In re Vistacare Grp., LLC

• Decision Date: 04 May 2012
• Docket Number: No. 11–2695.,11–2695.
• Citation: 56 Bankr.Ct.Dec. 111,678 F.3d 218
• Parties: In re VISTACARE GROUP, LLC, et al., Debtors. William G. Schwab, Trustee, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

678 F.3d 218

56 Bankr.Ct.Dec. 111

In re VISTACARE GROUP, LLC, et al., Debtors. William G. Schwab, Trustee, Appellant.

No. 11–2695.

United States Court of Appeals, Third Circuit.

Argued Jan. 24, 2012.

Filed: May 4, 2012.

Frank J. Lavery, (Argued), Sunshine J. Thomas, Lavery, Faherty, Young & Patterson, Harrisburg, PA, for Appellant.

Barry W. Sawtelle, (Argued), Kozloff Stoudt, Wyomissing, PA, for Appellee.

John H. Doran, Doran & Doran, Wilkes–Barre, PA, Barry A. Solodky, Blakinger, Byler & Thomas, Lancaster, PA, for Debtor.

Martin P. Sheehan, (Argued), Sheehan & Nugent, Wheeling, WV, for Amicus Appellant, National Association of Bankruptcy Trustees.

Before: McKEE, Chief Judge, FISHER and GREENAWAY, JR., Circuit Judges.

OPINION OF THE COURT

FISHER, Circuit Judge.

William Schwab appeals from an order of the District Court affirming an order of the Bankruptcy Court granting CGL, LLC's motion for leave to sue Schwab in the Lancaster County, Pennsylvania, Court of Common Pleas for actions taken in his capacity as trustee of the bankruptcy estate of VistaCare Group, LLC. The primary question on appeal is whether the Barton doctrine, which requires a party seeking to sue a court-appointed receiver, to first obtain leave of the appointing court, applies to bankruptcy trustees in light of changes in the bankruptcy laws. For the reasons set forth below, we hold that (1) the Barton doctrine continues to apply to bankruptcy trustees and (2) the Bankruptcy Court's decision to grant leave in this case was proper. Therefore, we will affirm.

I.

William Schwab (“the Trustee”) was appointed as the Chapter 7 trustee of the bankruptcy estate of VistaCare Group, LLC (“VistaCare”). VistaCare's bankruptcy estate included Parkside Manor Retirement Community (“Parkside”), a 12.2 acre parcel of land located in Lancaster County, Pennsylvania. The parcel consisted of forty-five lots, forty-four of which were subdivided and zoned for mobile homes. The forty-fifth lot (“Lot 45”) contained a four-story retirement and assisted living facility. All of the lots shared common infrastructure, including roads, sewer lines, storm lines, and water lines. The lots were subject to a subdivision plan, which contained various restrictions, including “Restriction No. 1,” which provided: “Fee title to the Lot shown on this plan will not be transferred to the parties having residences constructed upon the said Lots, but title will remain in the developer, his heirs and assigns.” The subdivision plan was approved by East Cocalico Township (“the Township”) and recorded in the Office of the Recorder of Deeds of Lancaster County.

On July 25, 2008, the Trustee filed a motion in the U.S. Bankruptcy Court for the Middle District of Pennsylvania, seeking authorization to sell Parkside, either as one parcel, or as two separate parcels, with one parcel consisting of Lot 45 and the other containing the remaining forty-four lots. The Trustee's motion acknowledged the existence of Restriction No. 1 and stated that a sale of Parkside as two separate parcels “would be contingent upon approval by East Cocalico Township of the modification of Restriction No. 1 to allow the personal care home and the mobile home park to be separated.” The Bankruptcy Court granted the motion on August 21, 2008. On September 27, 2008, after a public auction, CGL, LLC (“CGL”) entered into an agreement for the purchase of Lot 45. On November 14, 2008, the Township Solicitor confirmed that Restriction No. 1 did not prevent the sale of Lot 45, and in an order dated March 10, 2009, the Bankruptcy Court stated, “[t]his sale shall ... be free and clear of Restriction # 1 of the Subdivision Plan.” The sale of Lot 45 closed on May 8, 2009.

During this time, the Trustee had determined that it was necessary to liquidate the remaining forty-four lots on Parkside. While making preparations to sell the lots, the Trustee discovered that some residents in the mobile home park had permanently affixed their mobile homes to the land. The Trustee then instituted adversary actions against these residents. To resolve the adversary actions, the Trustee and the residents agreed that the lots could be sold to the residents, despite Restriction No. 1's prohibition on sales to individuals “having residences constructed” on the land. Most of the lots were subsequently sold to the individual residents. For each sale, the Trustee filed a Report of Sale with the Bankruptcy Court. On December 14, 2009, the Trustee and the Township entered into an agreement abrogating Restriction No. 1 as to the forty-four individual lots. CGL was not a party to that agreement.

On July 30, 2010, CGL filed in the Bankruptcy Court a motion for leave to file suit against the Trustee in the Lancaster County, Pennsylvania, Court of Common Pleas. CGL alleged that the sales of the individual lots were unlawful and that such sales damaged its property interests in Lot 45. CGL further alleged that the December 14 agreement between the Trustee and the Township abrogating Restriction No. 1 deprived CGL of its property rights without notice and without due process of law. On August 12, 2010, the Trustee filed a response, in which he asserted that under Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881), CGL could not proceed in state court without the permission of the Bankruptcy Court. The Trustee urged the Bankruptcy Court to refuse to give permission in this case, arguing that CGL's proposed state law claims were “frivolous.” The Trustee also asserted various “affirmative defenses.”

On October 21, 2010, the Bankruptcy Court held a hearing on CGL's motion, in which Grant Wise, the sole owner of CGL, and the Trustee, testified. During the hearing, the Bankruptcy Court expressed doubt as to whether CGL needed its permission to file suit against the Trustee in state court, opining that Barton was “antiquated and probably not controlling in the Third Circuit.” Nevertheless, the Bankruptcy Court went on to determine whether it should grant leave in this case. After hearing arguments, the Bankruptcy Court concluded that although it could not predict whether CGL would be successful on its state law claims, such claims were not “on [their] surface, frivolous.” The Bankruptcy Court added that state court was the appropriate forum to resolve the dispute given that state courts “probably ha[d] an expertise in th[e] area.” On October 22, 2010, the Bankruptcy Court issued an order formally granting CGL's motion for leave.

The Trustee appealed to the U.S. District Court for the Middle District of Pennsylvania. On May 26, 2011, the District Court affirmed the Bankruptcy Court's order. In re Vistacare Grp., LLC, No. 10CV–2522, 2011 WL 2111997, at *5 (M.D.Pa. May 26, 2011). The District Court declined to address the Trustee's claim that the Bankruptcy Court erroneously found that Barton did not apply, reasoning that although the Bankruptcy Court questioned Barton 's continued validity, the Bankruptcy Court did, in fact, examine whether it should approve CGL's motion for leave. Id. at *3. The District Court then concluded that the Bankruptcy Court's decision to grant leave was proper. Id. at *3–4. The Trustee filed a timely notice of appeal. ¹

II.

The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157(b). The District Court had jurisdiction over the appeal from the Bankruptcy Court under 28 U.S.C. § 158(a), and we have jurisdiction under 28 U.S.C. §§ 158(d) and 1291. On appeal, “we ‘stand in the shoes' of the District Court and review the Bankruptcy Court's decision.” In re Global Indus. Techs., Inc., 645 F.3d 201, 209 (3d Cir.2011) (en banc) (citations omitted). We review the Bankruptcy Court's legal determinations de novo, and its factual findings for clear error. Id. We review a bankruptcy court's decision to grant a motion for leave to sue a trustee under the deferential abuse of discretion standard. In re Linton, 136 F.3d 544, 546 (7th Cir.1998); In re Beck Indus., Inc., 725 F.2d 880, 889 (2d Cir.1984).

III.

A.

The first question presented by this case is whether a party must first obtain leave of the bankruptcy court before it brings an action in another forum against a bankruptcy trustee for acts done in the trustee's official capacity. We now join our sister circuits in holding that, under the doctrine established in Barton v. Barbour, leave of the bankruptcy court is required before instituting such an action. See, e.g., Lawrence v. Goldberg, 573 F.3d 1265, 1269 (11th Cir.2009) (holding that the Barton doctrine is applicable to bankruptcy trustees); In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir.2005) (same); Muratore v. Darr, 375 F.3d 140, 143 (1st Cir.2004) (same); In re Linton, 136 F.3d at 545–46 (same); In re Lehal Realty Assocs., 101 F.3d 272, 276 (2d Cir.1996) (same); In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir.1993) (same); Anderson v. United States, 520 F.2d 1027, 1029 (5th Cir.1975) (same).²

Established by the Supreme Court over a century ago, the Barton doctrine provides that “before suit is brought against a receiver[,] leave of the court by which he was appointed must be obtained.” 104 U.S. at 128 (citing Davis v. Gray, 83 U.S. 203, 16 Wall. 203, 21 L.Ed. 447 (1872)). The Barton Court explained that a court approval requirement was necessary to ensure a consistent and equitable administration of the receivership property. Id. at 128–29. Because a judgment against the receiver in his capacity as receiver would be satisfied out of the receivership property, the effect of a suit brought without leave to recover such a judgment would be “to take the property of the trust from [the receiver's] 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 [was] administering the trust property.” Id. In other words, the party bringing suit would be able to “obtain [an] advantage over the other claimants” as to the distribution of “the...