4th Circuit: McDaniel v. Blust- Liability of Trustee’s Agents

Summary: The former officers of EBW Laser, Inc., which has been the subject of a fair bit of litigation in its bankruptcy in the Middle District of North Carolina, brought a complaint against the Chapter 7 Trustee’s law firm and several individual attorneys at the law firm, as well as the accountant for EBW Laser, as they allegedly improperly obtained the officers’ tax return in an attempt to show preferential transfers and/or fraudulent conveyances.  The case was originally brought in state court, but then removed by the Defendants to federal district court, where, following the recommendations of the magistrate,    the complaint was dismissed as to the Attorney Defendants and remanded to state court as to the Accountant Defendant, on the basis of the Barton v. Barbour, 104 U.S. 126 (1881), which requires  "that before another court may obtain subject-matter jurisdiction over a suit filed against a receiver for acts committed in his official capacity, the plaintiff must obtain leave of the court that appointed the receiver." The Plaintiffs argued that the Barton doctrine did not apply  as the Trustee was not alleged to have  specifically directed the challenged actions and because the allegedly wrongful actions exceeded the scope of the  Defendants’ authority as attorney for the Trustee. The 4^th Circuit rejected the argument that only actions which a Trustee  specifically directed his counsel and/or agents to take are insulated by the Barton doctrine.  Further, as these alleged actions were clearly taken in an attempt to show preferential transfers and/or fraudulent conveyances, even if wrongful did not preclude application of the Barton doctrine, which is intended to both protect Trustees "from unjustified personal liability for acts taken within the scope of his official duties." Lebovits v. Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272, 276 (2d Cir. 1996) and also to enable the bankruptcy court to "monitor the work of the trustees they have appointed so that the courts may be fully informed when they make future appointments."  In re Linton, 136 F.3d 544, 545 (7th Cir. 1998). Commentary: It should be kept in mind that neither the holding in this case nor Barton doctrine means that the Plaintiffs are without recourse, but only that they must seek leave from the bankruptcy court first. On the other hand, it would seem that the Barton doctrine should  provide substantial protection and comfort to Trustees. This is helpful for Chapter 13 debtors, since Trustees occasionally object or express concern about plans that do not vest property in the debtor at confirmation, instead retaining the property as assets of the estate.  Debtors may want such a retention by the estate, since 11 U.S.C. § 362(c)(3) only terminates the automatic stay after 30-days as to the debtor and not the estate.  Concerns from Trustees that such retention could open them to liability, including personal liability, for incidents and accidents related to such assets, for example a slip-and-fall case at the Debtor’s home, would seem to be largely overblown in light of this case. For a copy of the opinion, please see: McDaniel v. Blust- Liability of Trustee’s Agents.PDF