Newman v. Crane, Heyman, Simon, Welch & Clar

590 B.R. 457

Norman B. NEWMAN, solely as Liquidating Trustee of the World Marketing Liquidating Trust, Plaintiff,

v.CRANE, HEYMAN, SIMON, WELCH & CLAR, Defendant.

No. 17-cv-6978

United States District Court, N.D. Illinois, Eastern Division.

Signed September 26, 2018

Aaron Leonard Hammer, Horwood Marcus & Berk Chartered, Michael Aaron Brandess, Sugar Felsenthal Grais & Helsinger LLP, Chicago, IL, Brandon V. Lewis, Harli David Benjamin Thomas, Pro Hac Vice, Eric D. Madden, Pro Hac Vice Reid Collins & Tsai LLP, Dallas, TX, for Plaintiff.

Daniel Francis Konicek, Thomas James Long, Amanda Jo Hamilton, Konicek & Dillon, P.C., Geneva, IL, Gabriel Aizenberg, Scott T. Mendeloff, Symone Danielle Shinton, Greenberg Traurig, LLP, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

Honorable Thomas M. Durkin, United States District JudgeNorman V. Newman, as the liquidating trustee of the World Marketing Liquidating Trust ("Trustee") brought this action against law firm Crane, Heyman, Simon, Welch & Clar ("Crane Heyman"), alleging Crane Heyman committed malpractice during the bankruptcy of World Marketing.¹ Before the Court is Crane Heyman's motion to dismiss. For the following reasons, Crane Heyman's motion is denied.

BACKGROUND

In the summer of 2015, World Marketing ran into financial trouble. It began working with its lender to implement a turnaround plan to improve its finances. The plan did not work. On September 15, 2016, World Marketing contacted Crane Heyman to provide it guidance if a bankruptcy filing became necessary. R. 1 ¶¶ 13-14. By September 25, 2015, World Marketing anticipated filing for bankruptcy and signed an engagement letter with Crane Heyman for Crane Heyman's "representation of [World Marketing] in a Chapter 11 bankruptcy proceeding." Id. ¶ 15. World Marketing filed for bankruptcy on September 28, 2015 in the Northern District of Illinois. Id. ¶ 22.

The Trustee alleges that during Crane Heyman's representation of World Marketing, Crane Heyman failed to advise World Marketing that it was subject to the Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 ("WARN Act"). As a result, World Marketing terminated over 300 employees without giving them sufficient notice. Id. ¶ 17. On October 21, 2015, World Marketing's former employees filed a class action alleging that their terminations violated the WARN Act. Id. ¶ 24. The class action eventually became a disputed proof of claim in World Marketing's bankruptcy case (the "WARN Claim"). Following confirmation of the bankruptcy plan, the Trustee objected to and litigated the WARN Claim, which sought roughly $4 million in damages. Id. ¶ 25. In February 2017, the bankruptcy court overruled the Trustee's objection, subjecting the trust to $4 million in liability. Id. ¶ 26. In doing so, the bankruptcy court held that an exception that would not require notice to the employees—the liquidating fiduciary exception—did not apply. See In re World Marketing Chicago, LLC , 564 B.R. 587, 600-603 (Bankr. N.D. Ill. 2017) (explaining that the issue was one of first impression in this circuit). The Trustee alleges that had Crane Heyman satisfied its professional standard of care and advised World Marketing to issue proper notices, the Trustee would have prevailed. R. 1 ¶ 26.

Crane Heyman moves to dismiss on two bases. First, it argues this Court lacks subject matter jurisdiction over the Trustee's claim because of the Barton doctrine. Second, Crane Heyman argues the Trustee's case is barred by the principles of res judicata and collateral estoppel. The Court will address each argument in turn.

DISCUSSION

I. The Barton Doctrine

The so-called " Barton Doctrine" takes its name from the decision rendered in Barton v. Barbour , 104 U.S. 126, 26 L.Ed. 672 (1881). There, Barbour had been appointed equity receiver in Virginia state court to operate a railroad company. Afterwards, a railroad passenger, Barton, was injured and brought a tort action against the receiver in the District of Columbia. The Supreme Court held that, as a matter of federal common law, "before suit is brought against a receiver leave of the court by which he was appointed must be obtained." Id. at 128. Without such leave of court, the other forum "had no jurisdiction to entertain [the] suit." Id. at 131.

The majority opinion in Barton explained that the doctrine was necessary to avoid plaintiffs obtaining an "advantage over the other claimants" as to the distribution of "the assets in the receiver's hands." Id. at 128. The Court also explained that the requirement served to prevent the "usurpation of the powers and duties which belonged exclusively to another court" and protect "the duty of that court to distribute the trust assets to creditors equitably and according to their respective priorities." Id. at 136.

In a comparatively more recent case, the Seventh Circuit further explained the policy reasons for not allowing appointed receivers such as trustees to be sued without approval of the appointing courts:

This concern is most acute when suit is brought against the trustee while the bankruptcy proceeding is still going on. The threat of his being distracted or intimidated is then very great ... [w]ithout the requirement, 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 (and the expense of bankruptcy is already a source of considerable concern). Furthermore, requiring that leave to sue be sought enables 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.

...

At stake ... is a concern ... with the integrity of the bankruptcy jurisdiction. If debtors, creditors, defendants in adversary proceedings, and other parties to a bankruptcy proceeding could sue the trustee in state court for damages arising out of the conduct of the proceeding, that court would have the practical power to turn bankruptcy losers into bankruptcy winners, and vice versa. A creditor who had gotten nothing in the bankruptcy proceeding might sue the trustee for negligence in failing to maximize the assets available to creditors, or to the particular creditor. A debtor who had failed to obtain a discharge might through a suit against the trustee obtain the funds necessary to pay the debt that had not been discharged.

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

Courts have included attorneys hired by a trustee and other representatives of the trustee as among those actors who cannot be sued without the plaintiff first obtaining leave of the bankruptcy court. See Lawrence v. Goldberg , 573 F.3d 1265, 1269-70 (11th Cir. 2009) ; Allard v. Weitzman (In re DeLorean Motor Co.) , 991 F.2d 1236, 1241 (6th Cir. 1993).

The circumstances here are not the usual circumstances observed in most cases applying the Barton doctrine. Both sides here are or were court appointed parties rather than third parties suing court appointed trustees for conduct not directly related to the bankruptcy case. And the plaintiff, the Trustee, is the current trustee of the liquidating trust. For this reason, the Trustee argues the Barton doctrine does not apply to such situations because the same policy considerations are not implicated.

The Court agrees with the Trustee that the concerns discussed by the Barton court and the Seventh Circuit in Linton are not implicated here. First, there is no concern that the Trustee is attempting to circumvent the appointing court's supervision to obtain some advantage over other claimants. The Trustee is not a creditor seeking faster payment. Rather, he is the estate representative administering the estate by attempting to liquidate one of its claims, and presumably bring more value to the estate. Second, there is no threat that either he or Crane Heyman will be distracted by an ancillary proceeding—litigating claims is precisely the Trustee's role, and Crane Heyman is already out of the case. Indeed, requiring trustees to seek additional leave beyond what the bankruptcy court already approved through the bankruptcy plan only causes additional delay and distraction to the Trustee in administering and liquidating the estate.

Even if the Barton doctrine did apply, it is clear that the bankruptcy court granted Trustee permission to sue Crane Heyman for legal malpractice for violations of the WARN Act. A plan approved by the bankruptcy court is sufficient to confer such authority to a trustee. See Grede v. Bank of N.Y. Mellon , 598 F.3d 899, 902 (7th Cir. 2010) (explaining that "the terms of the plan of reorganization (and of the trust instrument) govern the permissible duties of a trustee after bankruptcy"); In re BC Funding , LLC , 519 B.R. 394, 410 (Bankr. E.D.N.Y. 2014) ("[T]he Court finds that the powers and duties bestowed upon the [estate representative] by the confirmed Plan, the Confirmation Order and the LLC Agreement—which was specifically approved by the Confirmation Order—provide the sole guidance for the Plaintiff's authority to prosecute the subject causes of action."). On the other hand, courts have stressed that parties cannot contract to suit—the appointing court must approve suits to avoid the Barton doctrine. See In re Sedgwick , 560 B.R. 786, 796 (N.D. Cal. 2016) ("Whether or not to grant leave under Barton to bring suit in another forum is at the discretion of the court. Appellant has provided no authority to support his contention that parties can enter into an agreement to waive the requirement of Barton approval, and effectively circumvent this power from the court."). Here, the bankruptcy court approved the bankruptcy plan,² and through it explicitly gave the...