Debtors In Possession May Be Sued “Without Leave Of The Court”?! (28 U.S.C. § 959(a), East Coast, & In re Crown)

By: Donald L Swanson

“Learn something new every day,” is a well-worn adage. 

And it’s mostly true (I only question giving a literal meaning to the “every day” part).

Nevertheless, I’m embarrassed to acknowledge learning only recently of the existence of a noteworthy, bankruptcy-related statute: 28 U.S.C. § 959(a).  Such statute reads in part (emphasis added):

• “Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property.”

How did I not know about this?!

What follows is an attempt to summarize portions of a couple Ninth Circuit opinions providing explanations about this § 959(a) statute.

Recent BAP Opinion

A recent “Not For Publication” opinion of the Ninth Circuit BAP discusses 28 U.S.C. § 959(a): East Coast Foods, Inc. v. Development Specialists, Inc., issued 7/19/2023.

This East Coast opinion identifies 28 U.S.C. § 959(a) and declares that it:

• “does not apply to alleged wrongdoing during the normal course of a trustee’s administration of the bankruptcy estate” (at 17); and
• “applies only if the [officer] is actually operating the business, and only to acts or transactions in conducting the debtor’s business . . . or in pursuing that business as an operating enterprise” (id., quoting from In re Crown Vantage, Inc., 421 F.3d 963, 971-72 (9th Cir. 2005)).

Ninth Circuit Opinion

The In re Crown Vantage, Inc., 421 F.3d 963 (9th Cir. 2005), opinion provides the following explanations about 28 U.S.C § 959(a).

–The Barton Doctrine

28 U.S.C. § 959(a) is “firmly grounded in the Barton doctrine, established by the Supreme Court over a century ago”:

• the doctrine takes its name from Barton v. Barbour, 104 U.S. 126, 26 L. Ed. 672 (1881);
• in that case, “the Supreme Court ruled” as follows:
  • “the common law barred suits against receivers in courts other than the court charged with the administration of the estate”; and
  • “before suit is brought against such a receiver, leave of the court by which the trustee was appointed must be obtained”;
• if leave of court is not obtained, the other forum lacks “subject matter jurisdiction over the suit” because:
  • the court appointing the officer “has in rem subject matter jurisdiction over the receivership property”; and
  • allowing the unauthorized suit to proceed would be “a usurpation of the powers and duties which belonged exclusively to another court” (421 F.3d at 970-71 & fn. 4).

The Ninth Circuit explains how policies underlying the Barton doctrine apply “with greater force” in bankruptcy:

• “The filing of a bankruptcy petition creates a bankruptcy estate,” over which the “district court in which the bankruptcy case is commenced obtains exclusive in rem jurisdiction over all of the property in the estate”—wherever located;
• “Thus, the jurisdiction of the bankruptcy court exceeds that of any other court-appointed receiver”; and
• “The requirement of uniform application of bankruptcy law dictates that all legal proceedings that affect the administration of the bankruptcy estate be brought either in bankruptcy court or with leave of the bankruptcy court” (421 F.3d at 971).

–28 U.S.C. § 959(b)

28 U.S.C. § 959(a) provides “a limited statutory exception to the Barton doctrine” (id.).

It’s a very narrow point. This limited exception applies only:

• “if the trustee or other officer is actually operating the business”; and
• “to acts or transactions in conducting the debtor’s business in the ordinary sense of the words or in pursuing that business as an operating enterprise” (id.).

This narrow point does not apply:

• to “suits against trustees for administering or liquidating the bankruptcy estate”; because
• “the mere continuous administration of property under order of the court” is not “an ‘act’ or ‘transaction’ in carrying on business connected with the estate” (421 F.3d at 972).

The point is so narrow that only a few suits “have been allowed under § 959(a).”  These include:

• “a wrongful death action filed against an operating railroad trustee”; and
• “suits for wrongful use of another’s property” (id.).

The Crown Vantage opinion concludes its § 959(b) discussion like this:

• “Here, the Liquidating Trustee was not operating the business previously conducted by the debtor; he was liquidating the assets of the estate”;
• “This is precisely the type of activity that the Barton doctrine was designed to protect”; and
• “Thus, the limited exception to the Barton doctrine contained in § 959(a) does not apply” (id.).

Conclusion

So . . . I’ve learned something new.

28 U.S.C. § 959(a) is that something new. 

And what I’ve learned is that § 959(a) is a narrow point that applies only in limited circumstances—so much so, that only a few lawsuits have been successful under it.

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