Suit against trustee fails without leave of court

A debtor cannot sue a trustee for his alleged negligence during the bankruptcy because the debtor did not first obtain permission from the court, as required by law, and because the suit was filed too late.

Background

On Nov. 23, 2011, the court granted the trustee’s motion to approve Marc Albert as the Chapter 11 trustee in connection with a voluntary petition filed by Providence Hall Associates. The trustee thereafter moved to sell two real properties, the court approved both motions and the properties were sold and Wells Fargo was paid in full satisfaction of its liens. The case was administratively closed by the clerk on Dec. 27, 2012.

On Feb. 28, 2014, PHA sued Wells Fargo in state court for lender liability. After removal to this court, the court granted Wells Fargo’s motion to dismiss, holding that orders approving the sale of two properties were res judicata of the lender liability claims. The Fourth Circuit affirmed in a published decision.

PHA then sued Albert in this suit on Sept. 8, 2017, alleging that Albert was negligent and breached his fiduciary duty by failing to preserve the bankruptcy estate’s claims against Wells Fargo when he sold the properties and paid Wells Fargo on its secured liens. Albert has moved to dismiss PHA’s suit.

Report and recommendation

The Supreme Court established in Barton v. Barbour, 104 U.S. 126 (1881), that before another court may obtain subject-matter jurisdiction over a suit against a receiver for acts committed in his official capacity, the plaintiff must obtain leave of the court that appointed the receiver.  The Fourth Circuit has reaffirmed the vitality of the Barton doctrine in this circuit.

PHA first argues that the Barton doctrine does not apply because the action was removed to his court. The court holds that the Barton doctrine continues to apply in a removed action.

PHA next argues that the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462 (2011), has effectively revoked the Barton doctrine. The court agrees with the Fifth Circuit that Stern did not implicitly revoke the Barton doctrine.

PHA next asserts that the trustee is judicially estopped from raising the Barton doctrine because he stated that the court had jurisdiction in his notice of removal of this case. The court finds the trustee’s jurisdictional allegations in his notice of removal are statements of law, not of fact. More importantly, the court finds that the trustee has not intentionally misled the court. The court finds that the trustee is not estopped from reliance on the Barton doctrine.

PHA argues that the “carrying on business” language of § 959(a) protects it from Barton doctrine review in this case. However, the courts agree that § 959(a) has not done away with Barton and that the carrying on business exception is more limited in scope than PHA would have it. The court finds that, consistent with these cases, § 959(a) was not intended to do away with the Barton doctrine. The court also finds that the fact the case was closed when PHA filed its lawsuit is irrelevant to the application of the Barton doctrine.

The court further finds that the suit is barred by the two-year statute of limitations. Accordingly, it is recommended that plaintiff’s complaint be dismissed for lack of compliance with the Barton doctrine and as barred under the applicable statute of limitations.

District court order

This matter comes before the court on the report and recommendation issued by U.S. Bankruptcy Judge Brian F. Kenney on Dec. 21, 2018. Plaintiff timely objected to the R&R, and defendant timely responded to plaintiff’s objections. The court has reviewed all the relevant pleadings, the supporting documents and the case law, and finds good cause to adopt the findings and recommendations of Judge Kenney.

Judge Kenney properly found that the Barton doctrine applies to cases raising Stern claims. Judge Kenney also correctly determined that the Barton doctrine compels dismissal of plaintiff’s complaint even though it was removed to the bankruptcy court, which appointed the trustee-defendant. Judge Kenney also properly found that the statute of limitations began to run on the date the underlying bankruptcy action was dismissed.

Motion to dismiss granted.

Providence Hall Associates Limited Partnership v. Albert, Case No. 19-cv-112, March 15, 2019. EDVA at Alexandria (O’Grady). VLW 019-3-116. 31 pp.