Opinion ID: 869684
Heading Depth: 3
Heading Rank: 2

Heading: Denial of Leave to Sue in State Court

Text: The Barton doctrine requires that, apart from a narrow exception not at issue here, permission must be obtained before bringing suit against the trustee in another forum “for acts done in the trustee’s official capacity and within the trustee’s authority as an officer of the court.” Allard, 991 F.2d at 1240. There can be no doubt that the limited exception under 28 U.S.C. § 959(a) for suits against trustees for actions taken in Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 22 “carrying on business” does not apply here. Id. at 1241; Satterfield, 700 F.3d at 123738; Muratore v. Darr, 375 F.3d 140, 144-45 (1st Cir. 2004).7
Rather, GKH maintains that Barton does not apply (and leave should not have been required) because the Trustee exceeded the scope of his authority. To the extent that GKH again argues that the Trustee’s actions were equivalent to the physical seizure of property found to be ultra vires in Leonard and Teton Millworks, that claim is even less persuasive in this case as the claims asserted in the Bradley County Complaint sought actual and punitive damages against GKH for its alleged breach of fiduciary duty in representing the Debtor in connection with the 50-Acre Transfer. Because the Trustee’s actions cannot be equated to a trustee’s physical seizure of property not belonging to the estate, reliance on those cases is misplaced. GKH also makes the now familiar argument that the Trustee exceeded his authority because he knew or should have known that the 50-Acre Transfer did not involve property of the bankruptcy estate either before filing suit or at least when Judge Cook so ruled in December 2010. GKH also argues that the Trustee knew that the claims would be found to be time barred, but a successful statute-of-limitations defense would not cause the Trustee’s pursuit of the claims to fall outside the scope of his authority. Neither a dismissal on the merits, nor an allegation that the claims were brought for ulterior purposes, equates to a transgression of the authority to assert claims to property on behalf of the estate. See Cutright, 2012 WL 1945703, at ; McDaniel, 668 F.3d at 157; Satterfield, 700 F.3d at 1236-37; Muratore, 375 F.3d at 144 (rejecting expanded exception to Barton doctrine for torts committed by the trustee). The bankruptcy trustee has authority, as the representative of the estate, to commence and prosecute any action or proceeding on behalf of the estate with or without court approval under 11 U.S.C. § 323(a) and Fed. Bankr. R. P. 6009. See In re 7 28 U.S.C. § 959(a) provides, in pertinent part, that: “Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property.” Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 23 McKenzie, 2011 WL 3439081 at  (citing Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1154 n.6 (3d Cir. 1989)). Moreover, the bankruptcy estate includes not only “all legal or equitable interests of the debtor,” 11 U.S.C. § 541(a)(1), but also causes of action arising after commencement of the bankruptcy case. Id. at  (citing cases). Consistent with this authority, the Trustee’s actions in filing and pursuing the Bradley County Complaint were taken in pursuit of possible assets of the estate and fell within the broad scope of the Trustee’s duties and obligations under 11 U.S.C. § 704. Id. at ; see also id. at . GKH has not demonstrated that the Trustee acted outside the scope of his authority so as to obviate the need to seek permission to file its third complaint in state court.
We review the bankruptcy court’s decision whether to grant leave to sue the trustee in state court for abuse of discretion. Matter of Linton, 136 F.3d at 546; see also Kashani v. Fulton (In re Kashani), 190 B.R. 875, 886 (BAP 9th Cir. 1995). Although this court has not yet endorsed any particular considerations to be taken into account, the bankruptcy court looked to the analysis articulated in Kashani for guidance. In re McKenzie, 2011 WL 3439081, at  9-12. Other courts also have relied on Kashani in varying degrees. Compare Beck v. Fort James Corp. (In re Crown Vantage), 421 F.3d 963, 976-77 (9th Cir. 2005); In re VistaCare Group, LLC, 678 F.3d 218, 232-33 (3d Cir. 2012); Cutright, 2012 WL 1945703, at -11; Strand v. Loveridge, No. 2:07-cv-576, 2008 WL 893004, at -4 (D. Utah Mar. 28, 2008); In re Eerie World Ent., LLC, 2006 WL 1288578 (Bankr. S.D.N.Y. Apr. 28, 2006).
GKH devotes a substantial portion of its opening brief to the argument that it alleged sufficient facts to establish a prima facie case of malicious prosecution and abuse of process, but acknowledges that no findings were made by the bankruptcy court in that regard. The court in Kashani explained that, even when a prima facie case has been alleged against the trustee, the bankruptcy court may nonetheless conclude that the suit Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 24 would be more properly maintained in bankruptcy court. In re Kashani, 190 B.R. at 886. Here, the bankruptcy court acknowledged GKH’s arguments, assumed that a prima facie showing could be made, and relied on the extensive record submitted in support of the motion for leave in analyzing the other Kashani factors. In re McKenzie, 2011 WL 3439081, at . Since the decision rested on other considerations, we also assume without deciding that GKH’s subsequently filed complaint alleged a prima facie case of malicious prosecution or abuse of process in connection with the Bradley County Complaint.
Five questions were identified in Kashani as being relevant to whether the bankruptcy court should retain jurisdiction: 1. Whether the acts or transactions relate to the carrying on of the business connected with the property of the bankruptcy estate. If the proceeding is under 28 U.S.C. § 959(a), then no court approval is necessary. . . . 2. If approval from the appointing court appears necessary, do the claims pertain to actions of the trustee while administering the estate? By asking this question, the court may determine whether the proceeding is a core proceeding or a proceeding which is related to a case or proceeding under Title 11. . . . 3. Do the claims involve the individual acting within the scope of his or her authority under the statute or orders of the bankruptcy court, so that the trustee is entitled to quasi-judicial or derived judicial immunity? 4. Are the movants or proposed plaintiffs seeking to surcharge the trustee; that is, seeking a judgment against the trustee personally? 5. Do the claims involve the trustee’s breaching her fiduciary duty either through negligent or willful misconduct? Kashani, 190 B.R. at 886-87. The existence of “one or more of these factors may be a basis for the bankruptcy court to retain jurisdiction over the claims.” Id. at 887; see also In re Crown Vantage, 421 F.3d at 976 (discussing Kashani). Here, the bankruptcy court addressed each factor and found that they militated in favor of retaining jurisdiction. Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 25 Without repeating those findings, we are satisfied that GKH has not established an abuse of discretion in the bankruptcy court’s denial of its motion for leave to sue in state court. GKH’s arguments to the contrary are briefly addressed. First. As already discussed, the § 959(a) exception to the Barton doctrine does not apply. GKH misapprehends this factor by focusing on Judge Cook’s ruling that the 50-acre parcel was not property of the bankruptcy estate. Second. As discussed above, the bankruptcy court did not err in finding that the Trustee’s actions in filing and pursuing the Bradley County Complaint were taken within the scope of his authority to administer the bankruptcy estate. Nor is it relevant that the Trustee filed his “non-core” claims in state court. As the bankruptcy court explained: The categorization of an action as “core” or “non core” for purposes of bankruptcy court jurisdiction may be determinative of what forum the trustee must use to obtain jurisdiction over the party from whom he is seeking the recovery. It is not determinative of whether the filing of that suit is inside or outside the scope of the trustee’s duties. In re McKenzie, 2011 WL 3439081, at . The bankruptcy court did not err in finding that this factor weighed in favor of retaining jurisdiction. Further, as is discussed below, the late addition of claims against the Debtor and the attorneys (to the extent that they represented him) did not require a different result. Third and Fourth. GKH contends that the need for bankruptcy court oversight may be less when the claims against the trustee are personal capacity claims that do not implicate the bankruptcy estate directly. That is not the case, however, when the trustee is entitled to immunity. Here, the bankruptcy court observed that similar questions of the Trustee’s immunity were already being considered in GKH’s related adversary proceedings. It was not an abuse of discretion to conclude that because there was a strong possibility that the Trustee would be entitled to immunity in this case, these factors weighed in favor of retaining jurisdiction over the claims against the Trustee. Indeed, the bankruptcy court has since dismissed the claims against the Trustee and his attorneys on the grounds of quasi-judicial immunity. Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 26 Fifth. The bankruptcy court acknowledged that GKH’s claims did not allege breach of any fiduciary duty owed to it as a creditor, but found that GKH’s tort claims were better suited to be heard in bankruptcy court both because the claims were “intertwined with the Trustee’s duties pursuant to 11 U.S.C. § 704” and because GKH was already pursuing a similar adversary proceeding based on the same operative facts. Id. at . We have already rejected GKH’s argument that the Trustee exceeded the scope of his authority under § 704.
Finally, the bankruptcy court identified several policy reasons supporting the decision to deny the motion and recognized that the decision “should include the balancing of the interests of all parties involved.” Kashani, 190 B.R. at 886. Briefly, those reasons included the determination that “resolution of GKH’s tort claims may have an impact on the administration of the estate since [the Bradley County Complaint] related directly to the Trustee’s attempts to administer that estate through its powers of investigation and its duty to collect assets of the estate.” In re McKenzie, 2011 WL 3439081, at . Further, “‘[t]he leave-to-sue requirement also protects trustees from excessive interference in the execution of their duties resulting from [the] need to defend themselves in lawsuits filed by parties upset by their treatment in the trustee’s bankruptcy proceeding[.]’” Id. at  (quoting In re Kids Creek Partners, 248 B.R. 554, 559 (Bankr. N.D. Ill. 2000)). Further, the bankruptcy court expressed concern that granting leave to do so in another court could distract from the ongoing bankruptcy case. More importantly, however, granting leave could result in a tremendous waste of judicial resources given the similarity to the related adversary proceeding, the bankruptcy court’s familiarity with the underlying and related litigation, and the burden that this “highly complicated and heavily litigated matter” could present to the state court. Id. at . Although GKH disputes that the matter is particularly complex and argues that leave should be granted because the Trustee’s underlying lawsuit was filed in state court, there can be no question that the issues of immunity and the scope of the trustee’s authority are better Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 27 adjudicated in bankruptcy court. Finally, GKH contends that the bankruptcy court failed to equally consider its interests in pursuing claims for having been subjected to unnecessary and legally unsupportable lawsuits. However, GKH has been able to litigate the claims asserted in its third complaint—just not in state court. We find no abuse of discretion in denying the motion for leave to file this action in state court.