The Eleventh Circuit allows a suit against a professional who had been retained in a dismissed bankruptcy case if there is prudential justification for an exception to the so-called Barton doctrine.
This writer understands the October 20 opinion to mean that nonbankruptcy courts have discretion to disregard Barton. The Eleventh Circuit may be saying that Barton is not founded on a lack of subject matter jurisdiction. Otherwise, a court could not disregard a lack of subject matter jurisdiction.
The Suit Against Debtor’s Counsel
A law firm represented the corporate debtor in a chapter 11 case. The debtor’s counsel repeatedly represented to special counsel that special counsel had been retained by the bankruptcy court in a “bench order.” The debtor’s counsel even made the same representation to the bankruptcy court. In fact, there was no order, even though special counsel was paid by the debtor.
Eventually, the truth came out, and the bankruptcy court directed special counsel to repay the fees it had been paid. Later, the chapter 11 case was dismissed.
After dismissal, special counsel sued the debtor’s counsel in federal district court, raising claims of negligent and intentional misrepresentation. The district court found personal jurisdiction over the debtor’s counsel but dismissed the case under the Barton doctrine for lack of subject matter jurisdiction.
The law firms filed cross-appeals. Special counsel argued that Barton cannot apply when the bankruptcy case has been dismissed.
The Genesis of Barton
Writing for the appeals court, Circuit Judge Beverly B. Martin explained that the doctrine was first pronounced by the Supreme Court in 1881. Barton v. Barbour, 104 U.S. 126 (1881). Originally, Barton amounted to a “general rule” that receivers could not be sued without permission from the appointing court. Id. at 128.
The doctrine was expanded to cover bankruptcy trustees after adoption of the Bankruptcy Act of 1898. Later still, Barton was broadened to protect court-appointed officials and fiduciaries, such as trustees’ and debtors’ counsel, real estate brokers, accountants, and counsel for creditors’ committees.
Judge Martin explained why courts have understood Barton to be based on a lack of subject matter jurisdiction.
The doctrine comes from the idea that the bankruptcy court has exclusive in rem jurisdiction over the bankrupt estate. By suing a court-retained professional outside of bankruptcy court, the creditor would be interfering with the bankruptcy court’s exclusive jurisdiction because the suit could have a “conceivable effect” on the estate.
In the case on appeal, Judge Martin said, both sides agreed there could be no “conceivable effect” on the estate because the bankruptcy case had been dismissed. Therefore, she said, the bankruptcy court did not have jurisdiction over the lawsuit, and special counsel was “not required to obtain leave from that court before filing this action in the District Court.”
Judge Martin held that Barton “has no application when jurisdiction over a matter no longer exists in the bankruptcy court. Our holding flows from Barton itself: when the bankruptcy court lacks jurisdiction, there are no ‘powers and duties which belong[]’ to that court to be usurped by the district court ‘entertain[ing] jurisdiction of th[e] suit.’” Id. at 136.
Judge Martin said she was laying down “no categorical rule that the Barton doctrine can never apply once a bankruptcy case ends.”
Judge Martin said she was addressing “this case only” and recognized that other circuits had applied Barton after the bankruptcy case had been closed. She recognized them as being “meritorious” because they identified “important policy reasons for applying the Barton doctrine in that context.”
Having found subject matter jurisdiction, Judge Martin went on to rule that the debtor’s counsel was subject to personal jurisdiction under Florida’s long-arm statute. She therefore reversed the district court in part and reinstated the suit.
Observations
Finding subject matter jurisdiction isn’t a matter of discretion. Traditionally speaking, it exists or it doesn’t.
The result may have been based on the parties’ concession that there could be no effect on the estate. Respectfully, that’s wrong.
Had the bankruptcy court been told that debtor’s counsel had made misrepresentations for years, it might have required the attorneys to disgorge fees, thus augmenting the estate. Furthermore, creditors might have had a thing or two to say about counsel’s conduct.
If there was misconduct in bankruptcy court and misrepresentations to the bankruptcy judge, shouldn’t the bankruptcy court assume the role of deciding the consequences?
On balance, this writer believes the Eleventh Circuit is saying that the court has discretion to apply Barton or not. A concession about the facts contrary to reality cannot confer subject matter jurisdiction. Without saying so directly, Judge Martin may have been hinting that Barton is not a rule of subject matter jurisdiction.
The Eleventh Circuit allows a suit against a professional who had been retained in a dismissed bankruptcy case if there is prudential justification for an exception to the so-called Barton doctrine.
This writer understands the October 20 opinion to mean that nonbankruptcy courts have discretion to disregard Barton. The Eleventh Circuit may be saying that Barton is not founded on a lack of subject matter jurisdiction. Otherwise, a court could not disregard a lack of subject matter jurisdiction.
The Suit Against Debtor’s Counsel
A law firm represented the corporate debtor in a chapter 11 case. The debtor’s counsel repeatedly represented to special counsel that special counsel had been retained by the bankruptcy court in a “bench order.” The debtor’s counsel even made the same representation to the bankruptcy court. In fact, there was no order, even though special counsel was paid by the debtor.
Eventually, the truth came out, and the bankruptcy court directed special counsel to repay the fees it had been paid. Later, the chapter 11 case was dismissed.
After dismissal, special counsel sued the debtor’s counsel in federal district court, raising claims of negligent and intentional misrepresentation. The district court found personal jurisdiction over the debtor’s counsel but dismissed the case under the Barton doctrine for lack of subject matter jurisdiction.
The law firms filed cross-appeals. Special counsel argued that Barton cannot apply when the bankruptcy case has been dismissed.