Delaware Bankruptcy Court Extends Barton Doctrine to Trustees of Mass-Tort Litigation Trust

A Delaware Bankruptcy Court has held that litigants pursuing post-confirmation state law fraud claims against the trustees of a mass-tort litigation trust must first seek leave from the bankruptcy court that established the trust. In Smith v. Hilton (In re Swan Transportation Co.), the bankruptcy court had previously confirmed the debtor’s plan establishing a litigation trust to handle asbestos- and silica-related claims against one of the debtor’s subsidiaries.[1] Under the plan, three trustees were appointed to administer claims against the trust. Over a decade after the plan was confirmed, three individuals filed claims against the trust seeking recompense for alleged asbestos- and silica-related injuries.[2] Two of the claims were disallowed on the grounds that the claimants had not suffered a “qualifying injury,” and the third claim was paid the distribution percentage established under the trust’s claim-resolution procedures.

The three claimants subsequently filed suit against the trustees in a Texas state court alleging breach of fiduciary duty and seeking removal of the trustees and appointment of a receiver. On the trustees’ motion, the case was removed to the district court and transferred to the Delaware Bankruptcy Court. The trustees then filed a motion in the bankruptcy court to dismiss the suit, arguing that the Barton doctrine required that plaintiffs seek leave from the Delaware Bankruptcy Court before suing the trustees in another forum.[3]

The Barton doctrine takes its name from the 1881 U.S. Supreme Court case Barton v. Barbour, where a railcar passenger sued the receiver of the railroad for injuries suffered in a train accident. The Court had affirmed dismissal on jurisdictional grounds, adopting the general rule that a party suing a receiver must first obtain leave of the court that appointed the receiver.[4] To allow otherwise, the Court reasoned, means that a plaintiff could “take the property of the trust from [the receiver’s] hands and apply it to the payment of the plaintiff's claim, without regard to the rights of other creditors or the orders of the court which is administering the trust property.”[5] The Barton doctrine has since been extended and continues to apply to bankruptcy trustees, including liquidating trustees.[6] The question before the court in Swan Transportation was whether the Barton doctrine should be extended to trustees of a post-confirmation asbestos trust.

The Swan court noted that the purpose of the Barton doctrine in bankruptcy is to “ensure consistent and equitable administration of the receivership or estate property; [] protect against judgments entered outside the purview of the bankruptcy court; and [] prevent usurpation of powers and supervisory duties which exclusively belong to the bankruptcy court.”[7] The Swan court reasoned that extension of the Barton doctrine to the asbestos trust trustee would prevent litigation affecting the “administration and distribution of the estate without the involvement of the bankruptcy court, risking impermissible diminution of trust assets available for other claimholders,” the very thing Barton is intended to do.[8] Therefore, to prevent the plaintiffs from litigating against the trustees in other courts, possibly diminishing estate assets to the benefit of the plaintiffs and thereby leading to the sort of “inconsistent and inequitable result for those ... whom the trust was created to protect,” the Swan court held that the plaintiffs were required to seek leave from the bankruptcy court before pursuing their state court litigation.[9]

Though Barton doesn’t insulate trustees, it does allow for consistent and uniform adjudication of claims against trust property, and it has the practical effect of protecting trustees from the inconvenience and associated costs of far-flung litigation. Trustees will surely welcome expansive application of the practical policy behind the doctrine to include mass-tort litigation trusts.