John Villegas, et al v. Michael Schmidt

Filing

PUBLISHED OPINION FILED. [14-40423 Affirmed ] Judge: CES , Judge: LHS , Judge: GJC Mandate pull date is 06/18/2015 [14-40423]

Case: 14-40423

Document: 00513057359

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Date Filed: 05/28/2015

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit

FILED
No. 14-40423

May 28, 2015
Lyle W. Cayce
Clerk

JOHN E. VILLEGAS; BFG INVESTMENTS, L.L.C.; BFG DEVELOPMENT,
INCORPORATED,
Plaintiffs-Appellants
v.
MICHAEL B. SCHMIDT, Trustee,
Defendant-Appellee

Appeal from the United States District Court
for the Southern District of Texas
Before STEWART, Chief Judge, and SOUTHWICK and COSTA, Circuit
Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
The plaintiffs appeal from the district court’s dismissal of their action
against a bankruptcy trustee. The court held that it was necessary to obtain
leave from the bankruptcy court before bringing such a suit. We AFFIRM.
FACTS AND PROCEDURAL BACKGROUND
In 2005, BFG Investments, acting through its president, John Villegas,
filed for bankruptcy.

Michael Schmidt was appointed as the bankruptcy

trustee and conducted the liquidation of BFG’s estate. The bankruptcy case

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was closed in November 2009 and Schmidt’s fees were approved. There was
no appeal from the bankruptcy court’s final approval of Schmidt’s fees.
Four years later, in October 2013, Villegas and BFG (“plaintiffs”) filed
suit against Schmidt under 28 U.S.C. § 1334(c), which provides that district
courts may hear proceedings “arising under title 11 or arising in or related to
a case under title 11.” 1 The plaintiffs alleged that Schmidt committed gross
negligence and breached his fiduciary duty while acting as trustee of BFG by
failing to pursue an action against Nationwide Insurance. They asserted that
Nationwide had issued an insurance policy worth $10 million to BFG, which
would have covered many of the creditors’ claims against it; Nationwide denied
that it had issued such a policy. According to the plaintiffs, Schmidt’s failure
to pursue BFG’s claim against Nationwide for coverage under that policy
depleted the estate and deprived the plaintiffs of property.
The district court dismissed the case on Schmidt’s motion because the
plaintiffs failed to obtain leave from the bankruptcy court that appointed
Schmidt as the bankruptcy trustee before filing suit against him.

The

plaintiffs appealed.
DISCUSSION
“We review de novo a district court’s Rule 12(b)(6) dismissal of a
complaint.” Meadows v. Hartford Life Ins. Co., 492 F.3d 634, 638 (5th Cir.
2007). The Supreme Court has held that, “before suit is brought against a
receiver leave of the court by which he was appointed must be obtained.”

Section 1334(c) also provides that “nothing in this section prevents a district court
in the interest of justice, or in the interest of comity with State courts or respect for State
law, from abstaining from hearing a particular proceeding arising under title 11 or arising in
or related to a case under title 11.”
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Barton v. Barbour, 104 U.S. 126, 128 (1881). We have applied this principle to
bankruptcy trustees, as have other circuits addressing the issue. See Anderson
v. United States, 520 F.2d 1027, 1029 (5th Cir. 1975); McDaniel v. Blust, 668
F.3d 153, 156-57 (4th Cir. 2012) (collecting cases).
The plaintiffs argue that what has become known as the Barton doctrine
does not apply in this case for two reasons. First, they contend that the
Supreme Court, in Stern v. Marshall, 131 S. Ct. 2594 (2011), effectively created
an exception to the Barton doctrine, and that that exception applies here.
Second, they argue that the Barton doctrine does not apply when a party brings
suit in the district court that exercises supervisory authority over the
bankruptcy court that appointed the trustee.
Whether Stern creates an exception to the Barton doctrine.

I.

In Stern, the Court held that bankruptcy courts lack constitutional
authority to enter final judgment on state-law counterclaims unless they
“stem[] from the bankruptcy itself or would necessarily be resolved in the
claims allowance process.” Id. at 2618. 2 The plaintiffs argue that the Barton
doctrine does not apply to “Stern claims” over which the bankruptcy court lacks
final adjudicative authority. They further contend that their negligence and
fiduciary duty claims against Schmidt are such claims. We conclude that the
Barton doctrine continues to apply regardless of whether the plaintiffs’ claims
qualify as Stern claims, for two reasons.

In Stern, the Court held that the Bankruptcy Act of 1984 violated the Constitution
“in one isolated respect” by authorizing bankruptcy courts to decide claims against creditors
for acts committed in their private capacities before the institution of bankruptcy
proceedings. See id. at 2612, 2620. In this case, the plaintiffs’ claims relate to Schmidt’s
actions in his representative capacity during the administration of the estate.
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First, the Supreme Court has directed appeals courts to abstain from
concluding that one of the Court’s later cases has, by implication, limited or
overruled one of its earlier cases. Agostini v. Felton, 521 U.S. 203, 237 (1997).
The plaintiffs’ claim that Stern silently limits Barton is exactly the sort of
limitation-by-implication the Court prohibits. Because the Barton doctrine is
directly applicable to this case, we must apply that doctrine and allow the
Court to impose, or decline to impose, limitations based on Stern. Second, the
Court has recently suggested that Stern would not, in fact, limit the Barton
doctrine when it stated that “Stern did not . . . decide how bankruptcy or
district courts should proceed when a ‘Stern claim’ is identified.” Executive
Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2168 (2014). 3
We are not called upon in this case to provide all the details regarding
how a party should, post-Stern, proceed under Barton. We hold only that a
party must continue to file with the relevant bankruptcy court for permission
to proceed with a claim against the trustee. If a bankruptcy court concludes
that the claim against a trustee is one that the court would not itself be able to
resolve under Stern, that court can make the initial decision on the procedure
to follow. Once a bankruptcy court makes such a determination, this court can
review the utilized procedure.
Whether Barton is inapplicable when a party brings suit in the court
with supervisory authority over the bankruptcy court.

II.

The plaintiffs also argue that the Barton doctrine does not apply when a
party brings suit in the court that exercises supervisory authority over the

We discover nothing in the most recent Supreme Court discussion of Stern to alter
this analysis. See Wellness Intern. Network, Ltd. v. Sharif, --- S. Ct. ----, 2015 WL 2456619
(May 26, 2015).
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bankruptcy court that appointed the trustee. The only authority the plaintiffs
cite for this argument is In re Harris, 590 F.3d 730 (9th Cir. 2009). There, the
Ninth Circuit held that the Barton doctrine does not apply when a case against
a trustee is removed from state court to the appointing bankruptcy court. See
id. at 742. The court reasoned that the appointing court could not invoke
Barton because the doctrine “denies subject matter jurisdiction to all forums
except the appointing court.”

Id.

Nothing in the opinion suggests that

“appointing court” should be construed to include the court with supervisory
authority over the appointing court. In fact, the Ninth Circuit Bankruptcy
Appellate Panel explicitly rejected this interpretation in an earlier opinion.
See In re Kashani, 190 B.R. 875, 885 (9th Cir. BAP 1995). The Ninth Circuit
has cited Kashani favorably without suggesting it overrules or limits Harris.
See In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005); In re Castillo,
297 F.3d 940, 946 (9th Cir. 2002).
Additionally, every other circuit to address the issue has maintained the
distinction between the bankruptcy court and the district court, holding that
“a debtor must obtain leave of the bankruptcy court before initiating an action
in district court when the action is against the trustee or other bankruptcycourt-appointed officer, for acts done in the actor’s official capacity.” Carter v.
Rodgers, 220 F.3d 1249, 1252 (11th Cir. 2000) (collecting cases).
We reject the plaintiffs’ argument that Barton is satisfied by filing suit
in the district court with supervisory authority over the bankruptcy court.
AFFIRMED.

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