Q: You have previously written about how the ultra vires exception to the Barton Doctrine is extremely narrow, highlighting a Texas case, In re Preferred Ready-Mix, LLC. When last discussed, you mentioned the bankruptcy debtor had appealed the district court’s decision that the debtor was barred from suing the receiver. Has the appeal been resolved?
A: Yes. In an unpublished decision, issued on New Years Eve, the Fifth Circuit reversed. While the decision was bad for the receiver involved, the result is actually consistent with the legal reasoning in the district court decision. Let’s recap for those viewers who haven’t watched the prior episodes.
The case, In re Preferred Ready-Mix, LLC, 647 B.R. 158 (Bankr. S. D. Tex. 2022)( Amended 2022 WL 1695269), started when a creditor obtained a default judgment in state court and obtained the appointment of a receiver collect the judgment. The state court ordered the receiver to seize and maintain various assets of Preferred Ready-Mix (“Preferred”) to satisfy the judgment, most of which were cement trucks. Two weeks later, Preferred filed bankruptcy. The receiver learned of the bankruptcy a week later, but took no action. He was eventually served with a written turnover demand. In response, the receiver said there were a number of administrative bills for towing, repairing and maintaining the trucks and he needed $5,565 prior to turnover to pay the costs, but would take $2,500, with the rest being an administrative claim. Preferred paid the demanded $2,500 and the turnover took place. Preferred then sued the receiver in the bankruptcy court for turnover, violation of the automatic stay and to deny the receiver’s $7,000 administrative claim. The bankruptcy court ruled in favor of Preferred. It held the receiver violated the turnover provisions of the bankruptcy code ( §§542 and 543), as well as the automatic stay (§ 363 (a)(3)) and entered judgment for $35,000 in damages plus $10,000 in punitive damages and denied the receiver’s $7,000 claim. The receiver appealed.
The district court in In re Preferred Ready-Mix, LLC, 660 B.R. 214 (S.D. Tex. 2024) reversed because Preferred violated the Barton Doctrine, by not obtaining permission from the state receivership court to sue its receiver. Preferred did not dispute that Barton applied, but argued there was an exception (the ultra vires exception), contending the receiver’s actions were ultra vires because he refused to turnover the assets, after he had notice of the bankruptcy and received a written turnover demand. The district court disagreed. It found the ultra vires exception “exceptionally narrow” and that it has been limited only to “the actual wrongful seizure of property”. Supra. at 219; see, In re DMW Marine, LLC, 509 B.R. 497, 507 (Bankr. E.D. Penn. 2014) (“ While no court has said as much definitively, it may be no exaggeration to state that the exception applies only in cases in which a receiver wrongfully seizes or controls non-receivership property.”).
Preferred appealed and the Fifth Circuit reversed. Importantly, the Fifth Circuit agreed Barton generally requires receivership court approval to sue its receiver and that Preferred had not obtained such leave. It did not disagree with the district court that the ultra vires exception to Barton is narrow or that it generally only applies when a receiver seizes or attempts to administer non-receivership property. It, however, disagreed with the district court’s application of the facts to the law. It stated it is undisputed that “when Preferred Ready-Mix filed for bankruptcy, the property in Berleth’s [the receiver] possession automatically became property of the bankruptcy estate. See 11 U.S.C. §541(a)(1)…(noting that ‘property of the estate’ includes ‘all legal or equitable interests of the debtor in property as of the commencement of the’ bankruptcy.)” *2 (citations omitted). Therefore, it held, the receiver acted ultra vires when he continued to maintain possession of Preferred’s bankruptcy estate’s property, after receiving notice of the bankruptcy and a turnover demand, Hence, leave of the receivership court was not required to sue the receiver.
