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January 9, 2010

9th Circuit Explains "Derived Quasi-Judicial Immunity" Protecting Trustees

Harris v. Wittman (In re Harris), ---- F. 3d ----, 2009 WL ------------- (9th Cir. Dec, 2009)

Issue:   Can the debtor here sue the trustee for breach of contract, that being a settlement contract approved by the court?

Holding:   No.  The trustee has “derived quasi-judicial immunity.”   
Appeal from the District Court

Judge Carlos T. Bea
The chapter 7 trustee in this case sued the debtor and his wife to avoid a fraudulent conveyance from the debtor to his wife.  The trustee then “entered into an Agreement for Use and Assignment of Interests and Prosecution of Claims with appellee Jack Swain, an unsecured creditor of the estate, which assigned to Swain the right to prosecute the adversary proceeding to set aside the alleged fraudulent conveyance.  In exchange, Swain was to be paid 68% of the net recovery he obtained, and to be reimbursed for any of his costs.”  Swain’s attorney’s fees would also be paid by the estate.  The agreement was approved by the bankruptcy court.

Two and a half years later, Swain, Harris, his wife and the trustee settled.  The property was transferred to the estate.  Mrs. Harris was to get a payment when the property was sold by the estate and everyone released everyone.  Six months later, the trustee agreed to sell the same property to Swain for $125,000 plus Swain agreed to pay the costs and attorneys fees and waive his claim.  Swain also agreed to pay Mrs. Harris when he sold the property.  “Altogether, Swain’s waiver of claims and assumption of liability totaled around $900,000.”  The bankruptcy court approved the “sale.” 

Three years later, Harris sued the trustee and Swain in state court for breach of the settlement agreement, breach of fiduciary duties etc.  Apparently he claimed that Swain’s waiver of claims etc was not worth $900,000.  The trustee removed the case to bankruptcy court.  The trustee and Swain filed a motion to dismiss.  Harris then amended the complaint to allege state law breach of contract only apparently trying to take jurisdiction away from the bankruptcy court.  The court dismissed the case saying “(1) the complaint was barred under the Barton doctrine due to Harris’s failure to obtain approval of the bankruptcy court prior to filing suit in state court, and (2) each defendant was entitled to derived quasi-judicial immunity as a result of the entry of the June 30, 2003 order, which approved the sale of the assets.”  The district court affirmed.

The 9th Circuit also affirmed although it reversed as to the Barton doctrine.  It agreed that the matter was a core proceeding and therefore the bankruptcy court had jurisdiction to dismiss the case.  “Here, although this is a state law cause of action, Harris’s claim arose in his bankruptcy case because it could not exist independently of his bankruptcy case.”  It said however that the case should not have been dismissed based on Harris failure to obtain permission to sue the trustee first.  It said that only applies where the suit is brought in another court.  “[T]he Barton doctrine is not a ground to dismiss a suit that is proceeding in the appointing bankruptcy court. As applied in the Ninth Circuit, the Barton doctrine requires ‘that a party must first obtain leave of the bankruptcy court before it initiates an action in another forum against a bankruptcy trustee or other officer appointed by the bankruptcy court for acts done in the officer’s official capacity.’” In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005).  “When Harris’s case was removed to the appointing bankruptcy court, all problems under the Barton doctrine vanished.”

The 9th Circuit affirmed however on the basis of immunity.  “’Bankruptcy trustees are entitled to broad immunity from suit when acting within the scope of their authority and pursuant to court order.’  Additionally, ‘court appointed officers who represent the estate are the functional equivalent of a trustee.’”  “For derived quasi-judicial immunity to apply, the defendants must satisfy the following four elements: (1) their acts were within the scope of their authority; (2) the debtor had notice of their proposed acts; (3) they candidly disclosed their proposed acts to the bankruptcy court; and (4) the bankruptcy court approved their acts.”  Those elements were all met and dismissal was therefore proper. 

January 9, 2010 in 9th Circuit Briefs | Permalink

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