Judgment creditors were given permission under the Barton doctrine to conduct garnishment proceedings in state court to collect some $29,000 held by a chapter 13 trustee in a case that was dismissed before confirmation.
The September 30 opinion by Bankruptcy Judge Sarah A. Hall of Oklahoma City is far from blanket authority to sue a chapter 13 trustee after dismissal. To the contrary, Barton applied, and the creditor must obtain the bankruptcy court’s permission before garnishing a debtor’s funds held by a trustee.
In the case before Judge Hall, the debtor had filed two short-lived chapter 13 cases and a third that was dismissed when the plan failed confirmation. All three were calculated to block the State of Oklahoma from collecting a $30,000 judgment for conducting frivolous litigation and to stop the debtor’s former wife from collecting a $140,000 judgment for unpaid domestic support.
Applying the various factors that underlay Barton, Judge Hall decided that the “compelling interests” of the judgment creditors outweighed the “minimal effect” if the trustee were subject to garnishment proceedings in state court. The judge was persuaded in significant part by the judgment creditors’ representations that they would not seek to hold the trustee personally liable.
The Prior Proceedings and Remand by the BAP
On dismissal of the third case, the chapter 13 trustee was holding about $29,000, after deducting the trustee’s fees, which amounted to $1,500.
The debtor’s former wife and the state filed motions for authority to garnish the $29,000 held by the trustee that would otherwise have been distributed to the debtor under Section 1326(a)(2). The former wife contended that her domestic support obligations were prior to the state’s judgment. It was not clear whether the wife’s judgment came ahead of the state’s.
Before retirement, the bankruptcy judge previously presiding over the case denied the judgment creditors’ motions for permission to garnish the trustee’s $29,000.
On appeal, the Tenth Circuit Bankruptcy Appellate Panel reversed and remanded in a non-precedential opinion. The BAP agreed with the bankruptcy court that Barton applied, meaning that the creditors could not garnish funds held by the trustee without the bankruptcy court’s permission.
The BAP went on to rule that the “mere possibility of inconvenience cannot serve as a blanket protection for trustees from a legal process to which any other person may ordinarily be subjected.” The panel said that the bankruptcy court had “abused its discretion by denying Barton leave based upon unsupported allegations of potential inconvenience to the Trustee without weighing the other important factors bearing upon such a decision.” Warren v. Bednar (In re Bednar), 20-041, 2021 BL 155233 (B.A.P. 10th Cir. April 27, 2021). To read ABI’s report, click here.
‘Unsubstantiated’ Burdens on the Trustee
In accordance with the BAP’s mandate, Judge Hall surveyed the authorities prescribing when a trustee may or may not be sued outside of bankruptcy.
The modern doctrine arose from Barton v. Barbour, 104 U.S. 126 (1881), where the Supreme Court held 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.
Judge Hall said that Barton “does not shield a trustee from a lawsuit but rather only determines where the suit may be brought.”
The BAP required consideration of “factors beyond the potential inconvenience and burden to Trustee.” In other words, Judge Hall said she was tasked with deciding who “should retain control of the garnishment proceedings.”
The trustee was not being sued for carrying on the debtor’s business. Thus, the exception to Barton in 28 U.S.C. § 959(a) did not apply. Leave to sue under Barton was required.
Neither was the trustee being sued for actions taken in administration of the case. As Judge Hall said, the trustee did not have “a dog in that particular fight.” Furthermore, the judgment creditors “repeatedly” said they would not impose personal liability on the trustee.
The critical factors, according to Judge Hall, were the “interests of all parties” and the court with “expertise in the legal issues involved.”
The trustee was concerned with being tangled in litigation outside of bankruptcy in the present case and in other cases in the future, without compensation for counsel fees incurred in the process. However, Judge Hall said that the trustee “failed to quantify such burdens with evidence.”
Significantly, the trustee admitted that answering the garnishment was not burdensome enough to warrant denial of the motions. On the other hand, Judge Hall said that the interests of the judgment creditors were “compelling.” They were “long . . . held at bay” by the debtor’s “clear abuse of the bankruptcy process.”
On the bottom line, Judge Hall said that “the delays in collection . . . outweigh[] the compelling, but unsubstantiated, burdens to Trustee arising out of requests for leave to garnish in this case or in future cases and favors granting leave under the Barton doctrine.”
The state court, according to Judge Hall, had the better expertise and experience to adjudicate the competing claims. Given the “minimal effect” that a garnishment judgment would have on the trustee, she granted leave under Barton to conduct garnishment proceedings in state court against the trustee.
Judgment creditors were given permission under the Barton doctrine to conduct garnishment proceedings in state court to collect some $29,000 held by a chapter 13 trustee in a case that was dismissed before confirmation.
The September 30 opinion by Bankruptcy Judge Sarah A. Hall of Oklahoma City is far from blanket authority to sue a chapter 13 trustee after dismissal. To the contrary, Barton applied, and the creditor must obtain the bankruptcy court’s permission before garnishing a debtor’s funds held by a trustee.
In the case before Judge Hall, the debtor had filed two short-lived chapter 13 cases and a third that was dismissed when the plan failed confirmation. All three were calculated to block the State of Oklahoma from collecting a $30,000 judgment for conducting frivolous litigation and to stop the debtor’s former wife from collecting a $140,000 judgment for unpaid domestic support.
Applying the various factors that underlay Barton, Judge Hall decided that the “compelling interests” of the judgment creditors outweighed the “minimal effect” if the trustee were subject to garnishment proceedings in state court. The judge was persuaded in significant part by the judgment creditors’ representations that they would not seek to hold the trustee personally liable.