"The simplest type of bankruptcy is liquidation under chapter 7 of the Bankruptcy Code. In liquidation, the DEBTOR'S property owned at filing of the bankruptcy becomes part of the bankruptcy estate, except for exempt property which is released to the debtor. In chapter 7 liquidations, the UNITED STATES TRUSTEE immediately appoints an INTERIM TRUSTEE from a standing panel of trustees in the district. This interim trustee can be replaced if the CREDITORS subsequently elect a PERMANENT TRUSTEE; if no permanent trustee is elected, the interim trustee continues to serve as the trustee.

Family farmers (using chapter 12) and individual "wage earners" (using chapter 13) can discharge their pre-petition debts without losing all their property. …. In these proceedings, a standing chapter 12 or 13 trustee for the district, appointed by the United States Trustee, serves as trustee for the case." (End of quote. Emphasis added.)

"To make matters worse, bankruptcy lawyers sometimes short-circuited the process altogether by arranging to be appointed as receiver of the debtor's assets. Although the receiver's only job was to oversee the assets until a trustee could be appointed, bankruptcy professionals, acting as receiver, often delayed the appointment of a trustee until they had completed nearly all the tasks of administering the bankruptcy estate. These were practices that outsiders bitterly attacked as the "bankruptcy ring."

In the late 1920s, the complaints about bankruptcy practice in New York City grew so loud that a federal grand jury issued a report concluding that bankruptcy practice had been "characterized by serious abuses and malpractices upon the part of attorneys, receivers, trustees, appraisers, custodians, auctioneers and other persons, associations or corporations within and subject to the jurisdiction of the United States District Court.

Heading up on the investigation on behalf of the association was Colonel William Donovan. By Donovan's count, "Over 1,000 court files of cases, and some 4,000 witnesses were examined" during daily hearings that lasted from June to September 1929. Even as chronicled by a defender of existing practice, the findings of the Donovan investigation were dramatic and shocking and suggested a wide-ranging conspiracy to control bankruptcy administration: As a result of this investigation, twelve attorneys were indicted; one absconded and committed suicide; two pleaded guilty and received jail sentences; one was already serving sentence for subornation of perjury; four other attorneys resigned from the Bar of New York; four others were disbarred; another was censured, and disciplinary action was taken against other attorneys. The United States auctioneer and two custodians were indicted; a clerk of the Bankruptcy Record Room was dismissed and attempted to commit suicide, and during the progressive of investigation one Federal Judge resigned. (End of quote. Emphasis added.)

Before the late 1920's investigation, federal judges legislated a doctrine from the bench to protect bankruptcy receivers. That doctrine, designed and instituted under the historically, factual corrupt system, continues today and has been expanded upon by judges to protect bankruptcy trustees from suits, thereby depriving victims their constitutional right to petition the government for redress. It is the Barton doctrine.

Although the Bankruptcy Code has undergone major changes since 1881, today's judiciary applies Barton v. Barbour, 104 U.S. 126 (1881) where the Supreme Court ruled that the common law barred suits against receivers in courts other than the court charged with the administration of the estate. "The Supreme Court ruled that before suit is brought against a receiver, leave of the court by which the trustee was appointed must be obtained."

"For trustees, and those of us who represent trustees, the Barton Doctrine is an especially helpful rule that provides a measure of protection from lawsuits while in the performance of our duties. The Barton Doctrine was a creation from common law by the U.S. Supreme Court in Barton v. Barbour, 104 U.S. 126, 129, 26 L.Ed. 672 (1881).

In Barton, the Supreme Court held that in order to sue a court-appointed receiver, the petitioning party must first seek leave of the court that issued the receiver's appointment. The Supreme Court's holding was based in part on the reasoning that the appointing court has in rem jurisdiction over the receivership property. Thus, without leave of the appointing court, the forum in which the receiver was sued lacked subject-matter jurisdiction over the action. Of course, subject-matter jurisdiction, or lack thereof, can be raised at any time. Although a rather risky proposition, it can even be raised for the first time on appeal. Torrez v. Edwards, 107 P.3d 1110 (Colo. App. 2004) (Barton Doctrine raised for first time on appeal).

Over the years, the Barton Doctrine was expanded beyond receiverships to include bankruptcy trustees, as they are the statutory successors to the equity receiver. It is well recognized that bankruptcy trustees are officers of the appointing court and are entitled to quasi-judicial immunity. The lengthy subject of immunity is beyond the scope of this article. However, a good discussion can be found at In re Castillo, 297 F.3d 940 (9th Cir. 2002). The Sixth Circuit extended the protections of the Barton Doctrine to counsel for the trustee, where they are acting under the direction of the trustee, and for the purpose of administering the estate or protecting its assets. In re DeLorean Motor Co., 991 F.2d 1236 (6th Cir. 1993).

The Barton Doctrine is appropriately applied to trustee's counsel because they function as court-appointed officers, appointed by court order to assist the trustee in carrying out his/her duties. Congress created one exception to this doctrine, codified in 28 U.S.C. §959(a), which permits lawsuits against a trustee where he/she is carrying on business connected with property of the estate. The "carrying on" of business has been interpreted to mean operating the debtor's business in the ordinary sense of the word - running the business as an "operating enterprise." Muratore v. Darr, 375 F.3d 140 (1st Cir. 2004).

The question then arises; can a non appointing court impose sanctions against the trustee or trustee's counsel without leave of the appointing court, particularly when the trustee has initiated the action? This question has been answered in favor of the trustee. In In re Solar Financial Services, Inc., 255 B.R. 801 (Bankr. S.D. Fla. 2000) (Solar Financial), in a state court action filed by a chapter 7 trustee, the defendant sought sanctions for discovery abuses by the trustee. The state court held that the defendant was entitled to seek sanctions without leave of the bankruptcy court.

However, according to the appointing bankruptcy court, the Barton Doctrine required that leave of the appointing court must be granted before the defendant could request sanctions, and that the trustee was entitled to immunity in any event. The appointing court affirmed that absent its consent, the state court lacked subject-matter jurisdiction over a request for sanctions. Non-appointing courts will be understandably reticent over the notion that they cannot impose sanctions for conduct in their court without the prior permission of another court. However, sound public policy dictates this result. This rule permits the bankruptcy court to supervise the conduct of its appointed officers, and provides trustees a measure of protection while they administer the estate. In re Crown Vantage, Inc., 421 F.3d 963 (9th Cir. 2005) (Crown Vantage).

The Ninth Circuit recently considered the applicability of the Barton Doctrine to liquidating trustees. In Crown Vantage, the issue was whether, and to what extent, a liquidating trustee appointed pursuant to an approved chapter 11 plan could be sued in a foreign jurisdiction without the consent of the appointing court. The Ninth Circuit held that leave of the appointing court must first be obtained before an action may be initiated in another forum "against a bankruptcy trustee or other officer appointed by the bankruptcy court for acts done in the officer's official capacity." The distinction between a chapter 7 or chapter 13 trustee and a liquidating trustee was "of no moment" to the Ninth Circuit, which relied on DeLorean to hold that "court-appointed officers who represent the estate are the functional equivalent of a trustee…" 28 U.S.C. §959(a) was raised as a defense, but was distinguished on the basis that liquidating estate assets is not the equivalent of operating a debtor's business.

In sum, the Barton Doctrine allows the appointing court to function as a gatekeeper of claims against bankruptcy trustees, their counsel and other officers appointed by the bankruptcy court. This ensures more efficient administration of the estate, and a measure of comfort while in the performance of one's court-appointed duties. However, in the unlikely event of misconduct, this rule will not act as a shield. In addition to adverse consequences in the nonappointing court, the offending party may find it difficult to obtain bankruptcy court approval for fees incurred or future appointments." (End of quote. Emphasis added.)

Let's remember the information provided in the Department of Justice's Civil Resource Manual 48 Title 4. "In chapter 7 liquidations, the UNITED STATES TRUSTEE immediately appoints an INTERIM TRUSTEE from a standing panel of trustees in the district. This interim trustee can be replaced if the CREDITORS subsequently elect a PERMANENT TRUSTEE; if no permanent trustee is elected, the interim trustee continues to serve as the trustee. Family farmers (using chapter 12) and individual "wage earners" (using chapter 13) can discharge their pre-petition debts without losing all their property. …. In these proceedings, a standing chapter 12 or 13 trustee for the district, appointed by the United States Trustee, serves as trustee for the case."

The Bankruptcy Reform Act of 1978 initiated the United States Trustee Program, which removed the administration of bankruptcy cases from bankruptcy judges, and placed that responsibility under the authority of Regional U.S. Trustees. Since 1978, bankruptcy courts lack jurisdiction to administer bankruptcy estates. (28 USC Sec. 157) Since 1978, United States Trustees have statutory authority to administer bankruptcy estates and appoint trustees. (28 USC Sec. 586 (a) (1), (2), (3)) Bankruptcy courts DO NOT APPOINT professionals for the trustee.

11 U.S.C. Sec 327 provides for trustees to employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons with the court's approval. A trustee filing a Motion in the court to approve the hiring of professionals is not, functionally, the same as the court appointing professionals to assist the trustee. The court simply rubber stamps an order approving the motion to hire professionals for the trustee. Subsection (c) provides a most logical conclusion that if there is a conflict of interest, "the court shall disapprove such employment …"

"Congress enacted the United States Trustee Program on a pilot basis in the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978), as a component of the Department of Justice and charged it with the responsibility of supervising the administration of bankruptcy cases and trustees. The success of the pilot program led Congress to expand the Program nationwide in 1986 as a permanent component within the Department of Justice. Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3088 (1986).

The Program consists of the Executive Office for United States Trustees, which is headed by the Director, and 21 United States Trustees. The Director is a Justice Department official who acts under authority delegated by the Attorney General. United States Trustees are Justice Department officials appointed by, and who serve at the pleasure of, the Attorney General. 28 U.S.C. 581(a) and (c). United States Trustees supervise the administration of bankruptcy cases and case trustees within specified geographic regions. 28 U.S.C. 581.

Congress created the Program to remedy two longstanding weaknesses that had impaired the efficient and fair administration of bankruptcy cases. The prior system's first weakness was its requirement that bankruptcy courts engage in both judicial and administrative functions in bankruptcy cases. Under the prior system, bankruptcy courts litigated disputes among parties, including trustees. At the same time, bankruptcy courts were responsible for appointing trustees to cases and awarding their compensation.

For nearly a century it was widely acknowledged that a separation of administrative and judicial functions was necessary to ensure the integrity of the system, to preserve its effective and fair administration, and to protect the innocent debtors and creditors for whose benefit the system exists. See, e.g., William J. Donovan, House Committee on the Judiciary, Administration of Bankrupt Estates, 71st Cong. 3d Sess. (Comm. Print 1931) (recommending--based upon an examination of 4,000 witnesses and interviews with 19 federal judges, 102 bankruptcy referees and 200 current or former trustees--that Congress rectify the inadequate and corrupt administration of bankruptcy cases by creating a Federal Bankruptcy Commissioner); Solicitor General Thomas Thacher, Report to the President on the Bankruptcy Act and its Administration in the Courts of the United States, Dated December 5, 1931, reprinted in S. Doc. No. 65, 72nd Cong. 1st Sess. (1932) (recommending legislation that would remedy cronyism and the lack of administrative oversight in bankruptcy cases by authorizing career civil servant bankruptcy administrators to oversee the administration of bankruptcy cases); Report of the Commission of the Bankruptcy Laws of the United States, H.R. Doc. No. 137, 93d Cong. 1st Sess. (1973) (recommending legislation to improve bankruptcy administration and reduce cronyism by transferring administrative functions to an administrative body staffed by civil servants).

The prior system's commingling of trustee supervision and the adjudication of disputes between trustees and third parties in bankruptcy courts resulted in a widespread perception that an unduly close relationship existed between bankruptcy judges and trustees, and this fostered cronyism and insider influence and abuse. See H.R. Rep. No. 595, 95th Cong. 2d Sess. 92 (1977). The House of Representative's Report on the proposed Bankruptcy Code concluded that "[a]s administrator of bankruptcy cases, and the individual responsible for the supervision of the trustee or debtor in possession, it is an easy matter for a bankruptcy judge to feel personally responsible for the success or failure of a case * * * The institutional bias thus generated magnifies the likelihood of unfair decisions in the bankruptcy court * * *." H.R. Rep. No. 595, 95th Cong., at 91, 1st Sess. (1977), reprinted in 1978 U.S.C.C.A.N. 5963.

The Bankruptcy Code fixed this problem by transferring administrative functions, including the appointment and supervision of trustees, to the United States Trustee Program within the Department of Justice. The Program now appoints and supervises trustees, and, if appropriate, suspends or terminates future case assignments to them.

Among the most important administrative functions assumed by the Program are the appointment and supervision of trustees who administer cases under chapters 7, 12, and 13 of the Bankruptcy Code. 28 U.S.C. 509, 510 and 586. The United States Trustee Program has enacted standards that set minimum qualifications for appointment. 28 CFR 58.3 and 58.4." (End of quote. Emphasis added.)

The federal judiciary, upholding the Barton Doctrine, disagrees with the Department of Justice, members of Congress, federal law, and the purpose for the U.S. Trustee Program. The Bankruptcy Code has changed. However, the retention of the Barton Doctrine maintains the old bankruptcy system where bankruptcy judges maintain unduly close relationships with trustees by alleging they are court appointed, thereby continuing the fostering of cronyism and insider influence and abuse.

"As one court has noted, in creating the United States Trustee Program, "Congress specified that the U.S. Trustees were to be independent of direct court supervision, as executives of the bankruptcy network." United States Trustee v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990) (quoting in part H.R. Rep. No. 595, 95th Cong. 88-89)." (End of quote)

Historical research into the United States Trustee Program is required by attorneys representing clients seeking redress from the unethical actions of bankruptcy trustees. Most attorneys remember know their high school Constitutional class, (citizens have right to petition the government for redress); their college political science class, (separation of powers provide that Congress legislates laws, and judges apply and interpret them according to the intent of legislatures); and their law school classes pertaining to doctrines such as res judicata.

Those attorneys, not members of the bankruptcy club, can never imagine the Barton Doctrine, as it is contrary to the 1978 United States Trustee Program, which applies in every state other than Alabama and North Carolina. Alabama and North Carolina still operate under the Bankruptcy Administrator Program.

Attorneys are sanctioned for filing legal action against trustees in violation of the Barton Doctrine. We have yet to see an attorney argue on the mootness of the doctrine, particularly when considering that recent case decisions allege the fraudulent premise that bankruptcy trustees are appointed by the court. Even if a party prevails in arguing that the Barton Doctrine is moot under the United States Trustee Program, it is more than likely that the judge will grant the trustee immunity.

A reasonable argument is that in order for the courts to grant immunity to bankruptcy trustees, they must show that they have jurisdiction to do so over private parties, who are not appointed by the court, who are independent of direct court supervision, who are not on the government's payroll, who are bonded, and who, in estate legal action, is represented by legal counsel. Trustees standing on their own are not officers of the court, as they are not employed by the court, neither need license to practice law to be appointed to the panel of trustees.

The failure of U.S. Trustees to supervise panel trustees leaves people with one option to seek justice and redress, which is to petition the courts. The federal judiciary's application of the Barton Doctrine, and granting immunity to bankruptcy trustees on the basis that they are court appointed, is simply outdated, misleading, and in disagreement of the purpose and functions of the U.S. Trustee Program and federal statute in which they exist and operate.

A plaintiff is required to obtain permission of the bankruptcy court before bringing a lawsuit in federal district court against a bankruptcy trustee for alleged misconduct in discharging his administrative responsibilities as trustee, the U.S. Court of Appeals for the First Circuit held July 19 (Muratore v. Darr, 1st Cir., No. 03-2179, 7/19/04).

Plaintiff Joseph R. Muratore Sr. owned and controlled debtor Columbus Mortgage Co. In February 1991, the debtor filed a Chapter 11 petition. In December 1991, the bankruptcy court appointed defendant Stephen Darr as trustee. In 1996, the bankruptcy court confirmed the debtor's reorganization plan. About four years later, the court granted Darr's application for a final decree and approved his application for final compensation. Muratore objected to these applications, and the court denied his objections. The court closed the case in November 2000.

In September 2002, Muratore filed a lawsuit against Darr, in his capacity as trustee, in the U.S. District Court for the District of Rhode Island. On Sept. 30, 2002, the bankruptcy court reopened the bankruptcy case for an unrelated matter, and the case was still open when Muratore amended his complaint. In his amended complaint, Muratore alleged that Darr "did not faithfully perform the duties of his office and committed acts of misfeasance [and/or] malfeasance in the performance of his duties" in that:

At issue, Campbell said, is whether the district court lacked subject matter jurisdiction because of Muratore's failure to obtain leave from the bankruptcy court to bring his lawsuit in the district court. In Barton v. Barbour, 104 U.S. 126 (1881), "the Supreme Court ruled that the common law barred suits against receivers in courts other than the court charged with the administration of the estate," he said. "The Supreme Court ruled that before suit is brought against a receiver, leave of the court by which the trustee was appointed must be obtained." While Barton involved a receiver in state court, "the circuit courts have extended the Barton doctrine to lawsuits against a bankruptcy trustee," Campbell said, quoting Carter v. Rodgers, 220 F.3d 1249 (11th Cir. 2000)(12 BBLR 772, 8/17/00). However, the judge said, there is a limited exception to the Barton rule that was codified in 28 U.S.C. § 959(a). That provision provides that "[t]rustees, 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.

There is little First Circuit case law on this issue, Campbell said, "but courts elsewhere have interpreted 'acts or transactions in carrying on business connected with' the bankruptcy estate to mean 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."

The judge agreed with the district court that § 959(a) does not apply to this case. The allegations in Muratore's complaint "focus upon Darr's actions in the fulfillment or non-fulfillment of his fiduciary responsibilities as trustee, as opposed to acts or transactions in the furtherance of Muratore's business …," he said.

The different counts in Muratore's complaint all allege Darr's misconduct in discharging his administrative responsibilities as trustee, Campbell noted. "These allegations are very similar to ones made in other cases holding the 959(a) exception did not apply," the judge said, citing Carter and other precedent. "Since Muratore bases his complaint on the trustee's alleged misconduct in liquidating and administering the estate's property, and not on tortious acts committed in the furtherance of Muratore's leasing or mortgage and real estate business, section 959(a) does not apply," he said.

Muratore urged the court to recognize an additional exception to the Barton doctrine "where the trustee commits a tort of any sort." He relied on a single case, U. and I. Inc. v. Fitzgerald (In re Campbell), 13 B.R. 974 (Bankr. D. Idaho 1981), the judge noted. The Campbell case "appears to be the only example of a court having articulated so broad a tort exception to the Barton doctrine," the judge said. On the other side, he said, "there are numerous cases in which the Barton doctrine was held to bar tort actions brought without permission of the bankruptcy court." Campbell found no basis for recognizing "some generalized tort exception to the Barton doctrine."