to be granted when there is a violation.

A company confirmed a chapter 11 plan in 2003 to deal with asbestos claims. The plan created a trust to pay future claimants. The plan called for three trustees to administer the trust.

Twelve years after confirmation, three alleged asbestos claimants sued the trustees in a state court in Texas. Among other misdeeds, they alleged that the trustees had violated their fiduciary duties. The complaint wanted the state court to remove the trustee, appoint one receiver and force the trustees to disgorge their compensation.

At the time, the claim of one of the plaintiffs had been accepted by the trust, but the claims of the other two plaintiffs had been rejected. The denial of the two claims was not final because the review process had not been completed.

The trustees removed the suit to district court in Texas and filed a motion to transfer venue. Over the plaintiffs’ objections, the Texas district court granted the venue motion. Once in Delaware, the suit was referred to Judge Shannon.

Under several theories, the trustees wanted Judge Shannon to dismiss the suit. The plaintiffs argued that the bankruptcy court had no jurisdiction.

Although the scope of jurisdiction narrows after confirmation, Judge Shannon found subject matter jurisdiction because removing the trustees would have a close nexus to the plan, which appointed the trustees and governed their conduct.

Next, Judge Shannon ruled that the Barton doctrine covers a post-confirmation asbestos trust, just like it has been held to protect a trustee in a post-confirmation liquidation trust. Invoking Barton, he said, would promote the purpose of the doctrine by contributing to the consistent and equitable administration of the trust.

Judge Shannon then confronted a question on which the courts are divided: Must he dismiss the originally unauthorized suit, even though it was now before the appointing court?

There is no Third Circuit authority, he said.

Requiring dismissal, Judge Shannon said, would be “somewhat contrary to the purpose of the doctrine itself.” It would be “illogical,” he said, “to be foreclosed from hearing matters relevant to the Trustees’ conduct and performance simply because those matters were brought by Plaintiffs in state court.”

A purpose of the Barton doctrine, according to Judge Shannon, is to give the appointing court notice of a trustee’s potential malfeasance. The purpose, he said, “could not be fulfilled if this Court were barred from taking action to supervise its appointee because Plaintiffs originally filed in an incorrect forum.”

As to the plaintiff whose claim had been allowed by the trust, Judge Shannon dismissed the suit without prejudice to filing an amended complaint within 30 days.

Judge Shannon did not permit a refiling by the two claimants whose claims were disallowed. He said that their “conjectural or hypothetical” injury would not confer Article III standing.