Title Disputes vs. Chapter 7 Trustees
Two recent Federal Court cases have affirmed the continued vitality of Barton v. Barbour, 104 U.S. 126 (1881). While Constructive Notice Newsletter subscribers are a rather erudite group, some may need to be reminded that Barton was a common-law bankruptcy case that required a party seeking to sue a court-appointed receiver to obtain permission from the appointing court before proceeding in another forum (e.g. a state law contract or tort claim).
The Third Circuit, in In re VistaCare Group LLC, No. 11-2695 (3rd Cir., May 4, 2012), permitted a real estate purchaser at a Chapter 7 sale to subsequently sue the Trustee. The real property of the bankruptcy estate consisted of a 45-lot subdivision. Lots 1-44 were occupied by mobile homes and burdened with a subdivision restriction that title could never be transferred to the occupants. Lot 45 was the site of a retirement home that was sold by the Trustee to CGL, LLC with the Bankruptcy Court’s approval.
When trying to dispose of Lots 1-44, the Trustee learned that circumstances arising from the long-time occupancy of the mobile home residents necessitated the removal of the sale restriction (presumably to maximize the value to the estate). The Trustee worked with the local municipality to have the restriction removed and then sold most of the remaining lots to the existing occupants. CGL, LLC, which was previously unaware of the maneuverings concerning the 44 lots, promptly sued the Trustee in state court. The Trustee responded with a Barton defense and the Bankruptcy Court felt that permission to sue was not even needed because Barton “was antiquated and probably not controlling,” but granted the motion anyway. The District Court affirmed.
The Third Circuit Court of Appeals cogently analyzed the arguments that modern bankruptcy law and practice render Barton irrelevant, including 28 USC §959 (no leave needed when Trustee is operating a business), 11 USC §362 (the automatic stay), the United States Trustee Program and 11 USC §323(b) (Trustees have the capacity to sue and be sued) and found them unavailing. Finally, the Court concluded that the Bankruptcy Court had not abused its discretion in granting permission, because CGL had alleged reliance upon the restriction in its decision to purchase from the Trustee, an issue that was best resolved pursuant to state subdivision law.
Just a few weeks after In re VistaCar
e came down, a Virginia Bankruptcy Court applied the Barton
doctrine to deny the purchaser of a foreclosed Estate parcel the opportunity to sue the Trustee over a defect in the chain of title. In re Tracy B. Cutright, Case No. 08-70160-SCS
(Bankr. E.D. Va., May 30, 2012). Since the allegations implicated the Trustee’s actions while administering the estate, the court concluded that Barton
leave would be required. The facts of the case, which are too complex to address at length, clearly established that the Trustee was neither responsible for the defect nor had made any improper representations concerning it. The court concluded that the Trustee would likely be immune from liability. That, as well as several other factors, led the court to deny leave.
A number of other Circuits have previously upheld the Barton doctrine in mismanagement or misappropriation cases, including the Second Circuit in In re Lehal Realty Assocs., 101 F.3d 272, 276 (2d Cir. 1996). But recently this issue has started coming up in title disputes. Will title insurers be saddled with the added defense costs of this additional layer of litigation?