In re Horton

612 B.R. 400

IN RE: Dean L HORTON and Frances H. Horton, Debtors.

Case No. 19-11162-t7

United States Bankruptcy Court, D. New Mexico.

Entered: January 9, 2020

Clifford C Gramer, Jr., Albuquerque, NM, for Debtor.

Chris W Pierce, Samuel I. Roybal, Thomas D Walker, Walker & Associates, P.C., Stephanie L Schaeffer, McCarthy & Holthus, LLP, Albuquerque, NM, for Trustee.

OPINION

Hon. David T. Thuma, United States Bankruptcy Court

Before the Court is the motion of Robert Marcus, the liquidating trustee in a related bankruptcy case, for leave to bring a constructive trust action against this estate's most valuable asset. Marcus proposes to name the chapter 7 trustee as an in rem defendant, assuring the Court there would be no allegations of wrongful conduct or personal liability. Debtors and the trustee object to the motion, arguing that both the " Barton doctrine" and the automatic stay bar the claim. Debtors and the trustee also argue that allowing the proceeding would be an unnecessary burden on the estate and that imposing a constructive trust would be legally and factually improper. The Court concludes that neither the Barton doctrine nor the automatic stay prevents Marcus from bringing his proposed in rem claim against the trustee in this court. The Court also concludes that the other objections go to the merits of the proposed claim and should be considered after the pleadings have been joined. Thus, the Court will grant Marcus's motion.

I. FACTS

For the limited purpose of ruling on the motion, the Court finds the following facts from the dockets in this case and a related chapter 11 case.¹

Debtors were dairy farmers. For many years they owned and operated a large dairy in New Mexico's Hatch Valley. The dairy land, buildings, cattle, and equipment were owned by a New Mexico general partnership, Las Uvas Valley Dairies ("Las Uvas"). Before 2008 Debtors each owned 50% of Las Uvas. Thereafter, their children owned between 20 and 30% of the general partnership, while Debtors owned the balance equally.

Between 2008 and 2015 Debtors built an expensive house on 584.4 acres of land near the dairy. Marcus alleges that the costs of designing, building, and furnishing the house were paid for either directly by Las Uvas or from Las Uvas partnership draws. Marcus alleges that Debtors caused Las Uvas to pay out as much as $24,000,000 during these years to build and furnish the house and for other personal expenses. Marcus also alleges that Las Uvas conveyed the house and land to Debtors in 2012 but continued to fund the house's construction and furnishing until its completion in 2015.

Las Uvas filed a chapter 11 case in this court on September 15, 2017. Debtors' attempts to reorganize failed and a creditor's plan of liquidation was confirmed on June 14, 2018.

The plan of liquidation provided for the creation of a post-confirmation liquidating trust, to be administered by a liquidating trustee. The liquidating trustee was given the tasks of operating the dairy until it could be sold; pursuing all preference and other claims owned by the trust estate; winding up the affairs of the estate; and distributing the net proceeds to the trust beneficiaries (i.e. Las Uvas' secured, priority, and unsecured creditors). Philip Mitchell was the original liquidating trustee. Marcus succeeded Mitchell in July 2018.

On May 19, 2019, Debtors filed this chapter 7 case. The U.S. Trustee's office appointed Clarke Coll as the case trustee.

Marcus, on behalf of the liquidating trust, filed a claim in this case for $12,747,462. Total filed claims exceed $27,600,000. Debtors' largest scheduled asset is their house and garage on the 584.4 acres, which they scheduled at $6,900,000. In comparison, Debtors scheduled all of their other assets at a combined value of $435,000.

Marcus alleges that Debtors drove Las Uvas into bankruptcy by taking exorbitant distributions in violation of their fiduciary duties to the partnership. He contends that the distributions were used in large part to build and furnish the house. According to Marcus, had most of the $24,000,000 been used to operate the dairy, Las Uvas would still be a going concern instead of an insolvent, liquidating shell.

Based on the allegations, Marcus wishes to file a complaint against Debtors and the chapter 7 trustee seeking to impose a constructive trust, for the benefit of the liquidating trust beneficiaries, on Debtors' house, furnishings, and land.

The Debtors and the trustee oppose Marcus's motion. They argue that the Barton doctrine and the automatic stay prevent Marcus from suing the chapter 7 trustee; that there is no cause to modify the automatic stay; that there are no grounds to impose a constructive trust; and/or that the proposed constructive trust subverts the Bankruptcy Code's distribution scheme.

II. DISCUSSION

A. The Barton Doctrine.

1. In general. In Barton v. Barbour , 104 U.S. 126, 26 L.Ed. 672 (1881), the plaintiff, who had been injured in a train accident, sued the receiver of the railroad company for damages arising from the railroad's alleged negligence. Id. at 126-27. The receiver had been appointed by a Virginia court but, without seeking leave from that court, the plaintiff filed a lawsuit against the receiver in the District of Columbia. Id. After recognizing the "general rule that before suit is brought against a receiver leave of the court by which he was appointed must be obtained," the Barton court held:

when the court of one [s]tate has ... property in its possession for administration as trust assets, and has appointed a receiver to aid it in the performance of its duty by carrying on the business to which the property is adapted, until such time as it can be sold with due regard to the rights of all persons interested therein, a court of another state has not jurisdiction, without leave of the court by which the receiver was appointed, to entertain a suit against him for a cause of action arising in the [s]tate in which he was appointed and in which the property in his possession is situated, based on his negligence or that of his servants in the performance of their duty in respect of such property.

Id. This " Barton doctrine," i.e., that a receiver cannot be sued in another jurisdiction without leave of the appointing court, has been held to apply to lawsuits against bankruptcy trustees. See, e.g. , Lankford v. Wagner , 853 F.3d 1119, 1122 (10th Cir. 2017) (citing Satterfield v. Malloy , 700 F.3d 1231 (10th Cir. 2012), the Tenth Circuit held that the Barton doctrine precluded a suit against a bankruptcy trustee in district court absent approval from the appointing bankruptcy court).

The Barton doctrine has three main purposes:

(1) to maintain the integrity of the bankruptcy court's jurisdiction; (2) to control burdensome litigation that may impede the trustee's work as an officer of the court; and (3) to allow the bankruptcy court to monitor effectively the trustee's work." CIT Commc'ns Fin. Corp. v. Maxwell (In re marchFIRST, Inc.) , Case No. 01 B 24742, 2008 WL 4287634, at *2 (N.D. Ill. Sept. 12, 2008) (relying on [In re ] Linton [136 F.3d 544 (7th Cir. 1998) ] ), aff'd sub nom. In re marchFIRST Inc. , 589 F.3d 901 (7th Cir. 2009).

In re World Marketing Chicago, LLC , 584 B.R. 737, 743 (Bankr. N.D. Ill. 2018) ; see also Lankford , 853 F.3d at 1122-23 (purposes of the doctrine are preventing trusteeship from becoming an irksome duty; ensuring that competent people are available for appointment; reducing the expenses of bankruptcy; enabling bankruptcy judges to monitor trustee work more effectively; and ensuring that other courts do not intervene in estate administration without permission).

2. Jurisdiction versus immunity. There is confusion about the effect of the Barton doctrine. "[T]he Barton doctrine does not shield trustees from lawsuits." Phoenician Mediterranean Villa, LLC v. Swope (In re J & S Properties, LLC) , 545 B.R. 91, 98 (Bankr. W.D. Pa. 2015), affirmed, 554 B.R. 747 (W.D. Pa. 2016), affirmed, 872 F.3d 138 (3d Cir. 2017). "The Barton doctrine is not a form of immunity ...." In re World Marketing Chicago, LLC , 584 B.R. at 745. "[I]t is critical to untangle Barton from the various immunity doctrines with which it can become conflated ... the protections it offers are entirely procedural." In re Christensen , 598 B.R. 658, 664-65 (Bankr. D. Utah 2019).

Simply stated, the Barton doctrine does not shield trustees from lawsuits. Rather, the doctrine requires the bankruptcy court to determine where the suit may be brought, not whether the trustee may be sued. Katz v. Kucej (In re Beibel [Biebel ]) , No. 08-3115, 2009 Bankr. LEXIS 1544, 2009 WL 1451637, at *6, n. 18 (Bankr. D. Conn. May 20, 2009) (unreported decision) ("The Barton Doctrine is jurisdictional. Quasi-judicial immunity is substantive. They are not the same thing."); In re Cutright , 2012 WL 1945703, *8, 2012 Bankr. LEXIS 2419, *26 (Bankr. E.D. Va. May 30, 2012) ("The Barton Doctrine pertains to ‘where the Trustee may be sued (i.e., in this court only), not whether she may be sued.’ " (citing In re Beibel [Biebel ], 2009 Bankr. LEXIS 1544, [2009 WL 1451637] at *6 ).

J & S Properties , 545 B.R. at 98 (emphasis in original). By precluding another court's jurisdiction over a lawsuit against a bankruptcy trustee unless the appointing court gives its prior approval, the Barton doctrine prevents a "plaintiff from obtaining some advantage over the other claimants upon the assets in the [trustee's] hands ...." Coll v. Franco (In re Franco) , 586 B.R. 489, 496 (Bankr. D.N.M. 2018). The doctrine thus allows the appointing bankruptcy court to "maintain control over all matters relating to the bankruptcy proceeding[.]" In re marchFIRST, Inc. , 2008 WL 4287634, at *2 (N.D. Ill.).

3. Does Marcus need permission to sue Coll in this court? The majority rule is that a plaintiff need not seek approval before suing a bankruptcy trustee in his appointing bankruptcy court. See, e.g., LeBlanc v. Salem (In re Mailman...