In re Yellowstone Mountain Club, LLC: Ninth Circuit Extends Barton Doctrine to Include Unsecured Creditors' Committee Members

Practical Law Legal Update w-004-9246 (Approx. 6 pages)

In re Yellowstone Mountain Club, LLC: Ninth Circuit Extends Barton Doctrine to Include Unsecured Creditors' Committee Members

by Practical Law Bankruptcy & Restructuring

Background

Timothy Blixseth (Blixseth) and his then wife Edra founded Yellowstone Mountain Club (Yellowstone), an exclusive ski and golf resort in Montana. For the development of Yellowstone, Blixseth borrowed $375 million from Credit Suisse. Relying on the advice of his attorney Stephen Brown (Brown) that his actions were legal, Blixseth allegedly used a portion of the Credit Suisse proceeds to pay off personal debts. Subsequently, shareholders of Yellowstone sued Blixseth in Montana state court and, on Brown's advice, Blixseth settled.

Blixseth again relied on Brown's advice during his subsequent divorce from Edra, in which property was divided pursuant to a settlement agreement, giving the Yellowstone entities to Edra.

In November 2008, Yellowstone filed a voluntary Chapter 11 petition and Brown was appointed chairman of the Yellowstone creditors' committee. Suspecting that Brown, to Blixseth's detriment, used certain confidential information that Brown had garnered from his previous representations of Blixseth, Blixseth sued Brown in the US District Court for the District of Montana.

The district court held that it lacked subject matter jurisdiction over the proceeding because Blixseth had not first obtained permission from the bankruptcy court to file an action in district court. The district court relied on the Barton Doctrine, stemming from the holding in Barton v. Barbour (104 U.S. 126 (1881)). The Barton Doctrine prohibits suits to be brought against bankruptcy officers, such as receivers and trustees, without permission from the appointing court. Blixseth then filed a motion in the US Bankruptcy Court for the District of Montana for leave of the bankruptcy court to pursue the action against Brown in district court, arguing that his claims against Brown were based on prepetition conduct. The bankruptcy court denied Blixseth's request and dismissed the claims on their merits, holding that it could not isolate Blixseth's claims of misconduct from Brown's activities as a member of the committee (In re Yellowstone Mountain Club, LLC, (Bankr. D. Mont. Mar. 15, 2013)). The district court affirmed the bankruptcy court's decision, and Blixseth appealed to the Ninth Circuit.

Outcome

Upon review, the Ninth Circuit held that:

Barton applies to committee members for acts performed in their official capacities (see The Barton Doctrine Extends to Committee Members).
Blixseth did not need bankruptcy court permission to bring prepetition claims in the district court, but did need permission to bring postpetition claims against Brown in the district court (see The Barton Doctrine Does Not Apply to Prepetition Claims).
The bankruptcy court has the authority to decide Blixseth's postpetition claims on their merits and these claims should be remanded to the bankruptcy court to determine whether or not Brown's alleged activities were conducted within his authority as committee chair and entitled to judicial immunity (see The Bankruptcy Court Should Decide the Merits of the Postpetition Claims).

The Barton Doctrine Extends to Committee Members

The Barton Doctrine requires a plaintiff to have leave of the bankruptcy court before a lawsuit can be brought in another forum against officers appointed by the bankruptcy court. The Ninth Circuit reasoned that because Barton applies to lawsuits brought against receivers and trustees for their acts in their official capacity and authority as officers of the court, the same should apply for committee members (see In re Crown Vantage, 421 F.3d 963 (9th Cir. 2005)).

The Ninth Circuit noted that while no other court of appeals had specifically extended Barton to apply to committee members, the US Courts of Appeals for the Sixth and Eleventh Circuits extended Barton to include counsel for the trustee and individuals approved to conduct sales of the estate property for being "functional equivalent[s] of a trustee" (see In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993); and see Carter v. Rodgers, 220 F.3d 1249, 1251, 1252 n.4 (11th Cir. 2000)).

The Ninth Circuit held that Barton applied to committee members because the interests of committee members are closely aligned with those of trustees. The Ninth Circuit reasoned that:

Committee members are obligated by statute to perform tasks in the administration of the estate that include:
- investigation of the acts, conduct, assets, liabilities, and financial condition of a debtor, and the operation and desirability of the continuance of a debtor's business (see section 1103(c)(2) of the Bankruptcy Code); and,
- participation in the formation of a plan (see section 1103(c)(3) of the Bankruptcy Code).
A lawsuit challenging committee members' actions could seriously interfere with the bankruptcy proceedings by making committee members:
- answer for their actions in a court unfamiliar with bankruptcy proceedings; and,
- timid in discharging their duties.

Further, the decision noted that the Commission to Study the Reform of Chapter 11 supported the Ninth Circuit's decision because it recommended extending the Barton Doctrine to estate neutrals and statutory committees and their members (see American Bankruptcy Institute, Commission to Study the Reform of Chapter 11, 2012-2014 Final Report and Recommendation 43 (2014)).

The Ninth Circuit rejected Blixseth's argument that committee members are distinguished from other functionally equivalent parties because those parties aid the trustee in maximizing the value of the estate whereas the committee members represent creditors that are seeking payment from the estate. This view of committee members was deemed too narrow because the committee can only maximize recovery for creditors by increasing the size of the estate.

The Barton Doctrine Does Not Apply to Prepetition Claims

The Ninth Circuit further held that while Barton applied to Brown's postpetition acts performed in his official capacity as a committee member, it did not apply to the prepetition tort, contract, and fraud claims that were not connected to Brown's position on the committee. Blixseth did not need the bankruptcy court's permission to bring actions for these prepetition claims in district court.

The Ninth Circuit further held that Blixseth's postpetition claims against Brown were for actions taken after Brown's appointment to the committee and challenged acts taken by Brown within his authority as an officer of the court and sought a personal judgment against Brown. The Ninth Circuit upheld the bankruptcy court's decision denying leave for Blixseth to bring these claims, which satisfied the fourth factor of a five-factor test, under In re Kashani, applied by bankruptcy courts to decide whether to grant leave to sue in another forum (see In re Kashani, 190 B.R. 875, 887 (9th Cir. BAP 1995)). The Kashani factors require a bankruptcy court to determine whether:

The acts complained of relate to the business connected with the property of the bankruptcy estate.
The claims concern the actions of the officer while administering the estate.
The officer is entitled to a quasi-judicial or derived judicial immunity.
The plaintiff seeks a personal judgment against the officer.
The claims seek relief for breach of fiduciary duty, through either negligent or willful conduct.

(Kashani, 190 B.R. at 887.)

The Bankruptcy Court Should Decide the Merits of the Postpetition Claims

The Ninth Circuit ultimately determined that the bankruptcy court had the authority to decide the postpetition claims against Brown on their merits. The Ninth Circuit rejected the bankruptcy court's original decision that Brown, as an officer of the court, was entitled to derivative judicial immunity for all his actions, and remanded the postpetition claims to the bankruptcy court to determine whether:

Brown acted in his official capacity and was entitled to derived judicial immunity.
Blixseth was given notice of Brown's proposed acts.
The bankruptcy court ultimately approved Brown's acts.

The Ninth Circuit rejected:

Blixseth's argument that the bankruptcy court exceeded its Article I jurisdictional authority under Stern v. Marshall, which prohibits bankruptcy courts from adjudicating common law causes of action not derived from or dependent on any agency regulatory regime (564 U.S. 462, 494 (2011); see Legal Update, Federal Rules of Bankruptcy Procedure to be Amended Effective December 1, 2016). Rather, Blixseth's postpetition and other claims that fall under Barton concern actions taken in a trustee's or officer's official capacity and stem from the bankruptcy itself.
Brown's argument that Blixseth consented to the bankruptcy court's authority and, if he had not, the district court cured any error. Throughout the proceedings Blixseth maintained that he had a right to litigate his claims in district court, and the district court did not cure any error because it did not undertake a meaningful, claim-by-claim analysis (relying on Dunmore v. U.S., 358 F.3d 1107, 1114 (9th Cir. 2004)).

Practical Implications

This decision is notable as it is the first US court of appeals decision to expand the Barton Doctrine to apply to actions taken by committee members. Parties bringing actions against committee members for acts performed within their authority as officers of the court should note that approval from the bankruptcy court will likely be required, though the Ninth Circuit made a clear distinction that Barton did not apply to acts beyond a court officer's authority.

In re Yellowstone Mountain Club, LLC: Ninth Circuit Extends Barton Doctrine to Include Unsecured Creditors' Committee Members | Practical Law