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Court Decision Discusses the Barton Doctrine and the Automatic Stay in Chapter 15

A recent decision in Delaware discussed the Barton doctrine and the application of the automatic stay in chapter 15 cases.  McKillen v. Wallace (In re Ir. Bank Resolution Corp.), No. 18-1797, 2019 U.S. Dist. LEXIS 166153 (D. Del. Sept. 27, 2019).

The decision involved an Irish bank that failed during the Great Recession, Irish Bank Resolution Corporation Limited (“IBRC”).  It was liquidated in a court proceeding in Dublin.  A chapter 15 case was also filed in Delaware.  Two liquidators appointed in the Irish case were recognized as the foreign representatives in the chapter 15. 

IBRC held the assets of two other Irish entities.  Borrowers with properties worth more than $350 million in the U.S. sued the foreign representatives in the chapter 15 case.   The lawsuit alleged that the foreign representatives’ actions in Ireland injured the plaintiffs’ business interests in the U.S.  The plaintiffs didn’t sue the debtor or anyone else.

The complaint asserted claims for breach of fiduciary duty, fraud, misrepresentation, negligent misrepresentation, and more.  The plaintiffs sought damages against the foreign representatives for allegedly misusing the chapter 15 process and to terminate them as the foreign representatives.

The Bankruptcy Court dismissed the lawsuit and the plaintiffs appealed.  The District Court affirmed.  Its decision addressed three issues:  whether (1) the Barton doctrine applies to actions against foreign representatives; (2) the automatic stay applies to a suit against foreign representatives, and (3) the stay, if it applies, should it have been applied in this case.

The Barton doctrine is a common law doctrine that bars suits against court-appointed trustees and other fiduciaries absent court permission.  The doctrine stems from a U.S. Supreme Court decision in the 19th Century, Barton v. Barbour, 104 U.S. 126 (1881).  That Court said leave to sue a fiduciary must be received from “the court by which [the fiduciary] was appointed.”  Id. at 128.

In a chapter 15 case, a foreign representative is recognized by a U.S. court but appointed by a foreign court.  The Bankruptcy Court concluded that it couldn’t authorize suit against the foreign representatives since it wasn’t the court that had appointed them.  The plaintiffs should have asked the Irish court for authority to sue. 

On appeal, District Judge Leonard Stark said application of the Barton doctrine in chapter 15 is an issue of first impression.  He said the Bankruptcy Court’s decision comported with the language of the Bankruptcy Code.  But Judge Stark also ruled that he didn’t need to determine “whether the Barton doctrine may be applied extraterritorially” as the plaintiffs/appellants sought.  The appeal could be decided based on the two rulings concerning the automatic stay.  So further consideration of the Barton doctrine will have to wait for the Third Circuit, if an appeal is taken, or another chapter 15 case.  2019 U.S. Dist. 166153, at *13.

The automatic stay bars lawsuits against debtors on claims that arose before the bankruptcy.  11 U.S.C. § 362.  The lawsuit here was against the foreign representatives, not the debtor.  The stay can be extended in “unusual circumstances” to non-debtor parties where “there is such an identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.”  A.H. Robins Co., Inc. v. Puccini’s, 788 F.2d 994, 999 (4th Cir. 1986).

Judge Stark ruled that such circumstances existed in this case.  “The available facts support a finding that there is such an identity between the debtor and these third-party defendants that a judgment against the [foreign representatives] individually ‘will in effect be a judgment or finding against the Debtor.’”  2019 U.S. Dist. LEXIS 166153, at *18 (quoting McCartney v. Integra Nat. Bank North, 106 F.3d 506, 510 (3rd Cir. 1997)).

The automatic stay may be modified for “cause.”  11 U.S.C. § 362(d).  Whether cause is present is a “fact-specific inquiry.”  Id. at *19.  “The balance of hardships” must “significantly favor” the party seeking stay relief.  In re FRG, 115 B.R. 72, 74 (E.D. Pa. 1990). 

The Bankruptcy Court had concluded that it wouldn’t necessarily have personal or subject matter jurisdiction over the case because the alleged conduct by the foreign representatives (i) had taken place outside the U.S. and (ii) wouldn’t impact the chapter 15 case.

Judge Stark agreed.  “Based on the facts asserted in the complaint, which would not support jurisdiction over the adversary proceeding, the Court finds no error in the Bankruptcy Court’s determination that the likelihood of success . . . did not weigh in appellees’ favor.”  Therefore, Judge Stark affirmed the Bankruptcy Court’s ruling that the stay should not have been lifted.  2019 U.S. Dist. LEXIS 166153, at *23.