The Barton Doctrine: Suit Against Receiver Did Not Require Court Permission

The Barton doctrine provides that a court-appointed receiver cannot be sued absent “leave of court by which he was appointed.” Barton v. Barbour, 104 U.S. 126, 127 (1881).
“An action against a receiver without court permission, the [Barton] Court reasoned, is an attempt ‘to obtain some advantage over the other claimants upon the assets in the receiver’s hands.’” Carroll v. Abide, 788 F.3d 502, 505 (5th Circuit. 2015) (quoting Barton, 104 U.S. at 128). Without permission, a court lacks subject-matter jurisdiction.
The doctrine also applies to lawsuits against bankruptcy trustees, their counsel, and liquidating trustees. See, Lebovits v. Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272, 276 (2d Cir. 1996) (noting cases that have extended the Barton doctrine to bankruptcy trustees); McDaniel v. Blust, 668 F.3d 153, 157 (4^th Cir. 2012); Beck v. Fort James Corp. (In re Crown Vantage, Inc.), 421 F.3d 963, 971 (9^th Cir. 2005).
The Fifth Circuit recently addressed a new fact pattern and issue concerning the Barton doctrine: whether a receiver appointed in a state court action could be sued in a subsequent bankruptcy case of the debtor absent court permission. Berleth v. Preferred Ready-Mix, L.L.C. (In the Matter of Preferred Ready-Mix, L.L.C.), No. 24-20158, 2024 WL 5252498 (5th Cir. Dec. 31, 2024)
In 2020, an individual sued the owners of Preferred Ready-Mix, LLC for breach of contract. The owners did not defend the lawsuit and defaulted. A judgment was entered against them in the amount of $173,120.68. And the court appointed a receiver to collect the judgment and seize the judgment debtor’s assets.
The receiver seized vehicles, office supplies, business records, and tools. This prompted the debtor to file for Chapter 11. The U.S. Bankruptcy Code required the receiver to deliver the seized property to the bankruptcy estate. 11 U.S.C. §543(b)(1) (custodian of a debtor’s property must deliver it to the trustee or debtor upon learning of the commencement of the bankruptcy case).
The debtor’s counsel demanded the receiver return the seized property. The receiver said he would do so if the debtor paid an administrative fee. A representative of the debtor went to where the receiver had stored the seized trucks, took them, and left a $2,500 check. However, according to the debtor, $50,000 worth of equipment was missing from the trucks, along with business records.
On March 7, 2022, the debtor sued the receiver over the seized property. The complaint alleged four claims: 1) turnover; 2) stay violation; 3) conversion; and 4) disallowance of claim. On Nov. 8, 2022, the bankruptcy court held a bench trial. The debtor won on all claims except conversion.
Ruling that the receiver had “effectively held the major assets of the debtor hostage,” the bankruptcy court fined the receiver $45,000. The receiver appealed the decision, first to the district court and then to the Fifth Circuit.
The receiver argued that, pursuant to the Barton doctrine, the debtor needed court permission to bring the suit. It was undisputed that the debtor had not obtained permission.
There are two exceptions to the Barton doctrine. First is “the business exception — which is statutory in nature and generally applies when a receiver or trustee is operating a business from which a stranger to the bankruptcy process is harmed.” Berleth v. Preferred Ready-Mix, L.L.C. (In re Preferred Ready-Mix, L.L.C.), 660 B.R. 214, 219 (S.D. Tex. Apr. 1, 2024) (citing 28 U.S.C. § 959(a)).
Second is the ultra vires exception, applicable when a receiver acts outside of her official duties. In other words, a receiver can be sued when she takes property that is not part of the estate. See, Leonard v. Vrooman, 383 F.2d 556 (9th Cir. 1967); Teton Millwork Sales v. Schlossberg, 311 F. App’x 145 (10th Cir. 2009).
In Preferred Ready-Mix, over the debtor’s objection, the district court ruled that the ultra vires exception did not apply. The receiver “was carrying out the role he was appointed to perform — i.e., to seize and hold onto Ready-Mix’s property.” 660 B.R. at 221-22. “Thus, in seizing the physical assets of Ready-Mix, [the receiver] did exactly as instructed, acting squarely within the scope of his official duties.” Id. at 222. Therefore, the district court ruled, the Barton doctrine applied. And because the debtor did not obtain court permission litigate against the receiver, the “Bankruptcy Court had no jurisdiction to hear the suit.” Id.
But the Fifth Circuit disagreed and reversed. The appellate court ruled that the ultra vires exception to the Barton doctrine did apply. The court observed that the receiver had authority to “seize and maintain” the property that belonged to the debtor pre-bankruptcy. But once the debtor filed for Chapter 11, the property belonged to the bankruptcy estate. According to the court, the receiver therefore “was without authority — and acted ultra vires — when he continued to seize and maintain possession of property of the bankruptcy estate despite receiving notice of the bankruptcy petition and demand for turnover.” 2024 WL 5252498 at *2.
Based on this analysis, the Fifth Circuit concluded that the debtor “did not need leave from the appointing court to sue [the receiver] in bankruptcy court for his belated return of property of the bankruptcy estate post-demand for turnover.” Id.
The purpose of the Barton doctrine is to protect receivers, trustees, and others from lawsuits that would “interfere with their ability to administer the estate.” 557 B.R. 443, 447. Parties seeking redress against them must assume that court permission is needed. The two exceptions are narrowly construed and apply in rare situations.
In Preferred Ready-Mix, the Fifth Circuit was willing to apply the ultra vires exception based on the distinction between a debtor and a debtor-in-possession and the creation of a bankruptcy estate in a Chapter 11 case.
It remains to be seen if and when this factual situation will arise again. But given the Fifth Circuit’s decision, it would be wise for parties who do face this type of situation and their counsel to be mindful of how the Fifth Circuit ruled.