Someone issuing a subpoena to a bankruptcy trustee in a criminal case or a lawsuit outside of bankruptcy court must first ask the bankruptcy court for permission to issue the subpoena in view of the Barton doctrine, for reasons explained by Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif.
Without prior bankruptcy court approval, expenses incurred by a trustee to comply with a subpoena issued outside of bankruptcy court would be an unauthorized use of estate property not in the ordinary course of business under Section 363(b), Judge Clarkson said in his March 3 opinion. The opinion suggests that a third party intending to issue a subpoena to a bankruptcy trustee for a case outside of bankruptcy court should offer to reimburse the estate for the expense of complying with the subpoena.
The Criminal Subpoena
The case involved Michael Avenatti, whose law firm is in chapter 7 liquidation in Judge Clarkson’s court. Individually, Mr. Avenatti is a defendant in a criminal case in California, with a trial scheduled to begin on May 10. He is now appealing a criminal judgment entered against him in February in New York.
Mr. Avenatti went to trial in a separate criminal case in New York beginning on January 24. The jury found him guilty of wire fraud and aggravated identity theft in a verdict on February 4.
In the criminal case that went to trial in January, both the prosecution and the defense had issued subpoenas on the California trustee demanding that the trustee appear personally and produce four terabytes of data held by the trustee.
On January 24, when the trial was beginning in New York, the California trustee filed an emergency motion asking Judge Clarkson to authorize expenses to be incurred in complying with the two subpoenas. The motion did not challenge the validity of the subpoenas, although the trustee’s motion did mention the Barton doctrine.
The 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.
Barton Applied
Although the trustee was not asking for a declaration that the subpoenas were invalid under Barton, Judge Clarkson said that “the Court must address issues that pertain to the Motion’s essence; namely, those principles that make up the Barton Doctrine.”
Judge Clarkson said that Barton was based on the notion that the bankruptcy court has exclusive jurisdiction of the estate. As the Ninth Circuit held in 2005, a party must first obtain leave from the bankruptcy court before “it initiates an action in another forum against a bankruptcy trustee or other officer appointed by the bankruptcy court for acts done in the officer’s official capacity.”
In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005).
Judge Clarkson relied heavily on In re Circuit City Stores, Inc., 557 B.R. 443 (Bankr. E.D. Va. 2016), where the bankruptcy court applied Barton to subpoenas served on trustees or other officers or their agents “owing their positions to bankruptcy court orders.”
On the other side of the fence, Judge Clarkson cited In re Media Group, Inc., 2006 WL 6810963 (B.A.P. 9th Cir. 2006), where he said that the BAP “declined to extend the application of the Barton Doctrine to a subpoena issued on a trustee’s lawyer.”
Judge Clarkson described the BAP as believing that Barton only applies to lawsuits against trustees, not subpoenas.
As an opinion from the BAP, even in his own circuit, Judge Clarkson said that Media Group was “not binding precedent.” He also said that the BAP “did not correctly apply the rule of law developed either in the Supreme Court’s 1881 decision in Barton or the Ninth Circuit’s 2005 Crown Vantage decision.” In his opinion, the BAP “engaged in a too narrow, textual analysis of the Supreme Court’s decision in Barton.”
Judge Clarkson quoted Crown Vantage for applying Barton to “all legal proceedings.” Under “any common-sense interpretation,” commanding a trustee to appear 3,000 miles away “involves a legal proceeding,” he said.
Although the Ninth Circuit has not addressed the question, Judge Clarkson said that he was “persuaded that the application of the Barton Doctrine respecting subpoenas, as so thoughtfully discussed in the more recent (2016) Circuit City case, is appropriate.”
Without permission from the bankruptcy court, Judge Clarkson said that the trustee could not comply with the subpoena because the trustee would have been using estate property outside of the ordinary course of business in violation of Section 363(b).
By asking him for permission to comply with the subpoena, Judge Clarkson said that the trustee was seeking permission to use estate property “without first allowing this Court to engage in a Barton analysis . . . . This was improper.”
“The proponent[s] of the subpoenas are the proper parties to seek permission to submit these subpoenas,” Judge Clarkson said. “In the absence of this Court’s prior approval, the subpoenas commanding the Trustee to use Estate resources usurp the power and authority of this Court.”
Judge Clarkson denied the trustee’s motion with prejudice, saying that Barton “considerations should be raised in the first instance by the issuers of the proposed subpoenas.”
Someone issuing a subpoena to a bankruptcy trustee in a criminal case or a lawsuit outside of bankruptcy court must first ask the bankruptcy court for permission to issue the subpoena in view of the Barton doctrine, for reasons explained by Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif.
Without prior bankruptcy court approval, expenses incurred by a trustee to comply with a subpoena issued outside of bankruptcy court would be an unauthorized use of estate property not in the ordinary course of business under Section 363(b), Judge Clarkson said in his March 3 opinion. The opinion suggests that a third party intending to issue a subpoena to a bankruptcy trustee for a case outside of bankruptcy court should offer to reimburse the estate for the expense of complying with the subpoena.