Dear constituency list members of the Insolvency Law Committee,the following is a case update analyzing a recent case of interest:
In Blixseth v. Brown (In re Yellowstone Mountain Club, LLC), 841 F.3d 1090 (9th Cir. 2016), the Ninth Circuit Court of Appeals addressed whether members of unsecured creditors’ committees can be sued outside of the bankruptcy court without bankruptcy court authority. The court determined that the Barton doctrine established in Barton v. Barbour, 104 U.S. 126 (1881), which prevents suit against a trustee or receiver without the authorization of the appointing court, also applies to claims against a committee member relating to his or her conduct as a committee member. To read the full decision, click here: http://bit.ly/2jxLX7o.
Timothy Blixseth was the founder and principal, together with his wife, Edra, of Yellowstone Mountain Club, a luxury Montana resort. Stephen Brown represented Blixseth at the time Blixseth borrowed $375,000,000 on behalf of the Yellowstone Mountain Club and related entities. Blixseth, allegedly on Brown’s advice, used some of the loan proceeds to pay personal debts. As a result, shareholders sued Blixseth and, on Brown’s advice, Blixseth settled. Later, when Blixseth and Edra divorced, Blixseth, who was again represented by Brown in those proceedings, transferred the Yellowstone entities to Edra.
Some time following the divorce, Edra caused the Yellowstone entities to file chapter 11 bankruptcy petitions. An unsecured creditors’ committee (“UCC”) was appointed. Brown became the chair of the UCC. Concerned that Brown was using confidential information he obtained as Blixseth’s counsel against Blixseth in the bankruptcy cases, Blixseth sued Brown in the district court. Brown moved to dismiss under the Barton doctrine, which was established in Barton v. Barbour, 104 U.S. 126 (1881). The Barton doctrine prohibits suits in other forums against officers appointed by a court (typically trustees or receivers) for actions taken in their official capacities and within their authority, absent the appointing court’s authorization. The district court found that the protection afforded officers appointed by the bankruptcy court should be extended to committee members and, based thereon, dismissed the suit.
Blixseth thereafter moved the bankruptcy court for permission to sue Brown in district court, arguing that some of his claims were based on prepetition conduct. The bankruptcy court denied the motion and dismissed the claims based on its conclusion that it would be “impossible. . . to isolate” the alleged “pre-petition malpractice and malfeasance” claims from Brown’s work on the UCC. Blixseth appealed to the district court, which affirmed. Blixseth subsequently appealed to the Ninth Circuit.
The Ninth Circuit first considered whether the Barton doctrine applies to members of an official committee of unsecured creditors. No court of appeals has previously extended Barton to committee members. However, courts have found that Barton extends to parties other than receivers or trustees, such as trustees’ lawyers or parties handling sales of estate assets. See In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993) (applying Barton to a trustee’s lawyer); Carter v. Rodgers, 220 F.3d 1249, 1251, 1252 n.4 (11th Cir. 2000) (applying Barton to an auctioneer). Here, the court found that the UCC’s interests were aligned with the estate’s, noting that committees can seek appointment of a trustee, have a duty to investigate the debtor and its financial condition, and participate in the formulation of a plan. Indeed, the Ninth Circuit pointed out that the duties of a committee and a trustee may overlap. Lawsuits against committee members, or even the potential for such lawsuits, may have the effect of chilling actions on the part of committee members attempting to fulfill their statutory duties. Thus, the court decided that Barton’s protections extend to committee members “sued for acts performed in their official capacities.” Yellowstone, 841 F.3d at 1095.
Next, the Ninth Circuit considered whether Blixseth needed bankruptcy court permission to sue Brown for Brown’s conduct prior to the bankruptcy case, on claims amounting to allegations of prepetition malpractice. The Ninth Circuit concluded that the bankruptcy court erred in finding that it was “impossible” to untangle the claims based on prepetition conduct from those based on postpetition conduct—Blixseth had clearly identified and separated the prepetition claims in his Barton motion and the prepetition claims had nothing to do with Brown’s role on the UCC. As a result, the Ninth Circuit held that Blixseth did not need bankruptcy court authority to pursue his prepetition claims against Brown in district court and that the bankruptcy court and district court had erred in concluding otherwise.
Turning next to the claims alleging postpetition misconduct by Brown in his capacity as chair of the UCC, the Ninth Circuit held that Blixseth could not pursue those claims in another forum absent the bankruptcy court’s authorization. In reaching this conclusion, the Ninth Circuit applied the following five factors:
(1) whether the acts complained of “relate to the carrying on of the business connected with the property of the bankruptcy estate,” (2)whether the claims concern the actions of the officer while administering the estate, (3) whether the officer is entitled to quasi-judicial or derived judicial immunity, (4) whether the plaintiff seeks a personal judgment against the officer and (5) whether the claims seek relief for breach of fiduciary duty, through either negligent or willful conduct.
Id. at 1096 (citing In re Kashani, 190 B.R. 875, 886–87 (9th Cir. BAP 1995)(also holding that satisfaction of any “one . . . factor may be a basis for the bankruptcy court to retain jurisdiction.”)). Because the fourth factor was satisfied by Blixseth’s seeking of a personal judgment against Brown, the Ninth Circuit held that the bankruptcy court did not err in denying Blixseth authority to sue Brown in district court.
Finally, the Ninth Circuit addressed Blixseth’s argument that the bankruptcy court lacked authority when it decided his claims against Brown. Brown asserted that Blixseth consented to the court’s authority, but there was no express consent and, in fact, Blixseth sought through his motion to litigate in district court. Further, Blixseth argued that the bankruptcy court exceeded its authority under Stern v. Marshall, 564 U.S. 462 (2011), which prohibits bankruptcy courts from adjudicating common law claims that are not constitutionally core to bankruptcy. However, the Ninth Circuit found that because Barton claims necessarily “stem from the bankruptcy itself,” Stern does not preclude bankruptcy courts from adjudicating such claims. The court ultimately remanded the case to the bankruptcy court to determine whether, with respect to Blixseth’s claims based on Brown’s postpetition conduct, Brown acted within the scope of his authority and with proper disclosures and, therefore, was entitled to derived judicial immunity for his acts as UCC chair.
Though its facts are unique, this Ninth Circuit decision sets an important precedent by expressly extending the protections of Barton to members of creditors’ committees. A committee can play an important role in a chapter 11 case—supervising the actions of the debtor in possession, investigating the debtor’s business and financial affairs, participating in the plan process, and otherwise advocating on behalf of all of the unsecured creditors. In some cases, a committee may be the only party with an economic interest in the case actively participating to ensure that the debtor is held accountable and is acting in the best interests of the estate. Accordingly, it makes sense to afford to committee members the same protections from suit in an outside forum afforded to trustees. A contrary decision would, as the court observed, chill committee actions. More than that, a contrary decision could dissuade creditors considering participation on a committee from doing so, which could ultimately detriment the bankruptcy system by minimizing the involvement of committees. This decision, however, should give comfort to creditors willing to serve as members of committees that their actions, if properly disclosed and authorized, will be subject to derived judicial immunity as well as protection from suit in an outside court pursuant to the Bartondoctrine—the same important protections long enjoyed by trustees.
These materials were written by Zev Shechtman of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (ZShechtman@dgdk.com). Editorial contributions were provided by Kyra E. Andrassy of Smiley Wang-Ekvall, LLP in Costa Mesa.
Thank you for your continued support of the Committee.
Insolvency Law Committee
Asa S. Hami
SulmeyerKupetz, A Professional Corporation
Macdonald Fernandez LLP
Radmila A. Fulton
Law Offices Radmila A. Fulton
John N. Tedford, IV
Danning, Gill, Diamond & Kollitz, LLP