Muratore v. Darr

• Citation: 375 F.3d 140
• Decision Date: 19 July 2004
• Docket Number: No. 03-2179.,03-2179.
• Parties: Joseph R. MURATORE, Sr., Plaintiff, Appellant, v. Stephen DARR, in his Capacity as Trustee in Bankruptcy Action 91-10365, Defendant, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

375 F.3d 140

Joseph R. MURATORE, Sr., Plaintiff, Appellant, v. Stephen DARR, in his Capacity as Trustee in Bankruptcy Action 91-10365, Defendant, Appellee.

No. 03-2179.

United States Court of Appeals, First Circuit.

Heard January 8, 2004.

Decided July 19, 2004.

Robert A. Scott with whom Scott & Scott, P.C., was on brief, for appellant.

William J. Hanlon with whom Seyfarth Shaw LLP, Thomas S. Hemmendinger, Brennan, Recupero, Cascinone, Scungio & McAllister, LLP, were on brief, for appellee.

Before HOWARD, Circuit Judge, COFFIN and CAMPBELL, Senior Circuit Judges.

LEVIN H. CAMPBELL, Senior Circuit Judge.

The question on appeal is whether the Barton doctrine bars the bringing of this action in the federal district court against a bankruptcy trustee without the prior permission of the bankruptcy court. The district court dismissed the complaint for lack of subject-matter jurisdiction, and we affirm.

FACTS

The following facts, except a few that are undisputed, are all alleged in Muratore's amended complaint. Plaintiff-appellant, Joseph R. Muratore, Sr. owned and controlled Columbus Mortgage Company, Inc. (Referred to herein as the "debtor"). On February 15, 1991, the debtor filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. On December 23, 1991, the bankruptcy court granted the U.S. Trustee's application to employ defendant-appellee, Stephen Darr, as trustee. On July 18, 1996, the bankruptcy court entered an order confirming the Plan of Reorganization. Approximately four years later, the bankruptcy court entered orders granting Darr's application for final decree and approving his application for final compensation. Muratore filed objections to these applications, which the bankruptcy court considered and denied. Muratore did not appeal. The bankruptcy court closed the case on November 9, 2000.

In September of 2002, Muratore brought the instant lawsuit against Darr, in Darr's capacity as trustee, in the United States District Court for the District of Rhode Island.

On September 30, 2002, apparently without relation to Muratore's present action, the bankruptcy court reopened the bankruptcy proceedings, and they were still open on October 18, 2002 when Muratore amended his complaint herein.¹

In Count I of 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 ...":

1. he did not pay taxes and, as a result, lost six properties at tax sale;

2. he defectively sold at a foreclosure rental properties, generating three additional law suits;

3. he defectively sold at a foreclosure income properties, generating three additional law suits;

4. he failed to file corporate returns, resulting in forfeiture of charter and causing real estate to revert to stockholders;

5. he failed to file tax returns to the Rhode Island Tax Administrator, resulting in the denial of issuance of letters of good standing, causing defective titles and defeating transfer of titles; and

6. purchases of some properties were procured with funds from the Gambino family in violation of 18 U.S.C. § 1956.

In Count II, Muratore alleged that Darr committed abuse of process by committing waste so egregious that his advisors and/or employees used Chapter 11 protection procedures to put Muratore out of business rather than to assist in reorganizing Muratore's business. He further alleged that "such use of his [Darr's] powers constitutes use of judicial appointment and proceedings in bankruptcy for an ulterior purpose, to wit, to make it impossible for Muratore to conduct business and to earn a living from his business." In Count III, Muratore alleged that Darr was negligent because he breached his duty to protect the assets of the trust and to serve the trust with diligence. In Count IV, Muratore alleged that the purchase of certain trust property was financed either directly or indirectly by funds obtained from the illegal interests and enterprises of a notorious crime family in violation of 18 U.S.C. § 1956.

Muratore neither obtained leave of the bankruptcy court nor sought bankruptcy court authority before commencing this lawsuit in the district court. Citing Muratore's failure to obtain such authority, Darr moved to dismiss the complaint for lack of subject-matter jurisdiction. The district court allowed the motion. Muratore appeals from the dismissal.

Discussion

"We review `the grant of a motion to dismiss de novo, taking the allegations in the complaint as true and making all reasonable inferences in favor of plaintiff.'" Doran v. Mass. Tpk. Auth., 348 F.3d 315, 318 (1st Cir.2003) (quoting Rockwell v. Cape Cod Hosp., 26 F.3d 254, 255 (1st Cir.1994)). The central issue here is whether the district court lacked subject-matter jurisdiction because of Muratore's failure to have obtained leave from the bankruptcy court to bring this action in the former court. In determining whether a complaint alleges sufficient facts to establish jurisdiction, we read the complaint holistically. LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 5 (1st Cir.1999).

In Barton v. Barbour, 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. 104 U.S. 126, 127, 26 L.Ed. 672 (1881). 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. The Court stated:

So, in cases of bankruptcy, many incidental questions arise in the course of administering the bankrupt estate, which would ordinarily be pure cases at law, and in respect of their facts triable by jury, but, as belonging to the bankruptcy proceedings, they become cases over which the bankruptcy court, which acts as a court of equity, exercises exclusive control.

Id. at 134; see also Katchen v. Landy, 382 U.S. 323, 337, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). "Barton involved a receiver in state court, but the circuit courts have extended the Barton doctrine to lawsuits against a bankruptcy trustee." Carter v. Rodgers, 220 F.3d 1249, 1252 (11th Cir. 2000).

A limited exception to the rule announced in Barton was codified in 28 U.S.C. § 959(a). See, e.g., Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1240-41 (6th Cir.1993) (describing 959(a) exception as "limited"). Section 959(a) states:

[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. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.

Muratore argues that section 959(a) applies here. In considering this argument, we must ascertain whether Muratore's claims apply to the trustee's "acts or transactions in carrying on business connected with" the bankruptcy estate.

There is little First Circuit case law on this issue, 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. See, e.g., Melvin v. Klein, 49 Misc.2d 24, 266 N.Y.S.2d 533, 536-37 (N.Y. Spec. Term 1965). In interpreting section 959(a)'s predecessor, 28 U.S.C. § 125,² Learned Hand, writing for the Second Circuit, concluded that "[m]erely to hold matters in statu quo; to mark time, as it were; to do only what is necessary to hold the assets intact; such activities" did not constitute carrying on business. Vass v. Conron Bros. Co., 59 F.2d 969, 971 (2d Cir.1932). Rather, section 959(a) "is intended to `permit actions redressing torts committed in furtherance of the debtor's business, such as the common situation of a negligence claim in a slip and fall case where a bankruptcy trustee, for example, conducted a retail store.'" Carter, 220 F.3d at 1254 (quoting Lebovits v. Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272, 276 (2d Cir.1996)).

For example, section 959(a) applied where a trustee continued the business of a debtor in operating a railroad, and the trustee had been sued in his representative capacity for damages for use of another's tracks, Thompson v. Texas Mexican Ry. Co., 328 U.S. 134, 138, 66 S.Ct. 937, 90 L.Ed. 1132 (1946) (applying predecessor to section 959(a)), and in a case for wrongful death and injury resulting to a member of the public in a grade crossing accident, Valdes v. Feliciano, 267 F.2d 91, 94-95 (1st Cir.1959). Also, the exception has been held to apply to an employee's claims arising from injuries caused by overwork at a railroad company operated by the trustee and the trustee's withholding of an employee's pension. Haberern v. Lehigh and New England Ry., Co., 554 F.2d 581, 585 (3d Cir.1981).

On the other hand, courts have concluded that merely holding and collecting the assets intact, Vass, 59 F.2d at 971, collecting and liquidating the assets of the debtor, Austrian v. Williams, 216 F.2d 278, 285 (2d Cir.1954), and taking steps for the care and preservation of the property, U. & I., Inc. v. Fitzgerald, (In the Matter of Campbell), 13 B.R. 974, 976 (Bankr.D.Idaho 1981), In re Kalb & Berger Mfg. Co., 165 F. 895, 896-97 (2d Cir.1908), do not constitute "carrying on business." Likewise, actions taken in the mere continuous administration of property under order of the court do not constitute an "act" or "transaction" in carrying on business connected with the estate. Field v. Kansas City Refining Co., 9 F.2d 213, 216 (8th Cir.1925); see also In re DeLorean Motor Co., 991 F.2d at 1241 (action against trustee and...