As shown in an opinion by New York’s Bankruptcy Judge James L. Garrity, Jr., the Barton doctrine stops third parties from suing a trustee even when the third parties sue in a forum that allegedly might have provided more comprehensive relief than the forum selected by the trustee.

A chapter 11 plan created a trust to pursue claims belonging to the estate. Insurance assets were among those transferred to the trust. The confirmation order retained jurisdiction over the trust, along with jurisdiction to resolve any causes of action the trust might bring.

To resolve disputes regarding insurance coverage for claims of creditors, the trust sued a passel of insurance companies in federal district court in Pennsylvania. Most of the insurers filed answers. To preclude having complete diversity in the Pennsylvania court, one insurer disclosed that its principal place of business was in New York, the same domicile as the trustee. Another insurer moved to compel arbitration.

Three months after the trust filed suit in Pennsylvania, some of the insurers filed a lawsuit against the trustee in a Delaware state court to resolve the coverage dispute. The insurers said they chose Delaware because there was no complete diversity in the Pennsylvania district court and because some of the policies required arbitration.

The insurers said that the Delaware court had subject matter jurisdiction and personal jurisdiction because the trust was created under Delaware law. All things considered, the insurers argued that the Delaware suit could bring prompt resolution about coverage.

The insurers had not obtained leave from the New York bankruptcy court to sue the trust in Delaware.

Anticipating that the trustee would invoke Barton and move in the New York bankruptcy court to halt the Delaware suit, the insurers filed a motion before Judge Garrity contending that Delaware was the better forum and that he should grant leave to proceed in Delaware.

Relying on Barton, the trust objected.

Barton Applies

On the merits, Judge Garrity cited Barton v. Barbour, 104 U.S. 126, 128 (1881), and quoted the Supreme Court when it said that the “doctrine generally requires that a party seeking to sue a receiver must obtain leave from the court that appointed the receiver.” When the doctrine applies, the court lacks subject matter jurisdiction.

After adoption of the Bankruptcy Act of 1898, the doctrine was extended to cover bankruptcy trustees and 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.

The Barton doctrine has two exceptions: the statutory carveout under 28 U.S.C. § 959(a), and the ultra vires exception. Neither was applicable to the case at hand, Judge Garrity said.

Finding no exception, Judge Garrity first analyzed whether the doctrine even applied.

Judge Garrity held that the “Delaware Action falls squarely within the scope of the Barton Doctrine” because the insurers “commenced the Delaware Action to circumvent the adjudication of the issues properly before the Pennsylvania Court under the Plan.”

No Other Exceptions to the Barton Doctrine

The insurers proffered two theories aimed at nixing the Barton doctrine. Judge Garrity rejected both.

First, the insurers claimed that the New York bankruptcy court lacked exclusive jurisdiction, as shown by the suit that the trust had filed in Pennsylvania. Judge Garrity said that provisions in the plan allowing the trust to sue anywhere had “no bearing on the application of the Barton Doctrine” because “this Court retains jurisdiction over the Trust Assets, including the insurance policies and the proceeds of those policies.”

Second, the insurers argued that Barton did not apply because the trust was attempting to resolve disputes under prepetition contracts. Judge Garrity rejected the argument, saying that the bankruptcy court “maintains exclusive and continuing jurisdiction over the bankruptcy estate, as explicitly preserved under the Plan and the GUC Trust Agreement.”

Because the Barton doctrine applied and the insurers did not obtain leave to sue, Judge Garrity said that the “‘only appropriate remedy’” was to order “‘cessation of the improper action,’” quoting a 2010 decision by Bankruptcy Judge Allan Gropper.

No Retroactive Relief from Barton

If Judge Garrity were to find Barton applicable, the insurers wanted him to give them “retroactive leave” to proceed in Delaware.

Judge Garrity rejected the argument and responded by saying that a “complaint filed in violation of the Barton Doctrine is void ab initio and lacks subject matter jurisdiction.”

“Moreover,” Judge Garrity said, “courts have denied retroactive leave to circumvent [the] Barton Doctrine even in cases involving strong competing policy interests,” such as circumstances in which the underlying dispute was subject to arbitration. Furthermore, he said that the “Delaware Action’s alleged merits are irrelevant because the action is void ab initio due to the [insurers’] failure to obtain this Court’s leave before filing.”

Judge Garrity enjoined the insurer’s suit in Delaware and “ordered” them “to dismiss their Delaware Action.”