Bankruptcy

11th Cir: Debtor Cannot File Suit Against Trustee Or Professionals In District Court Without Leave Of Bankruptcy Court

By Scott Riddle

Lawrence v. Goldberg, et al., 08- 11034 (11th Cir. July 10, 2009) (click here for .pdf opinion). 

Debtor file suit against the Chapter 7 trustee, professionals employed by the trustee, and creditors in District Court..  The District Court dismissed for lack of subject matter jurisdiction.  The Eleventh Circuit affirmed.

In [Barton v. Barbour, 104 U.S. 126 (1881)], a court in equity had appointed a receiver 'of all the property, rights, and franchises' of a railroad company. Barton, 104 U.S. at 126–27. While the receiver was operating the railroad, one of the company's train cars derailed, and a passenger sustained personal injuries. Id. at 127. The injured passenger attempted to sue the receiver without obtaining the leave of the court that had appointed the receiver. Id. The Supreme Court reasoned that allowing the plaintiff's action to proceed without leave of the appointing court would have been 'an usurpation of the powers and duties which belonged exclusively to [the appointing] court.' Id. at 136. Therefore, the Supreme Court held that a court does not have 'jurisdiction, without leave of the court by which the receiver was appointed, to entertain a suit against him for a cause of action . . . based on his negligence or that of his servants in the performance of their duty in respect of [the property administered by the receiver].' Id. at 137.

In 2000, we held—in our only published case interpreting the Barton doctrine—that, as a matter of federal common law, 'a debtor must obtain leave of the bankruptcy court before initiating an action in district court when that action is against the trustee or other bankruptcy-court-appointed officer, for acts done in the actor's official capacity.' [Carter v. Rodgers, 220 F.3d 1249, 1252 n.3 (11th Cir. 2000)] at 1252. We also held that the Barton  doctrine applies to actions against officers approved by the bankruptcy court when those officers function 'as the equivalent of court appointed officers.' ...

With regard to the creditor defendants, the bankruptcy court approved a financing arrangement in which the creditors—namely Bear Stearns, acting through managing partners Taub and Lehman—would advance the costs necessary to recover property of the estate and would receive repayment from recovered assets, if any. Thus, to the extent the creditors financed the Trustee's efforts to locate hidden assets on behalf of the estate, they likewise functioned as the equivalent of court appointed officers, as did their counsel. By alleging that the creditors, through counsel, hired professionals for their own benefit but billed their fees to the estate, Lawrence essentially claimed that they breached their official fiduciary duties to the Trustee and the bankruptcy court.

Full post as published by Georgia Bankruptcy Blog on July 11, 2009 (boomark / email).