Now that the Eleventh Circuit has seemingly abolished the Barton doctrine as protection for estate professionals after bankruptcy cases have closed, an opinion by Bankruptcy Judge Erik P. Kimball shows how bankruptcy courts may no longer be available to protect trustees from the predation of possibly vexatious litigants.
As we shall discuss at the foot of this story, there still may be notions of jurisdiction that would allow the bankruptcy court to ride to the rescue.
The Obstreperous Debtor
The individual debtor filed a chapter 11 petition that was converted to chapter 7. In his January 28 opinion, Judge Kimball, from West Palm Beach, Fla., said that the case involved “an unusual amount of contentious litigation.”
Due a “great extent . . . to [the debtor’s] obstruction of the trustee and extreme litigiousness,” Judge Kimball said, the estate was insolvent; there was no distribution to unsecured creditors, and administrative creditors received “only a tiny portion of” their claims. He alluded to the debtor’s “shocking behavior.”
Judge Kimball said he had “twice held [the debtor] in contempt, including for previously filing suit against the trustee and trustee’s counsel without the Court’s authority during the pendency of his chapter 7 case.” He added that the debtor had been “permanently disbarred by the Florida Supreme Court, . . . [i]n part because of his actions in this case.”
More than one year after the chapter 7 case was closed, the debtor sued the chapter 7 trustee, the trustee’s counsel and others in federal district court in New York. Judge Kimball said that the lawsuit in New York was “a continuation of [the debtor’s] inappropriate actions in this Court, for which he was twice held in contempt.”
In addition to the trustee and the trustee’s counsel, defendants in the $30 million civil RICO suit included 13 law firms, seven lawyers and numerous individuals. The complaint raised a plethora of allegations of fraud in connection with legal proceedings involving the debtor.
The U.S. Trustee responded by filing a motion asking Judge Kimball to reopen the case and reappoint a chapter 7 trustee. Were he to reopen the case, Judge Kimball said, the U.S. Trustee would contend under the Barton doctrine that the debtor should have sought permission from the bankruptcy court before suing the chapter 7 trustee and his counsel.
The chapter 7 trustee joined in the motion by the U.S. Trustee.
The Doctrine and Its Limitations
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 by many circuits to protect court-appointed officials and fiduciaries, such as trustees’ and debtors’ counsel, real estate brokers, accountants, and counsel for creditors’ committees.
Judge Kimball traced the adoption of the Barton doctrine in the Eleventh Circuit. First, the Eleventh Circuit held in 2000 that Barton protected trustees and other court-appointed officers for actions taken in their official capacity. In 2009, the Atlanta-based appeals court ruled that Barton protected a receiver’s court-approved counsel and other court-sanctioned professionals.
In both, Judge Kimball said that the underlying cases were still pending when Barton protection was invoked.
Then came Tufts v. Hay, 977 F.3d 1204 (11th Cir. Oct. 20, 2020), and Chua v. Ekonomou, 1 F.4th 948 (11th Cir. 2021), where the Eleventh Circuit created a split of circuits by holding that the Barton doctrine does not protect a bankruptcy trustee from suit after the bankruptcy case is closed and there are no more estate assets. To read ABI’s reports, click here and here.
The New, Limited Barton Doctrine Applied
Judge Kimball said that Chua wrought “a significant change in Eleventh Circuit precedent.” After the 2021 decision, he said it is “not appropriate to apply the Barton doctrine primarily as a prophylactic measure to protect bankruptcy trustees and other representatives of the bankruptcy estate.”
After Chua, “the sole question,” Judge Kimball said, “is whether the bankruptcy court has subject matter jurisdiction over the matter presented in the suit. The Barton doctrine applies only where the suit would have a conceivable effect on the administration of the bankruptcy estate.”
Applying the facts to the law, Judge Kimball said that the estate was closed and fully administered. There were no longer any assets to distribute, so the lawsuit in New York “cannot impact distributions in this case as there are no longer any assets to distribute.”
Finding that “the Barton doctrine does not apply,” Judge Kimball denied the motion to reopen the case. He said there was no “subject matter jurisdiction over the claims brought against” the trustee and the trustee’s counsel.
As consolation for the trustee and his counsel, Judge Kimball said that judicial immunity still afforded “a remedy.”
Observations
By reopening the case, an estate would arise from the dead. Respectfully, jurisdiction in the bankruptcy court does not depend entirely on the existence of estate assets. Jurisdiction can exist if there is a conceivable effect on the estate.
Section 541(a) creates an estate alongside the filing of a petition. Nothing in the Bankruptcy Code requires the existence of assets in the U.S. before there is an estate or before a debtor can file a petition under title 11. In fact, Section 109(a) says that a person may be a debtor who has “a domicile, place of business, or property in the United States.” [Emphasis added.]
Although previously existing estate property may have disappeared, the ability of the chapter 7 trustee to sue the debtor for later misdeeds conceivably gave life to new estate assets that previously did not exist.
There would at least be a “conceivable” effect on the estate, given the right of the trustee to seek compensation for fending off the new lawsuit. The fact that the estate has no remaining cash assets would not obviate the right of the trustee to assert an administrative claim to be paid if assets were found to exist.
Given the debtor’s prior obstreperous behavior, it’s conceivable that the estate would have claims of some sort against the debtor, perhaps under Rule 11, for fomenting frivolous litigation or for violating prior bankruptcy court orders.
The trustee and counsel would have other defenses lending themselves to bankruptcy jurisdiction.
The trustee and his counsel received final allowances of compensation, which will bar claims by the debtor alleging misdeeds by the trustee and counsel. The final allowances arguably gave res judicata defenses available to the trustee and counsel that in turn may lead to sanctions against the debtor.
The bankruptcy court had discharged the trustee in closing the case, arguably absolving the trustee for misdeeds.
Although jurisdiction in the bankruptcy court would not be exclusive, the bankruptcy court arguably had concurrent jurisdiction to enforce and interpret its own prior orders.
All things considered, this writer respectfully submits there should be sufficient “related to” or “arising in” jurisdiction to permit the reopening of the case, to hear the defenses of the trustee and counsel, and to hear claims against anyone who may have offended the good order of the bankruptcy proceedings.
The trustee might have employed another strategy even if there were no bankruptcy jurisdiction.
The debtor brought suit in federal court in New York based on diversity jurisdiction. The trustee could have filed a venue motion, seeking to transfer the suit to a Florida district court.
Once in Florida, a district judge could refer the suit to the bankruptcy court as being “related to” the bankruptcy court. There would be no jurisdiction problem because the debtor was claiming diversity jurisdiction.
Now that the Eleventh Circuit has seemingly abolished the Barton doctrine as protection for estate professionals after bankruptcy cases have closed, an opinion by Bankruptcy Judge Erik P. Kimball shows how bankruptcy courts may no longer be available to protect trustees from the predation of possibly vexatious litigants.
As we shall discuss at the foot of this story, there still may be notions of jurisdiction that would allow the bankruptcy court to ride to the rescue.
The Obstreperous Debtor
The individual debtor filed a chapter 11 petition that was converted to chapter 7. In his January 28 opinion, Judge Kimball, from West Palm Beach, Fla., said that the case involved “an unusual amount of contentious litigation.”
Due a “great extent . . . to [the debtor’s] obstruction of the trustee and extreme litigiousness,” Judge Kimball said, the estate was insolvent; there was no distribution to unsecured creditors, and administrative creditors received “only a tiny portion of” their claims. He alluded to the debtor’s “shocking behavior.”