In a recent case arising out of the bankruptcy of the Yellowstone Mountain Club, a private ski club for the ultrawealthy, Blixseth v. Brown (In re Yellowstone Mountain Club, LLC) (9th Cir. Nov. 28, 2016), the Ninth Circuit held that plaintiff needed the bankruptcy court’s permission to bring post-petition claims against the chair of Yellowstone’s Unsecured Creditors Committee (“UCC”). The circuit invoked the Barton doctrine, which requires plaintiffs to obtain authorization from the bankruptcy court before suing officers appointed by the court for actions taken in their official capacities. Blixseth is the first case to extend the Barton doctrine to UCC members.
Timothy Blixseth and his former wife founded the Yellowstone Mountain Club in the 1990s. The club took a $375 million loan from Credit Suisse, and Blixseth used some of the proceeds to pay personal debts. He later claimed that he relied on the advice of his attorney, Stephen R. Brown, in doing so. When Yellowstone filed for bankruptcy in 2008, the U.S. trustee appointed Brown as UCC chair. Blixseth sued Brown in district court, claiming that Brown had used confidential information to his former client’s detriment in the bankruptcy proceedings.
The district court dismissed the suit for lack of jurisdiction, explaining that Blixseth had not obtained permission from the bankruptcy court, as required by the Barton doctrine. The Barton doctrine is a common-law rule created by the 1881 Supreme Court case of Barton v. Barbour, 104 U.S. 126, which involved a lawsuit against a court-appointed receiver. The Court there explained that requiring permission from the bankruptcy court facilitates equitable administration of the receivership property, out of which any judgment against the receiver would be satisfied. More recent cases have held that the doctrine is still relevant despite subsequent changes in bankruptcy law and have extended the doctrine to protect other officers of the court, such as bankruptcy trustees.
When Blixseth subsequently sought permission from the bankruptcy court, he explained that several of his claims against Brown related to pre-petition conduct and did not involve Brown’s actions as a member of the UCC. The bankruptcy court found it “impossible ... to isolate” these pre-petition claims from Brown’s activities as a member of the UCC. Blixseth appealed to the Ninth Circuit, arguing that (i) the Barton doctrine does not protect UCC members, and (ii) even if it did, the bankruptcy court was wrong to conclude that Blixseth’s pre- and post-petition claims against Brown could not be separated.
The Ninth Circuit rejected Blixseth’s first argument. It explained that “because creditors have interests that are closely aligned with those of a bankruptcy trustee, there’s good reason to treat the two of them the same for purposes of the Barton doctrine.” The circuit also noted that it was the first court to extend the Barton doctrine to protect UCC members. However, the circuit took Blixseth’s side on his second argument, reversing the bankruptcy court on the basis that the pre-petition claims against Brown related to “tort, contract, and fraud” and had nothing to do with Brown’s position as UCC chair. Thus, Blixseth could sue Brown on pre-petition claims without the permission of the bankruptcy court. “Because Barton never applied to Blixseth’s pre-petition claims, he can bring them in district court as he originally intended,” the court wrote.
Thus, the takeaway from Blixseth is that (at least according to one circuit) UCC members are protected by the Barton doctrine, but their membership on the UCC does not protect them from claims of pre-petition wrongdoing.