Going beyond the appeals court’s own decision eight months ago, the Eleventh Circuit has now created a stark split of circuits by holding that the Barton doctrine does not protect a bankruptcy trustee from suit after the bankruptcy case is closed.
In contrast to what the result would be in four other circuits, a bankruptcy trustee or receiver in the Eleventh Circuit now can be sued outside of the appointing court if the receivership or bankruptcy has been closed and there are no more estate or receivership assets that could be affected.
Consequently, a bankruptcy trustee, a receiver and other retained professionals must bear the cost and defend themselves in the Eleventh Circuit if they are sued outside of the bankruptcy court or the receivership court. The Atlanta-based appeals court found no policy concerns resulting from the lack of protection by the Barton doctrine because a receiver or trustee still will be protected by judicial immunity.
Receiver Sued in District Court
As an adjunct to the criminal prosecution of a doctor for homicide and violation of state narcotics laws, the state court appointed a receiver to liquidate the doctor’s assets in a civil forfeiture action.
The doctor was convicted of murder, but he filed a habeas petition that resulted in a settlement where the doctor was released from prison in return for accepting a conviction for involuntary manslaughter. The doctor also agreed to forfeit his claims for the assets seized in the receivership.
After the assets were gone, the receivership was terminated. Later, the doctor sued the receiver for monetary damages in federal district court, alleging that the receiver was part of a conspiracy to deprive him of his civil rights under 42 U.S.C. § 1985.
Invoking the Barton doctrine, the district judge dismissed the suit for lack of subject matter jurisdiction, even though the receivership had terminated. The doctor appealed.
In an opinion on June 15, Circuit Judge William Prior reversed on the Barton issue but upheld dismissal because the receiver was entitled to judicial immunity.
The Prior Decision
The starting point for Judge Prior’s opinion was the circuit’s decision in October 2020 written by Circuit Judge Beverly B. Martin. Tufts v. Hay, 977 F.3d 1204 (11th Cir. Oct. 20, 2020). To read ABI’s report, click here.
Judge Martin dealt with Barton v. Barbour, 104 U.S. 126 (1881), the genesis of the idea that receivers cannot be sued without permission from the appointing court.
After adoption of the Bankruptcy Act of 1898, the doctrine was extended to cover bankruptcy trustees. Barton was subsequently broadened to protect court-appointed officials and fiduciaries, such as trustees’ and debtors’ counsel, real estate brokers, accountants, and counsel for creditors’ committees.
Like Tufts, the new opinion by Judge Prior explained that the Barton doctrine was based on the idea that the court lacked subject matter jurisdiction, because the receivership or bankruptcy had exclusive in rem jurisdiction over the estate.
By suing a court-retained professional outside of the bankruptcy court or receivership, the creditor would be interfering with the bankruptcy court’s or the receivership’s exclusive jurisdiction, since the suit could have a “conceivable effect” on the estate.
When Bankruptcy Ends, Barton Ends
Judge Prior cited the First, Seventh, Ninth and Tenth Circuits for holding that Barton continues to confer protection for policy reasons even after bankruptcy has ended. Those courts, Judge Prior said, believe that courts will have difficulty finding competent people to serve if receivers or trustees can be sued outside of the appointing court for actions taken in their official capacities.
Despite policy concerns, Judge Prior said that the jurisdictional foundation for Barton protection ends when the bankruptcy or receivership ends. “It follows,” he said, “that when there is no longer a res controlled by a single court, there is no longer a potential conflict in the exercise of jurisdiction over it. And the court that first exercised jurisdiction over the res may no longer exclude other courts from exercising jurisdiction.”
Judge Prior enlarged on the jurisdictional foundation, saying:
We disagree with our sister circuits that the need to protect court-appointed receivers and bankruptcy trustees is relevant to the Barton doctrine. Their opinions fail to grapple with the fact that the Barton doctrine is grounded in the exclusive nature of in rem jurisdiction.
There “might be a legitimate policy concern,” Judge Prior said, “but it has nothing to do with subject matter jurisdiction.”
Judge Prior said that Tufts “credited this policy concern,” but in dicta. He went on to say that the
“policy concern is unfounded because court-appointed receivers enjoy judicial immunity for acts taken within the scope of their authority. Receivers do not need the Barton doctrine to provide an additional layer of protection for the performance of their duties.”
Because there was no longer any property in the receivership, Judge Prior held that “there is no longer a disputed property over which [the receivership court] may exercise jurisdiction,” and thus no jurisdictional conflict between the district court and the receivership.
Judge Prior therefore held that Barton did not apply and that the district court had subject matter jurisdiction.
Next, Judge Prior examined the doctor’s complaint in district court. He found that the receiver was entitled to judicial immunity and upheld dismissal on the merits.
Observations
This writer respectfully disagrees with the idea that trustees or retained professionals do not need the “additional layer of protection” afforded by Barton or some other theory.
In case after case, there are obstreperous parties who oppose everything and take groundless appeals. Lift Barton’s protection, and they will begin suing in state courts or districts courts.
Yes, professionals have qualified judicial immunity, but they will be obliged to mount their defense in courts unfamiliar with the bankruptcy. In bankruptcy courts, claims against trustees and retained professionals can be disposed of more economically than in courts unfamiliar with the underlying proceedings.
The loss of Barton protection will fall disproportionately on the shoulders of chapter 7 or chapter 13 trustees. Why? Because chapter 11 confirmation orders inevitably contain releases and indemnifications in favor of retained professionals and other parties central to the conduct of the case. Trustees lack similar protections.
Judge Prior has a point to the extent that Barton must be based on the idea of exclusive subject matter jurisdiction. Under 28 U.S.C. § 1334, the bankruptcy court only has exclusive jurisdiction over the “case.” If Barton has any continuing validity, the rationale must be found somewhere else.
Perhaps protection similar to Barton can be based on another strategy: Having been sued, a trustee could reopen the bankruptcy case and remove the suit to federal district court for referral to the bankruptcy court. Plaintiffs will likely back off when faced with the same bankruptcy judge. Removal, venue transfer and referral are less costly and less complicated than litigating on the merits in a court unfamiliar with the bankruptcy.
Going beyond the appeals court’s own decision eight months ago, the Eleventh Circuit has now created a stark split of circuits by holding that the Barton doctrine does not protect a bankruptcy trustee from suit after the bankruptcy case is closed.
In contrast to what the result would be in four other circuits, a bankruptcy trustee or receiver in the Eleventh Circuit now can be sued outside of the appointing court if the receivership or bankruptcy has been closed and there are no more estate or receivership assets that could be affected.
Consequently, a bankruptcy trustee, a receiver and other retained professionals must bear the cost and defend themselves in the Eleventh Circuit if they are sued outside of the bankruptcy court or the receivership court. The Atlanta-based appeals court found no policy concerns resulting from the lack of protection by the Barton doctrine because a receiver or trustee still will be protected by judicial immunity.
Receiver Sued in District Court
As an adjunct to the criminal prosecution of a doctor for homicide and violation of state narcotics laws, the state court appointed a receiver to liquidate the doctor’s assets in a civil forfeiture action.
The doctor was convicted of murder, but he filed a habeas petition that resulted in a settlement where the doctor was released from prison in return for accepting a conviction for involuntary manslaughter. The doctor also agreed to forfeit his claims for the assets seized in the receivership.
After the assets were gone, the receivership was terminated. Later, the doctor sued the receiver for monetary damages in federal district court, alleging that the receiver was part of a conspiracy to deprive him of his civil rights under 42 U.S.C. § 1985.
Invoking the Barton doctrine, the district judge dismissed the suit for lack of subject matter jurisdiction, even though the receivership had terminated. The doctor appealed.
In an opinion on June 15, Circuit Judge William Prior reversed on the Barton issue but upheld dismissal because the receiver was entitled to judicial immunity.