9th Circuit is first to tackle novel bankruptcy question

A bankruptcy trustee is the representative of the bankruptcy estate and has the capacity to sue and be sued. 11 U.S.C. Section 323. In what has become known as the "Barton doctrine," however, no suit against an estate representative may be initiated for actions taken in the administration of the estate, without prior leave of the bankruptcy court. See Barton v. Barbour, 104 U.S. 126 (1881). In Barton, the U.S. Supreme Court ruled that common law bars suits against receivers in courts other than the court charged with the administration of the estate. Therefore, before a suit against a receiver is brought, leave of the court that appointed the receiver must be obtained. While Barton involved a receiver, it is applied to bankruptcy trustees. See Beck v. Fort James Corp. (In re Crown Vantage, Inc.), 421 F.3d 963 (9th Cir. 2005).

The justification underlying the Barton rule is that the court that appointed the trustee has a strong interest in protecting her or him from unjustified personal liability for acts taken within the scope of official duties. Furthermore, requiring that leave to sue be sought enables the bankruptcy court to monitor the work of officers of the court more effectively. In Blixseth v. Brown (In re Yellowstone Mountain Club, LLC), 2016 DJDAR 11709 (Nov. 28, 2016), the 9th U.S. Circuit Court of Appeals became the first appellate court to consider whether Barton applies to suits against a member of an unsecured creditors' committees (UCC). UCC members are appointed by the U.S. Trustee. The United States Trustee Program is a component of the Department of Justice responsible for overseeing the administration of bankruptcy cases.

In Yellowstone Mountain Club, the 9th Circuit recognized that Barton traditionally applies to actions against receivers and bankruptcy trustees. The court explained that this does not limit the scope of Barton since the touchstone of the inquiry involves a functional approach considering whether a suit challenges acts done in the official capacity and authority of an officer of the court.

The 9th Circuit characterized the bankruptcy litigation in the Yellowstone Mountain Club case as a "long-running saga," stating that "[i]n the late 1990s, Timothy Blixseth and his wife, Edra, developed the Yellowstone Mountain Club, and exclusive ski and golf resort in Montana that caters to the 'ultra-wealthy.'" With regard to financing the development and the use of funds, Blixseth alleged that he relied on the advice of his attorney, Stephen Brown, and that Brown "assured him that his actions were lawful." Subsequently, Blixseth was sued by investors and settled based on Brown's advice. Blixseth and Edra divorced around the same time. Again represented by Brown, Blixseth entered into a marital settlement agreement giving the Yellowstone Mountain Club to Edra. In 2008, Yellowstone commenced a Chapter 11 bankruptcy case. In the bankruptcy case, Brown was appointed to the UCC and was selected as the committee's chairman.

Blixseth alleged that Brown used confidential information to his detriment in the bankruptcy case. On this basis, he sued Brown in the district court. The district court held that it lacked jurisdiction because Blixseth had failed to comply with Barton by obtaining prior approval of the bankruptcy court to sue. Blixseth next sought bankruptcy court authorization to pursue his claims in the district court. Blixseth asserted that some of his claims involved pre-bankruptcy actions that didn't relate to Brown's activities on the UCC. The bankruptcy court determined it was "impossible ... to isolate Blixseth's so-called 'pre-petition malpractice and malfeasance' claims from Brown's activities as a member of the Unsecured Creditors Committee." The bankruptcy declined to grant Blixseth permission to pursue his claims in the district court and dismissed the suit on its merits. Blixseth appealed first to the district court, which affirmed, and then to the 9th Circuit.

Discussing that no appellate court had applied Barton to a UCC member, the 9th Circuit explained that the 6th Circuit has extended the doctrine to apply to counsel for the trustee as the "functional equivalent of a trustee" for purposes of administering the estate. In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993). Applying this functional equivalence test, the Eleventh Circuit applied Barton protection to individuals approved by the court to conduct sales of estate property. Carter v. Rodgers, 220 F.3d 1249, 1251, 1252 n.4 (11th Cir. 2000).

The 9th Circuit examined the alignment of interests of a bankruptcy trustee and an UCC. Both seek to maximize the recovery of creditors. A committee may bring a motion for the appointment of a trustee and, if granted, the role of the UCC may be reduced. Taking a functional approach, the 9th Circuit determined that it is appropriate to apply Barton protection equally to committee members and a trustee since their interests are closely aligned. The court continued by explaining that UCC members are obligated by statute, like a trustee, to perform tasks involving the administration of the estate, including (1) investigation of the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, (2) participation in the formulation of a plan, and (3) examination of the debtor. 11 U.S.C. Sections 1103(c) and 343.

The 9th Circuit found that lawsuits challenging actions of creditors' committees "could seriously interfere with already complicated bankruptcy proceedings." The court recognized that the fear that "UCC members would have to answer for their actions in a court unfamiliar with the bankruptcy proceedings - may cause UCC members to be timid in discharging their duties." Accordingly, the 9th Circuit applied Barton protection to UCC members sued for acts performed in their official capacities. Lawsuits based on such acts must be brought in the bankruptcy court or in another court only with prior permission of the bankruptcy court.

The 9th Circuit found that some of Blixseth's claims against Brown for pre-bankruptcy misconduct were not intertwined and had nothing to do with Brown's participation on the UCC. As a result, Blixseth did not need bankruptcy court permission to bring these claims in the district court.

Blixseth's remaining claims against Brown related to actions taken while he served as UCC chair and constituted acts done within his authority as an officer of the court. Accordingly, bankruptcy court permission was required to brings these claims in the district court. The 9th Circuit cited a five-factor test for a bankruptcy court determining whether to grant leave to sue in another forum under Barton or to retain jurisdiction: "(1) whether the acts complained of 'relate to the carrying on of the business connected with the property of the bankruptcy estate,' (2) whether the claims concern the actions of the officer while administering the estate, (3) whether the officer is entitled to quasi-judicial or derived judicial immunity, (4) whether the plaintiff seeks a personal judgment against the officer and (5) whether the claims seek relief for breach of fiduciary duty, through either negligent or willful conduct." The presence of just one of the factors may be enough for the bankruptcy court to retain jurisdiction. Since Blixseth sought a personal judgment against Brown, the 9th Circuit held that the bankruptcy court did not abuse its discretion in denying the request for permission to sue in the district court.

The court held that since Barton claims arise from actions taken in the official capacity of an officer of the court, the bankruptcy court has the power to adjudicate the claims unlike claims that don't stem from the bankruptcy case. With regard to whether Blixseth can even sue Brown in the bankruptcy court, the 9th Circuit remanded to the bankruptcy court the issue of whether Brown is entitled to derived judicial immunity. If so, he is shielded from suit. The court explained that such a shield is limited to acts taken within the scope of Brown's authority, with notice to the debtor, and disclosed to and approved by the bankruptcy court.