Q:      I am a state court receiver in a case that has been disrupted by a bankruptcy filing. The bankruptcy trustee has been threatening to sue me, in the bankruptcy court, for what she claims were negligent actions and to recover alleged preferential transfers. Doesn’t the trustee have to get prior permission from the state receivership court to be able to sue me?

A:      Yes. The Barton Doctrine [ Barton v. Barbour, 104 U.S. 126 (1881) ] provides that a party seeking to sue a receiver must first obtain leave of the appointing court to do so and, absent such leave, no other court has jurisdiction to hear a lawsuit against the receiver. It applies to any lawsuits a bankruptcy trustee may want to bring. Ask the Receiver previously discussed the case of In re Preferred Ready-Mix, LLC, 647 B.R. 158 (Banks. S.D. Tex. 2022) where a bankruptcy trustee sued a state court receiver who, after the trustee’s demand, had failed to timely turn over a debtor’s assets. The receiver eventually conditioned the turnover on the trustee paying him for certain administrate expenses first. The trustee complied, but then sued the receiver for violating the automatic stay and the Bankruptcy Code turnover provisions. The bankruptcy court ruled in favor of the trustee and awarded damages of $35,000 and punitive damages of $10,000 for violating the automatic stay. The receiver appealed and the district court has now reversed. In re Preferred Ready-Mix, LLC, 2024 WL 1392550 (W.D. Tex. 2024). Why? You guessed it—the trustee had not obtained prior permission from the state receivership court to sue its receiver—thereby violating the Barton Doctrine.

          It was not disputed that the Barton Doctrine applied or that the trustee had not obtained permission to sue the receiver. See, In re DMW Marine, LLC, 509 B.R. 497, 503 (Banks. E.D. Penn. 2014) ( “In the bankruptcy context, it applies to actions that a third party brings against a bankruptcy trustee, as well as actions that a bankruptcy trustee brings against receivers appointed by federal and state courts.”). The trustee, however, contended there are exceptions to the Barton Doctrine that were applicable. There are two exceptions to the Barton Doctrine. The first is the business exception, which can apply when the claimed damages arose from the receiver’s operation of a business. 28 U.S.C. § 959(a). It did not apply because the receiver had not been operating a business. It also could not apply because the federal statutory exemption only applies to federal receivers. The second exception is the ultra vires exception. The trustee contended the receiver’s actions were ultra vires because he refused to timely turnover the assets, after he had notice of the bankruptcy and had received a demand to do so. The district court disagreed. It found the ultra vires exception “exceptionally narrow” and has been limited only to “the actual wrongful seizure of property”. The trustee has appealed to the Fifth Circuit.

          The district courts limitation on the extent of the ultra vires exception is consistent with the holdings of other courts. See, In re DMW Marine, LLC, supra. at 507. (“Over the years, courts have curtailed the scope of “ultra vires” exception to the Barton Doctrine. While no court has said as much definitively, it may be no exaggeration to state that the exemption applies only in cases in which a receiver wrongfully seizes or controls non-receivership property.”). The DMW court goes on to explain that one of the core purposes of the Barton Doctrine is to prevent interference with the receivership court’s control over receivership property. “Because a judgment against the receiver in his capacity as receiver would be satisfied out to the receivership property, the effect of a suit brought without leave to recover such a judgement would be ‘to take the property of the trust from [the receiver’s] hands and apply it to the payment of the plaintiff’s claim, without regard to the rights of other creditors or the orders of the court which [was] administering the trust property.” Id. at 506. quoting In re VistaCare Group, LLC, 678 F.3d 218, 224 (3rd Cir. 2012) (quoting Barton 104 U.S. at 128-29). It also notes that the doctrine is even stronger when suit is brought in federal court and a state court receivership is involved because of federal-state comity. “Until the administration of the estate has been completed, and the receivership terminated, no court of the one government can, by collateral suit, assume to deal with rights of property or of action constituting part of the estate within the exclusive jurisdiction and control of the courts of the other” (quoting Porter v. Sabin, 149 U.S. 473,480 (1893).) Id. at 513 fn.10.