In re Citx Corp.

• Decision Date: 03 November 2003
• Docket Number: Bankruptcy No. 01-19604F.,Adversary No. 03-0723.
• Citation: 302 B.R. 144
• Parties: In re CITX CORPORATION, Debtor. Gary Seitz, Chapter 7 Trustee, for CitX Corporation, Inc., v. Lewis B. Freeman, Receiver of Professional Resources Systems International, Inc. a/k/a PRSI, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

302 B.R. 144

In re CITX CORPORATION, Debtor Gary Seitz, Chapter 7 Trustee, for CitX Corporation, Inc., v. Lewis B. Freeman, Receiver of Professional Resources Systems International, Inc. a/k/a PRSI, Inc., Defendant.

Bankruptcy No. 01-19604F.

Adversary No. 03-0723.

United States Bankruptcy Court, E.D. Pennsylvania.

November 3, 2003.

COPYRIGHT MATERIAL OMITTED

Diana M. Dixon, Doylestown, PA, for CitX Corp.

Lee Harrington, Blank, Rome, Comisky, McCauley, Philadelphia, PA, Michael B. Schaedle, Neal A. Jacobs, Philadelphia, PA, for Gary Francis Seitz.

Kevin P. Callahan, Philadelphia, PA, for United States Trustee.

Maurice R. Mitts and Eric F. Spade, Frey, Petrakis, Deeb, Blum, Briggs & Mitts, P.C., for Lewis B. Freeman, Receiver of Professional Resources Systems International, Inc. a/k/a PRSI, Inc., Defendant.

MEMORANDUM

BRUCE I. FOX, Chief Judge.

The defendant, Lewis B. Freeman, has filed a motion to dismiss the above-captioned adversary proceeding pursuant to Fed. R. Bankr.P. 7012. The defendant maintains that this bankruptcy court has no subject matter jurisdiction.

This jurisdictional challenge is unusual in that the defendant does not argue that this proceeding is outside the scope of the bankruptcy jurisdictional statute-28 U.S.C. § 1334. Indeed, the defendant concedes that this proceeding is at least "related to" the underlying bankruptcy case within the meaning of section 1334(b).¹ Rather, the defendant contends that the "Barton Doctrine" renders him immune from suit in this court until the plaintiff obtains permission to sue from the Circuit Court of the 15th Judicial Circuit for Palm Beach County, Florida, the court that appointed him as the receiver of Professional Resources Systems International, Inc.²

The plaintiff-trustee counters that the Barton Doctrine is inapplicable to the claims asserted by him in this proceeding. Alternatively, he posits that federal bankruptcy law expressly authorizes this lawsuit and, therefore, trumps the Barton Doctrine.

The following relevant facts are either uncontested by the parties for the purpose of this motion or are the subject of judicial notice.³

I.

Defendant Freeman was sued in his capacity as receiver of a corporation known as Professional Resources Systems International, Inc. ("PRSI"). He was originally appointed receiver on January 4, 2000 by the Circuit Court of the 15th Judicial Circuit for Palm Beach County, Florida at the request of the Florida Attorney General.⁴ Motion to Dismiss, Ex. A.⁵

On January 13, 2000, the state court issued an order detailing the scope of this receivership. Among its terms, this order authorized Mr. Freeman to take possession and control of all of the assets of PRSI, id. ¶ 8, required him to: safeguard those assets, collect all sums due to PRSI, and bring suit on behalf of PRSI in any court of competent jurisdiction, id. ¶ 9, and directed him to establish a claims procedure by which creditors of PRSI could file claims for payment, which claims would be determined by the state court. Id. ¶ 9(j).

In the instant complaint, the chapter 7 trustee alleges that CitX Corporation ("CitX") was established in 1996 to provide Internet services to businesses. Complaint ¶ 5. PRSI, in turn, promised small businesses that it would create websites which would allow them to enter into online business transactions with their customers. Id. ¶ 6. In 1999, CitX and PRSI entered into contracts by which CitX would design and establish these promised websites. Id. ¶¶ 7-8.

In this proceeding, the plaintiff-trustee contends that PRSI was a "criminal enterprise" controlled by "organized crime," which never provided the promised websites, and whose officers, directors and "principals" have either been charged with or convicted of various crimes. Id. ¶¶ 10-14. Moreover, the trustee avers that certain individuals involved with CitX were involved in this criminal enterprise and that these two companies had officers and directors in common. Id. ¶¶ 19-20.

The trustee also alleges that after Mr. Freeman became receiver of PRSI, he brought suit against CitX in the Pennsylvania Court of Common Pleas, Bucks County, which lawsuit was settled with a judgment entered against the debtor in February 2001 in the amount of $700,000.00. Id. ¶¶ 24-25. Thereafter, CitX paid $50,000.00 to Mr. Freeman prior to its July 2001 bankruptcy filing; moreover, CitX purportedly made post-bankruptcy transfers as well to the receiver. Id. ¶¶ 26-27.

In his complaint, the trustee asserts claims under the Bankruptcy Code for preferences (§ 547), improper postpetition transfers (§ 549), and fraudulent conveyances (§§ 544 and 548). For those claims, the trustee seeks a judgment and "immediate pay[ment]" from the Receiver, as well as disallowance of the Receiver's proof of claim in this case under section 502(d).⁶ In addition, the trustee contends that PRSI controlled CitX and the activities of the two entities were so intermingled that any claims of PRSI in this bankruptcy case should be "equitably subordinated," that the assets and liabilities of the two companies should be "substantively consolidated," and that the PRSI funds in possession of Mr. Freeman be held in "constructive trust" so that CitX creditors may share in their distribution. Complaint ¶¶ 46, 58, 63.

Mr. Freeman, through his attorneys, has been an active participant in this bankruptcy case. For example, in August 2001, he filed a motion to convert the case from chapter 11 to chapter 7, see Docket entry # 26, which motion was granted after a hearing. He has filed a proof of claim in an amount greater than $800,000.00, claim # 46, and he has responded to a motion to sell CitX assets. See Docket entry # 84.

II.

The so-called "Barton Doctrine" takes its name from the decision rendered in Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881). Mr. Barbour had been appointed equity receiver in Virginia state court to operate a railroad company. Thereafter, a railroad passenger, Ms. Barton, was injured and brought a tort action against the receiver in the District of Columbia. The Supreme Court held that, as a matter of federal common law, "before suit is brought against a receiver leave of the court by which he was appointed must be obtained." Id., 104 U.S. at 128. Without such leave of court, the other forum "had no jurisdiction to entertain [the] suit." Id. at 131.

The Court explained that its holding was necessary to uphold the fair administration of receivership property:

If he has the right, in a distinct suit, to prosecute his demand to judgment without leave of the court appointing the receiver, he would have the right to enforce satisfaction of it. By virtue of his judgment he could, unless restrained by injunction, seize upon the property of the trust or attach its credits. If his judgment were recovered outside the territorial jurisdiction of the court by which the receiver was appointed, he could do this, and the court which appointed the receiver and was administering the trust assets would be impotent to restrain him. The effect upon the property of the trust, of any attempt to enforce satisfaction of his judgment, would be precisely the same as if his suit had been brought for the purpose of taking property from the possession of the receiver. A suit therefore, brought without leave to recover judgment against a receiver for a money demand, is virtually a suit the purpose of which is, and effect of which may be, to take the property of the trust from his hands and apply it to the payment of the plaintiff's claim, without regard to the rights of other creditors or the orders of the court which is administering the trust property. We think, therefore, that it is immaterial whether the suit is brought against him to recover specific property or to obtain judgment for a money demand. In either case leave should be first obtained.

* * * * * *

If the court below had entertained jurisdiction of this suit, it would have been an attempt on its part of [sic] adjust charges and expenses incident to the administration by the court of another jurisdiction of trust property in its possession, and to enforce the payment of such charges and expenses out of the trust property without the leave of the court which was administering it, and without consideration of the rights and equities of other claimants thereto. It would have been an usurpation of the powers and duties which belonged exclusively to another court, and it would have made impossible of performance the duty of that court to distribute the trust assets to creditors equitably and according to their respective priorities.

Id. at 128-29, 136.

The Supreme Court soon restated this holding in Porter v. Sabin, 149 U.S. 473, 13 S.Ct. 1008, 37 L.Ed. 815 (1893), adding considerations of comity to the concern of fair adjudication of property in the control of the receivership court that it had expressed in Barton:

When a court exercising jurisdiction in equity appoints a receiver of all the property of a corporation, the court assumes the administration of the estate. The possession of the receiver is the possession of the court; and the court itself holds and administers the estate through the receiver, as its officer, for the benefit of those whom the court shall ultimately adjudge to be entitled to it.

It is for that court, in its discretion, to decide whether it will determine for itself all claims of or against the receiver, or will allow them to be litigated elsewhere. It may direct claims in favor of the corporation to be sued on by the receiver in other tribunals, or may leave him to adjust and settle them without suit, as in its judgment may be most beneficial to those interested in the estate. Any claim against the receiver or the corporation the court may permit to be put in suit in another tribunal against the receiver, or may reserve to itself the determination of; and no suit, unless expressly authorized by statute, can be brought against...