A nonprecedential opinion by the Ninth Circuit Bankruptcy Appellate Panel explains that 28 U.S.C. § 959(a) doesn’t mean what its words seem to say.
The section says:
Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property.
A chapter 11 trustee retained a management consultant to operate the business. Allegedly, the consultant didn’t disclose that he purchased merchandise from companies he owned and overcharged the debtor by hundreds of thousands of dollars.
The confirmed chapter 11 plan created a plan trust and conveyed all estate claims to the trust. The plan also gave the plan trustee exclusive authority and responsibility for investigating and prosecuting estate claims.
After confirmation, the bankruptcy court granted final compensation to the trustee.
Not long after confirmation, the plan trustee discovered the consultant’s alleged misrepresentations and overcharges. Following the plan trustee’s objection to the consultant’s fee applications, the bankruptcy court required the consultant to disgorge some $375,000 in previously paid fees.
Four years later, the corporate debtor sued the chapter 11 trustee and the consultant in state court. The claims included fraud, negligent misrepresentation and breach of fiduciary duty.
A month later, the debtor filed a motion in bankruptcy court for leave to bring the suit that it had already filed. In the hearing on the motion, the debtor argued it was suing the trustee under Section 959(a) and that Section 959(a) was an exception to the Barton doctrine.
The plan trustee opposed the motion, saying that the plan trustee alone had authority to sue the chapter 11 trustee and the consultant. The bankruptcy court denied the debtor’s motion for leave to sue on several grounds. The debtor appealed to the BAP.
Section 959(a)
Citing Barton v. Barbour, 104 U.S. 126 (1881), the BAP’s memorandum opinion on July 19 quoted the Ninth Circuit for saying that the Barton doctrine means that
a party must first obtain leave of 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.
Beck v. Fort James Corp. (In re Crown Vantage Inc.), 421 F.3d 963, 970 (9th Cir. 2005).
Citing Crown Vantage, the BAP said it “is broadly accepted that 28 U.S.C. § 959(a) does not apply to alleged wrongdoing during the normal course of a trustee’s administration of the bankruptcy estate.” The BAP quoted the circuit court for saying that Section 959(a)
applies only if the trustee . . . is actually operating the business, and only to acts or transactions in conducting the debtor’s business in the ordinary sense . . . or in pursuing that business as an operating enterprise. Section 959(a) does not apply to suits against trustees for administering or liquidating the bankruptcy estate. Actions taken in the mere continuous administration of property under order of the court do not constitute an “act” or “transaction” in carrying on business connected with the estate. The few examples of suits that have been allowed under [28 U.S.C.] § 959(a) include a wrongful death action filed against an operating railroad trustee and suits for wrongful use of another’s property.
Id. at 971-972.
The BAP said it had held in a prior case that a “breach of a fiduciary duty in the administration of the estate does not fall within the exception provided by 28 U.S.C. § 959(a).” Kashani v. Fulton (In re Kashani), 190 B.R. 875, 884 (B.A.P. 9th Cir. 1995). To sue in another court in a case of the sort, the BAP held that the debtor must obtain leave from the bankruptcy court.
In the case on appeal, the BAP said that the complaint dealt with the trustee’s acts in administering the estate and “not torts committed in the course of running the business.” Likewise, the claims for misrepresentation and breach of fiduciary duty “do not seek relief for independent torts while operating” the business.
The BAP therefore held that Section 959(a) was not an exception to the Barton doctrine.
The Debtor Lacked Standing
Having held that Section 959(a) itself did not permit the debtor to sue the trustee, the BAP proceeded to rule that the debtor lacked standing to sue, because all claims vested in the plan trustee. The BAP also concluded that the bankruptcy court had not abused its discretion in denying leave to sue, for several reasons mostly based on the Barton doctrine.
A nonprecedential opinion by the Ninth Circuit Bankruptcy Appellate Panel explains that 28 U.S.C. § 959(a) doesn’t mean what its words seem to say.
The section says:
Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property.
A chapter 11 trustee retained a management consultant to operate the business. Allegedly, the consultant didn’t disclose that he purchased merchandise from companies he owned and overcharged the debtor by hundreds of thousands of dollars.
The confirmed chapter 11 plan created a plan trust and conveyed all estate claims to the trust. The plan also gave the plan trustee exclusive authority and responsibility for investigating and prosecuting estate claims.
After confirmation, the bankruptcy court granted final compensation to the trustee.