In re Eagan Avenatti, LLP

637 B.R. 502

IN RE: EAGAN AVENATTI, LLP, Debtor.

Case No.: 8:19-bk-13560-SC

United States Bankruptcy Court, C.D. California.

Hearing held, Date: January 26, 2022

Signed March 3, 2022

Meghan C. Murphey, Murphey & Murphey, APC, Aliso Viejo, CA, Tinho Mang, Judith E. Marshack, Marshack Hays LLP, Irvine, CA, for Trustee.

Jack A. Reitman, John P. Reitman, Landau Law LLP, Los Angeles, CA, for Debtor.

MEMORANDUM DECISION DENYING CHAPTER 7 TRUSTEE'S EMERGENCY MOTION FOR ORDER AUTHORIZING TRUSTEE TO USE PROPERTY OF THE ESTATE PURSUANT TO 11 U.S.C. § 363 [DK. 353]

Scott C. Clarkson, United States Bankruptcy Judge

Chapter 7 Trustee, Richard A. Marshack ("Mr. Marshack" or "Trustee"), filed an emergency motion for an order seeking authorization to use property of the Estate pursuant to 11 U.S.C. § 363 on January 24, 2022 [Dk. 353] ("Motion"). This Court held a hearing on the Motion on January 26, 2022 ("January 26 Hearing"). Appearances are as noted in the record.

Mr. Marshack is the recipient of two subpoenas from the United States District Court for the Southern District of New York (SDNY) arising in the criminal proceeding of United States v. Michael Avenatti , Case No. 1:19-cr-00374-JMF, each commanding him to appear "and not depart the Court without leave thereof, or of the United States Attorney" (as to the subpoena delivered by the United States Attorney for the Southern District of New York) and "remain at the court until the judge or a court officer allows you to leave" (with respect to the subpoena delivered by Mr. Avenatti's counsels, the Federal Defenders of New York, Inc.). Copies of these subpoenas appear as Exhibits 1 and 3 of the Motion, together with declarations regarding waivers of attorney client privilege of Stephanie Clifford, aka Stormy Daniels, and Gary Franklin which appear at Exhibits 4 and 5 of the Motion.

Debtor, Eagan Avenatti, LLP, is a law firm presently in Chapter 7 before this Court. Mr. Marshack, in his capacity as Chapter 7 Trustee of Debtor's Estate (the "Trustee"), has in his possession at least four terabytes of Debtor's financial and other data. In connection with the aforementioned SDNY criminal matter, two subpoenas were issued and served upon the Trustee, both demanding his appearance at trial and the production of certain data held in the possession of the bankruptcy Estate.

On an emergency basis, the Trustee moved for entry of an order from this Court authorizing the Trustee "to use property of the Estate pursuant to 11 U.S.C. § 363, [to] authoriz[e] Force 10 to receive payment from the SDNY USA Office for the time and expense related to the search for responsive documents, and to produce all responsive documents to the Subpoenas." Motion, Dk. 353, Pg. 2:17-20.

Section 363(b) requires notice and hearing in order to grant the Trustee approval to use Estate property,¹ but it does not authorize another forum to order a trustee's use of Estate property.² Because there is insufficient evidence to find that the Trustee's request is in the best interests of the Estate, particularly where the subpoenas were issued without leave of this Court as required under Barton v. Barbour , 104 U.S. 126, 136-37, 26 L.Ed. 672 (1881) and its progeny (collectively, the " Barton Doctrine"), the Motion is DENIED.

I. Factual Background

On September 13, 2019, Debtor filed a Chapter 7 bankruptcy petition. Mr. Marshack was appointed trustee of the Estate. On August 27, 2020, this Court granted the Trustee's application to employ Force 10 Partners, LLC as the Estate's electronic document manager. Utilizing the services of Force 10 Partners, the Trustee is in possession and control of over four terabytes³ of financial and other data of Debtor.

The Motion indicates the following facts: On March 22, 2019, the United States Attorney for the Central District of California filed a criminal complaint against Mr. Avenatti (United States v. Avenatti , Case No. SACR19-00061-JVS). A mistrial was declared on August 24, 2021, and a current trial date has been re-set for May 10, 2022.

Separately, Mr. Avenatti faced criminal action in the SDNY (United States v. Michael Avenatti , Case No. 1:19-cr-00373-PGG) (the "Nike Case") in which a verdict was entered on or about July 15, 2021.

Additionally, the subject of this particular motion arises from a then-pending second criminal case which was brought against Mr. Avenatti in SDNY (United States v. Michael Avenatti , Case No. 1:19-cr-00374-JMF). Trial in that case began on January 24, 2022, and concluded with a verdict on February 4, 2022. The jury found Mr. Avenatti guilty of wire fraud and aggravated identity theft. Jury Verdict Form, United States v. Michael Avenatti , Case No. 1:19-cr-00374-JMF, Order entered February 4, 2022, Dk. 371, Exh. 8.

With respect to the second SDNY case, the Trustee received a subpoena from United States Attorneys for the SDNY on December 20, 2021. The subpoena commanded the production of "[a]ny data contained in the Quickbooks [sic] or TABS databases related to [Mr. Avenatti's client] Stephanie Clifford, a/k/a ‘Stormy Daniels.’ " Motion, Dk. 353, Exh. 1. The data was requested to be produced on or before January 24, 2022. Id .

On January 7, 2022, Federal Defenders of New York, Inc., representing Mr. Avenatti in the second SDNY criminal case, caused a subpoena to be issued upon the Trustee requesting the production of items in advance of the trial to be held on January 24, 2022. Motion, Dk. 353, Exh. 3. The requested items included "any and all communications" among Mr. Avenatti, Stephanie Clifford ("Ms. Clifford"), and Eagan Avenatti paralegal, Judy Regnier, related to Mr. Avenatti's representation of Ms. Clifford. Id . The subpoena also requested all documents and financial records related to such representation.

On January 24, 2022, the Trustee filed an emergency motion for entry of an order authorizing the Trustee to use property of the Estate to comply with the two subpoenas.

II. Discussion

a. The Trustee's Motion Did Not Request, Yet Necessitates, a Barton Determination

Before the Court is a Motion for an order authorizing the Trustee to use property of the Estate for the purpose of responding to two subpoenas from the District Court of the Southern District of New York seeking the Trustee's appearance, as well as specific information and physical data, either in digital or hard form. The Motion does not ask for a determination of the validity of the subpoenas. However, in considering the Motion, the Court must address issues that pertain to the Motion's essence; namely, those principles that make up the Barton Doctrine.

b. The Barton Doctrine Was Developed to Protect the Integrity of Bankruptcy Proceedings and Eliminate Inefficiencies

Once a bankruptcy case is filed, "[t]he district court in which the bankruptcy case is commenced obtains exclusive in rem jurisdiction over all of the property in the estate." In re Crown Vantage, Inc. , 421 F.3d 963, 971 (9th Cir. 2005) (quoting Hong Kong and Shanghai Banking Corp., Ltd. v. Simon (In re Simon ), 153 F.3d 991, 996 (9th Cir. 1998) ).

In Barton v. Barbour , 104 U.S. at 136-37, the Supreme Court instituted an approach, further developed by circuit courts, for protecting the jurisdictional integrity of the bankruptcy court in light of proceedings in other fora (collectively, the " Barton Doctrine").

The Barton Doctrine requires "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." In re Crown Vantage, Inc. , 421 F.3d at 970. Without such leave, the other forum lacks subject matter jurisdiction over the suit. Barton, 104 U.S. at 136-37. A district court other than the appointing bankruptcy court is considered "another forum" for purposes of a Barton analysis. In re Kashani , 190 B.R. 875, 884 (9th Cir. B.A.P. 1995).

Specifically stated in Crown Vantage , "[t]he requirement of uniform application of bankruptcy law dictates that all legal proceedings that affect the administration of the bankruptcy estate be brought either in bankruptcy court or with leave of the bankruptcy court." 421 F.3d at 971 (emphasis added).

This long-standing doctrine has since been expressly expanded to include other types of court-appointed parties, such as bankruptcy trustees and counsel for trustees. See Id. (granting liquidating trustee Barton protection); McDaniel v. Blust , 668 F.3d 153, 157 (4th Cir. 2012) (citing Lowenbraun v. Canary (In re Lowenbraun) , 453 F.3d 314, 321 (6th Cir. 2006) ) (protecting trustee's attorneys).

In In re Linton , the Court of Appeals for the Seventh Circuit explained the rationale behind the Barton Doctrine as it relates to trustees:

If [the Trustee] is burdened with having to defend against suits by litigants disappointed by his actions on the court's behalf, his work for the court will be impeded ... Without the requirement [of leave], trusteeship will become a more irksome duty, and so it will be harder for courts to find competent people to appoint as trustees. Trustees will have to pay higher malpractice premiums, and this will make the administration of the bankruptcy laws more expensive ... Furthermore, requiring that leave to sue be sought enabled bankruptcy judges to monitor the work of the trustees more effectively. It does this by compelling suits growing out of that work to be as it were prefiled before the bankruptcy judge that made the appointment; this helps the judge decide whether to approve this trustee in a subsequent case.

136 F. 3d 544, 545 (7th Cir. 1998).

By retaining exclusive control of the estate, the appointing court could better preserve assets and equitably distribute those assets to creditors. See Barton , 104 U.S. at 134.

c. The Barton Doctrine Includes Responding to Subpoenas

The Barton Doctrine applies to subpoenas issued by courts that are served upon trustees and other officers and agents...