Serving on a court-appointed bankruptcy committee can come with many benefits, and the list just got a little longer. In Blixseth v. Brown, the Ninth Circuit held that committee members enjoy some of the same protections as trustees when it comes to potential attacks for actions taken during a bankruptcy case. Applying the Barton doctrine, the court held that a committee member could not be sued outside the bankruptcy court for actions taken in its committee member capacity without bankruptcy court approval.

Background

In the late 1990s, Timothy Blixseth (“Blixseth”) and Edra Blixseth (“Edra”), then husband and wife, developed the Yellowstone Mountain Club (together with its subsidiaries and related entities, “Yellowstone”), an exclusive ski and golf resort in Montana that caters to the “ultra-wealthy.” Blixseth was advised by his lawyer, Stephen Brown (“Brown”), in his business activities and, later, in his divorce from Edra. As part of the divorce, Edra received the Yellowstone companies.

The Yellowstone Bankruptcy and Blixseth’s Suit Against Brown

Before his divorce, Blixseth had engaged in actions (allegedly signed off on by Brown) which resulted in poor business prospects for Yellowstone. As a result, in November 2008, Edra filed chapter 11 petitions on behalf of Yellowstone. The chairman of the Official Committee of Unsecured Creditors (“UCC”) in the Yellowstone bankruptcy cases was Brown. Blixseth ultimately sued Brown in the District Court for the District of Montana, alleging (1) that Brown had given Blixseth faulty advice with respect to actions Blixseth took in connection with the Yellowstone companies and his divorce from Edra, and (2) that Brown had used confidential knowledge gained by representing Blixseth to assist the UCC.

The District Court dismissed the lawsuit without prejudice, holding that a suit alleging Brown had engaged in misconduct associated with the UCC was required to be brought in the Bankruptcy Court under Barton v. Barbour, 104 U.S. 126 (1881), a nineteenth century Supreme Court case requiring plaintiffs alleging misconduct by a bankruptcy trustee to obtain authorization from the bankruptcy court before suing the trustee in another forum. Blixseth appealed that dismissal to the Court of Appeals for the Ninth Circuit, which dismissed the appeal without prejudice on the grounds that Blixseth could later appeal from the Bankruptcy Court’s final disposition of the suit. Blixseth promptly refiled his case in the Bankruptcy Court, and asked the Bankruptcy Court for permission to file the case in District Court. The Bankruptcy Court declined to grant permission, holding that the case was better heard along with the rest of the bankruptcy proceedings. Finally, the Bankruptcy Court dismissed Blixseth’s lawsuit on the merits, holding that Brown was entitled to “derived judicial immunity” based on his position on the UCC. Blixseth appealed to the District Court, which affirmed the Bankruptcy Court’s opinion, and then appealed to the Ninth Circuit.

The Ninth Circuit Holds That Committee Members May Be Protected by Barton

The first issue the Ninth Circuit dealt with was whether the District Court erred in the first proceeding by extending the Barton doctrine, which was established to protect trustees, to protect Committee members at all. While recognizing that no court of appeals had used the Barton doctrine to protect Committee members, the Court of Appeals noted that the Sixth Circuit had applied the doctrine to protect a trustee’s counsel (In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993)) and the Eleventh Circuit had used the doctrine to protect individuals assigned to sell estate property (Carter v. Rodgers, 220 F.3d 1249, 1251, 1252 n.4 (11th Cir. 2000)). Both the Sixth and Eleventh Circuits used a “functional equivalent” test, under which an entity is protected from suit outside the bankruptcy court if such entity is the “functional equivalent of a trustee for purposes of administering the estate.” Without explicitly adopting the “functional equivalent” test, the Ninth Circuit held that “Barton applies to UCC members . . . who are sued for acts performed in their official capacities.” This is because of the identity of interests between the UCC and a trustee: both serve the purpose of maximizing the estate for distribution to unsecured creditors.

Thus, the Ninth Circuit held, the District Court was right to require Blixseth’s allegation that Brown made improper use of confidential information for the UCC’s benefit to be brought first to the Bankruptcy Court. The same, however, was not true of Blixseth’s claims alleging that Brown was at fault in connection with advice given to Blixseth prior to the bankruptcy filing (the “Pre-Bankruptcy Claims”). The mere fact that Brown was on the Committee did not bring claims against him for his acts before the bankruptcy under the Barton umbrella. Thus, the Ninth Circuit held that the courts below erred by requiring Blixseth to initially raise the Pre-Bankruptcy Claims in the Bankruptcy Court, and held that Blixseth was now free sue Brown for those claims in the District Court.

The Ninth Circuit Remands for Reconsideration of Judicial Immunity

The Bankruptcy Court had also dismissed Blixseth’s claims on the merits, holding that Brown was entitled to derived judicial immunity for the claims related to Brown’s conduct as UCC Chair. Derived judicial immunity is a doctrine under which certain entities appointed by a court share in the judge’s immunity to suit for acts done in the course of a legal proceeding. The Ninth Circuit, however, held that this form of immunity did not automatically apply to all the acts Brown took as UCC Chair. Instead, “[f]or derived judicial immunity to apply, Brown must have [1] acted within the scope of his authority and [2] candidly disclosed his proposed acts to the bankruptcy court. Additionally, [3] the debtor must have had notice of his proposed acts and [4] the bankruptcy court must have approved those acts.” The Ninth Circuit thus remanded the claims that it deemed subject to Barton to the Bankruptcy Court for consideration of whether those four requirements were met with respect to each claim.

Takeaway

The Ninth Circuit’s decision should provide a measure of comfort for creditors and indenture trustees considering whether to sit on court-appointed bankruptcy committees. While the decision sets out high standards for committee members to benefit from derived judicial immunity, a well-advised party can ensure that it acts on the committee in accordance with those standards. Potential committee members should be aware, however, that these protections apply only to acts on the committee, and that parties to the bankruptcy will be able to sue them as usual for alleged wrongs that predate or are unconnected with their committee membership.