Bankruptcy News Alert – New 9th Cir. Bankruptcy Opinion

New 9th Cir. Bankruptcy Opinion – Panel holds that Barton v. Barbour applies to claims against members of the Unsecured Creditors’ Committee; bankruptcy courts have authority to adjudicate Barton actions under Article I.

In In re Yellowstone Mountain Club, handed down yesterday by the Ninth Circuit Court of Appeals, the court answered two related inquiries: whether a plaintiff must obtain a bankruptcy court’s permission before suing a member of the Unsecured Creditors’ Committee (“UCC”) in district court under Barton v. Barbour, and whether the bankruptcy court had authority to enter a final judgment on the plaintiff’s Barton claims.  The court answered both questions in the affirmative.

Under Barton, a plaintiff must obtain authorization from the bankruptcy court before initiating an action in another forum against certain officers appointed by the bankruptcy court, such as receivers and bankruptcy trustees, for actions taken in their official capacities.  A district court is “another forum” for the purposes of the Barton rule.

The district court below recognized that the Barton doctrine’s broader purpose is to centralize bankruptcy litigation and “keep a watchful eye” on court-appointed officers.  The Ninth Circuit agreed, noting that the touchstone of the Barton inquiry is whether a suit challenges acts done in an official’s capacity and within his authority as an officer of the bankruptcy court.  The court further noted that creditors’ interests are closely aligned with the trustee’s, creating good reason to treat the two the same for purposes of Barton.  The court concluded that Barton applies to UCC members who are sued for acts performed in their official capacities, and that such suits must be brought in the bankruptcy court, or in another court only with the bankruptcy court’s express permission.

The court next held that Stern v. Marshall, which prohibits bankruptcy courts from adjudicating common law causes of action that neither derive nor depend on any regulatory regime, does not preclude a bankruptcy court from adjudicating Barton claims.  The court confirmed that Stern applies only to claims with no connection to the bankruptcy estate, except that they may be assets of the estate.  Because Barton claims concern actions taken in an officer’s official capacity and cannot exist independently of the underlying bankruptcy case, Stern does not bar a bankruptcy court from entering a final judgment on a Barton claim.

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The opinions expressed in this article are those of the author and do not necessarily reflect the views of Riddell Williams or its clients. This article is for general informational purposes and is not intended to be, and should not be taken as, legal advice.