BankruptcyProf Blog

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. 

ABI Law Student Writing Competition

Sponsored by the Bankruptcy Litigation Committee of the American Bankruptcy Institute ("ABI"), the Competition will take place from January 1, 2010 through March 1, 2010.  First place gets $1,000.  The submissions must be 10 to 12 pages.  The info can be accessed here.

Oral Argument Next Week in NFL Antitrust Case

Oral argument in American Needle v. NFL is set for next Wednesday.  You can acess the briefs here.   

Circuit Court of Appeals Cases from Last Week

3rd Circuit Court of Appeals, December 31, 2009
In re W.R. Grace & Co., --- F.3d ---, 2009 WL ------------ (3rd Cir. 2009)(no subject matter jurisdiction to expand a preliminary injunction to include Montana actions - bankruptcy court does not have related-to-jurisdiction over a third-party lawsuit if that lawsuit would affect the bankruptcy proceeding only through the intervention of yet another lawsuit)

11th Circuit Court of Appeals, December 28, 2009
In re Baker,  --- F.3d ---, 2009 WL ------------ (11th Cir. 2009)(Keogh plan was not property of the estate - plan did not have to be maintained under ERISA for the debtor to claim an exemption under Florida law)

California Appellate Districts, December 29, 2009
Jasmine Networks, Inc. v. Sup. Ct.,slip Cal.App.4th 2009/h034441 (plaintiff does not lose standing to maintain an action under California Uniform Trade Secrets Act for misappropriation by filing a bankruptcy petition and selling the trade secrets during the bankruptcy)

Thanks to Findlaw.com

December Filings

The LA Times reported 116,000 total bankruptcy filings in December, 2009.  This compares to 115,500 in November, and 130,200 in October, 2009.  The rest of the year is: 125,500 September; 120,000 in August; 130,500 in July; 124,800 in June; 120,400 in May; 128,700 in April, 131,000 in March, 102,000 in February and 89,000 in January.

Total filings 2009; 1,446,000
Total filings 2008; 1,096,000
Total filings 2007;    827,000

Last December was 95,900 total for the month. 

I had a hearing yesterday in Bankruptcy Court Woodland Hills.  In the clerk's office at 10:00 a.m., all five windows were open helping people and there were at least 25 people in line.  

New California Legislation Effective Jan 1

From the California Insolvency Law Committee:

New California Legislation Effective January 1, 2010  

With the start of the New Year, several statutory amendments of interest to insolvency constituents came into effect in California: 

Impound Accounts on Residential Mortgages.  California Civil Code Section 2954 has been amended to add two new exceptions to the law which prohibits a lender from requiring an impound account as a condition of a loan on a single family, owner-occupied dwelling.  As of January 1, 2010, a lender may, in addition to the previously-allowed situations, require an impound account: 
• Where the loan is made in compliance with the requirements for higher priced mortgage loans established in Regulation Z, whether or not the loan is a higher priced mortgage loan; or
• Where the loan is refinanced or modified in connection with a lender’s home ownership preservation program or a lender’s participation in such a program sponsored by a federal, state or local government authority or a nonprofit organization. 

Reverse Mortgages.  California Civil Code Sections 1923.2 and 1923.5 have been amended to add restrictions on a reverse mortgage lender’s participating in certain other financial or insurance activities, and on referring the prospective borrower to anyone for the purchase of other financial or insurance products; to make certain changes in the 16-point type notice required to be given to a potential borrower; and to add requirements for the delivery of a written checklist covering issues that might impact the borrower as a consequence of the loan. 

Residential Real Property Foreclosure.  California Civil Code Sections 2923.5, 2923.6, 2924.8 and 2924f and 2943, and California Financial Code Section 17312, have been amended to make temporary changes to the handling of foreclosures relating to certain mortgages and deeds of trust.  Changes include adding procedures for the handling of short pay agreements.  The new provisions sunset January 1, 2014. 

Judgment Liens.  California Code of Civil Procedure section 697.510 and 697.670 have been amended to provide that, within six months prior to the expiration of a judgment lien recorded with the California Secretary of State, the judgment lien can be renewed in the same manner as a UCC financing statement.  

In addition to the foregoing, a new law on mechanics liens will come into effect on January 1, 2011:
Mechanics Liens.  California Civil Code Sections 3084 and 3146 have been amended, effect on January 1, 2011 to require, as a condition of the enforceability of the mechanics lien, that notice of the lien be served on the owner or reputed owner of the property, by registered, certified or first class mail, or on the construction lender or original contractor.  The amended statute provides that failure to serve such a notice will render the lien unenforceable. 

These materials were prepared by Molly J. Baier in the San Francisco office of Reed Smith LLP 

Oral Argument set in Hamilton v. Lanning

Mon., March 22:

Hamilton v. Lanning (08-998) — formula for bankruptcy courts in deciding future income of debtor filing under Chapter 13