In McKillen v. Wallace (In re Irish Bank Resolution Corp. Ltd.), 2019 WL 4740249 (D. Del. Sept. 27, 2019), the U.S. District Court for the District of Delaware had an opportunity to consider, as an apparent matter of first impression, whether the U.S. common law "Barton Doctrine" applies extraterritorially. One of the issues considered by the district court on appeal was whether parties attempting to sue a foreign representative in a chapter 15 case must first obtain permission to sue from the foreign court that appointed the foreign representative. The district court declined to decide that issue. Instead, it affirmed the bankruptcy court's decision to extend the automatic stay to prevent potential plaintiffs from filing an adversary proceeding against a chapter 15 debtor's foreign representatives because allowing the plaintiffs' litigation to proceed would be, in effect, a judgment or finding against the debtor in contravention of the Bankruptcy Code's automatic stay.
The Barton Doctrine
Named for the decision in Barton v. Barbour, 104 U.S. 126 (1881), the Barton Doctrine requires that "leave of the appointing forum must be obtained by any party wishing to institute an action in a non-appointing forum against a trustee for the acts done in the trustee's official capacity and within the trustee's authority as an officer of the court." ACE Insurance Co., Ltd. v. Smith (In re BCE West, L.P.), 2006 WL 8422206, *2 (D. Ariz. Sept. 20, 2006) (quoting In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993)).
Although originally applicable to litigation against receivers, the doctrine has long been applied to bankruptcy trustees as well. See Lebovits v. Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272, 276 (2d Cir. 1996)) (describing the "well-recognized line of cases" extending the Barton Doctrine to bankruptcy trustees, and its application in the post-receivership context); accord In re VistaCare Grp., LLC, 678 F.3d 218, 224 (3d Cir. 2012) (citing cases).
"In addition to protecting a court-appointed receiver from personal liability, the Barton Doctrine is intended to protect the receivership court's 'overriding interest in [the] administration of the estate.'" Id. at 773 (citation omitted); see also DeLorean, 991 F.2d at 1240 (explaining that the Barton Doctrine "enables the Bankruptcy Court to maintain better control over the administration of the estate"). The doctrine can also serve to "centralize bankruptcy litigation" and "keep a watchful eye" on court-appointed officers. In re Yellowstone Mountain Club, LLC, 841 F.3d 1090, 1094 (9th Cir. 2016) (citation omitted).
There are two recognized exceptions to the Barton Doctrine—the "business exception" and the "ultra vires exception." The first is based on 28 U.S.C. § 959(a), which provides in relevant part 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."
The ultra vires exception applies when a trustee's actions exceed the bounds of his or her official duties. See In re Christensen, 598 B.R. 658, 665 (Bankr. D. Utah 2019); Phoenician Mediterranean Villa, LLC v. Swope (In re J & S Props., LLC), 545 B.R. 91, 105 (Bankr. W.D. Pa. 2015). A typical example is litigation against a receiver who seizes or otherwise attempts to administer property that is not receivership property, but actually belongs to a third party. See In re DMW Marine, LLC, 509 B.R. 497, 506 (Bankr. E.D. Pa. 2014) (citations omitted).
The Barton Doctrine is not restricted to legal actions brought within the United States and obligates "a party who seeks to file suit in an international forum" to obtain leave of the appointing U.S. court. BCE West, 2006 WL 8422206, at *8.
The Barton Doctrine has been applied to bar litigation against not only receivers and bankruptcy trustees but also lawsuits against other persons or entities acting as the functional equivalent, including:
- Members of an unsecured creditors' committee (see Yellowstone, 841 F.3d at 1095) (noting that "[b]ecause creditors have interests that are closely aligned with those of a bankruptcy trustee, there's good reason to treat the two the same for purposes of the Barton [D]octrine"));
- A trustee's counsel (see DeLorean, 991 F.2d at 1241 (holding that counsel for a trustee is the "functional equivalent" of the trustee for purposes of estate administration and reasoning that the "protection that the leave requirement affords the Trustee and the estate would be meaningless if it could be avoided by simply suing the Trustee's attorneys"));
- Officers appointed by a trustee and approved by the bankruptcy court to sell estate assets (see Carter v. Rodgers, 220 F.3d 1249 (11th Cir. 2000));
- Other professionals retained by a trustee to assist in discharging the trustee's duties and creditors who "financed the Trustee's efforts," because these entities "functioned as the equivalent of court appointed officers" (see Lawrence v. Goldberg, 573 F.3d 1265, 1270 (11th Cir. 2009));
- Trustees of litigation or other trusts established pursuant to a chapter 11 plan (see BCE West, 2006 WL 8422206, at *8 (upholding award of sanctions for suing chapter 11 plan trustee without obtaining court permission); In re Swan Transportation Co., 596 B.R. 127 (Bankr. D. Del. 2018)) (trustees of an asbestos/silica litigation trust)); and
- The court-appointed administrator of a liquidating chapter 11 plan and a successor entity formed under the confirmed plan to retain certain assets in accordance with the terms of a global settlement (see MF Glob. Holdings Ltd. v. Allied World Assurance Co. (In re MF Glob. Holdings Ltd.), 562 B.R. 866 (Bankr. S.D.N.Y. 2017), leave to appeal denied, 2017 WL 2819870 (S.D.N.Y. June 28, 2017)).
Extending the Automatic Stay to Non-Debtors
Section 362(a)(1) of the Bankruptcy Code stays "the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under [the Bankruptcy Code], or to recover a claim against the debtor that arose before the commencement of the case under [the Bankruptcy Code]." Although the scope of section 362(a)(1) is broad, by its terms, the automatic stay applies only to actions or the recovery of claims against "the debtor." See In re Durr Mech. Constr., Inc., 604 B.R. 131, 136 (Bankr. S.D.N.Y. 2019) (citing Nippon Fire & Marine Ins. Co. v. Skyway Freight Sys., Inc., 235 F.3d 53, 58 (2d Cir. 2000); McCartney v. Integra Nat'l Bank N., 106 F.3d 506, 509–10 (3d Cir. 1997)).
However, under certain narrowly defined circumstances, including cases in which a claim against the non-debtor will have an immediate adverse economic impact on the estate, the automatic stay may be extended to non-debtors. See Queenie v. Nygard Int'l, 321 F.3d 282, 287-88 (2d Cir. 2003) (examples warranting extension of the stay to non-debtors include: (i) a claim to establish an obligation as to which the debtor is a guarantor; (ii) a claim against the debtor's insurer; and (iii) actions where "there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.") (quoting A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)).
In In re W.R. Grace & Co., 2004 WL 954772, *2 (D. Del. Apr. 29, 2004), the district court explained that, "[a]lthough the automatic stay can be extended to situations involving nondebtors, courts are careful to reserve such power to the most extreme and 'unusual circumstances'" (citing McCartney, 106 F.3d at 510); see also Belcufine v. Aloe, 112 F.3d 633, 636-37 n.5 (3d Cir. 1997) (noting that the rationale articulated in A.H. Robins has since been adopted by the Third Circuit).
Courts have also extended the automatic stay to non-debtors "where stay protection is essential to the debtor's efforts of reorganization." McCartney, 106 F.3d at 510 (citing In re Lazarus Burman Assocs., 161 B.R. 891, 899-900 (Bankr. E.D.N.Y. 1993); In re Nelson, 140 B.R. 814, 816-17 (Bankr. M.D. Fla. 1992)). However, the purpose underlying extension of the stay to a non-debtor "must be consistent with the purpose of the stay itself, that is, to 'suspend actions that pose a serious threat to a corporate debtor's reorganization efforts.'" In re Uni-Marts, LLC, 404 B.R. 767, 781 (Bankr. D. Del. 2009) (quoting In re First Cent. Fin. Corp., 238 B.R. 9, 19 (Bankr. E.D.N.Y. 1999)).
Courts have also extended the scope of the automatic stay to protect non-debtors under section 105(a) of the Bankruptcy Code, which provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." See, e.g., Marcelino v. Mon Cher 57 Inc., 2019 WL 2480402 (S.D.N.Y. June 14, 2019); see also Blue Cross of California v. Sonoma W. Med. Ctr., Inc., 2019 WL 926329, at *8 (C.D. Cal. Feb. 7, 2019) (noting that any extension of the automatic stay to non-debtors is not automatic but requires the filing of an adversary proceeding requesting the court to act under section 105(a)).
Even where the automatic stay applies, an entity precluded from acting by the stay may seek an order under section 362(d) of the Bankruptcy Code modifying or terminating the stay for, among other reasons, "cause." The lack of "adequate protection" is listed as a nonexclusive example of "cause," but the Bankruptcy Code does not otherwise define the term. Cause for relief from the stay has been found to exist in cases where, for example, the debtor filed for bankruptcy in bad faith, or relief is necessary to allow litigation to be concluded in another forum, especially if the nonbankruptcy litigation involves multiple parties or is ready for trial. See generally Collier on Bankruptcy ¶ 362.07 (16th ed. 2019) (discussing "cause" and citing cases).
Some courts have applied a hardship balancing test to determine whether cause exists to modify or terminate the automatic stay. See, e.g., In re Cont'l Airlines, Inc., 152 B.R. 420, 424 (D. Del. 1993); In re Aleris Intern., Inc., 456 B.R. 35, 47 (Bankr. D. Del. 2011); In re The SCO Group, Inc., 395 B.R. 852, 856 (Bankr. D. Del. 2007). This three-prong test includes consideration of:
(1) whether any great prejudice to either the bankrupt estate or the debtor will result from lifting the stay; (2) whether the hardship to the non-bankrupt party by the maintenance of the stay considerably outweighs the hardship to the debtor if the stay is lifted; and (3) whether it is probable that the creditor will prevail on the merits of its case against the debtor.
Aleris, 456 B.R. at 47 (citations omitted).
Procedures and Relief Under Chapter 15
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Section 1517(b) of the Bankruptcy Code accordingly provides that a "foreign proceeding shall be recognized … as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests; or … as a foreign nonmain proceeding if the debtor has an establishment … in the foreign country where the proceeding is pending" (emphasis added) (see also 11 U.S.C. §§ 1502(4) and 1502(5) (defining "foreign main proceeding" and "foreign nonmain proceeding," respectively)).
If a U.S. court recognizes a foreign main proceeding under chapter 15, section 1520(a)(1) of the Bankruptcy Code provides that section 362 applies "with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States." In addition, following recognition of a foreign main or nonmain proceeding, a bankruptcy court is authorized under section 1521 to grant, among other things, injunctive relief staying actions, proceedings or execution against the debtor's U.S. assets, the authority to distribute the proceeds of the debtor's U.S. assets, and, with certain exceptions, any additional relief available to a bankruptcy trustee "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors."
In Irish Bank, the Delaware district court considered whether a bankruptcy court properly extended the automatic stay to preclude litigation against the foreign representatives of a chapter 15 debtor. It also had an opportunity to examine, as a matter of apparent first impression, whether the Barton Doctrine applies extraterritorially.
Dublin-based Irish Bank Resolution Corporation Limited ("IBRC") holds the remaining assets and liabilities of two distressed Irish banks nationalized by the Irish government following the global financial crisis of 2008.
As the effects of the financial crisis continued to impair the Irish economy, the Irish government determined that it was necessary to wind down IBRC. In accordance with 2013 legislation, the Irish Minister for Finance issued an order commencing a liquidation proceeding for IBRC in Ireland and appointing two individuals as liquidators.
The liquidators, as IBRC's foreign representatives, filed a chapter 15 petition in the U.S. bankruptcy court seeking recognition of IBRC's Irish liquidation proceeding. The bankruptcy court issued an order recognizing the proceeding as a foreign main proceeding in December 2013.
In 2014, the foreign representatives filed a lawsuit in the Irish High Court against a former client of one of the nationalized Irish banks seeking repayment of certain loans made in 2008 and 2009 to fund the purchase of the bank's stock.
In 2018, the former client and two other plaintiffs (collectively, the "plaintiffs") filed a motion with the U.S. bankruptcy court seeking: (i) a determination that the automatic stay did not prevent them from naming the foreign representatives (but not IBRC) as defendants in a proposed adversary proceeding to be filed in the bankruptcy court alleging that the foreign representatives abused the chapter 15 process, breached their fiduciary duties, and committed fraud and other misconduct in connection with the Irish litigation, and seeking an order terminating the defendants' status as foreign representatives of IBRC; or (ii) in the alternative, an order granting relief from the automatic stay in order to file the complaint.
The proposed adversary complaint did not allege that the foreign representatives had any relationship with the plaintiffs outside of the representatives' official capacity as foreign representatives and liquidators of IBRC, nor did it allege that the foreign representatives had taken any actions within the U.S. that affected the plaintiffs. Instead, the complaint focused solely on actions taken by the foreign representatives in Ireland, which the plaintiffs alleged had harmed their business interests in the U.S.
The plaintiffs asserted that they filed the stay relief motion out of an abundance of caution and as a safeguard against the penalties that might be imposed if they were adjudged to have willfully violated the automatic stay or the Barton Doctrine. The bankruptcy court denied the stay relief motion.
Initially, addressing the Barton Doctrine, the bankruptcy court explained that it was not the "appointing court." A foreign representative, the court wrote, "is recognized, not appointed" by a U.S. bankruptcy court in a chapter 15 case. According to the bankruptcy court, "[t]he power to act as the foreign representative" derives from Ireland, not from the U.S., and "under Barton, that's where the … Plaintiffs should proceed." Moreover, the court noted, invoking the doctrine as the sole basis for denying the stay relief motion "would be a very expansive application of Barton," particularly as the court was unable to find any U.S. case applying the Barton Doctrine to insulate or protect trustees or representatives appointed by a foreign entity or government.
Next, the bankruptcy court acknowledged that the decision regarding whether to extend the automatic stay to the foreign representatives was a "close call." Even so, the court ultimately decided the extension was warranted, finding "a significant identity of interests" between IBRC and the foreign representatives based on indemnification obligations, and the role of the foreign representatives in IBRC's liquidation. Finally, after weighing relevant factors, including the parties' respective harms, and concluding that the plaintiffs were unlikely to succeed in the litigation because the court lacked subject matter jurisdiction over actions that occurred in Ireland, the bankruptcy court denied the plaintiffs' request for relief from the stay to file the adversary proceeding.
The plaintiffs appealed to the district court.
The District Court's Ruling
On appeal, the plaintiffs renewed their argument that their adversary complaint did not implicate the Barton Doctrine because the action was brought in the appointing court—namely, the U.S. bankruptcy court. "In a Chapter 15 bankruptcy case," they claimed, "the bankruptcy court 'appoints' a debtor's foreign representative for purposes of the Barton doctrine." They reasoned that a chapter 15 recognition order is akin to the appointment of a bankruptcy trustee and recognition imposes a duty of oversight on the bankruptcy court.
The plaintiffs further argued that the bankruptcy court erred in holding that the Barton Doctrine could be applied extraterritorially. According to the plaintiffs, they would need to obtain the Irish court's permission "as a condition precedent to any lawsuit against the Foreign Representatives in the United States for breaches of United States law." Such a policy, the plaintiffs' claimed, would undermine the Bankruptcy Code and other applicable U.S. law, and place an undue burden on parties injured in the U.S. by tortious conduct that occurs outside the U.S.
The foreign representatives argued that the plaintiffs' arguments are controverted by the express language of: (i) section 101(24), which provides that a foreign representative "means a person or body … authorized in a foreign proceeding; (ii) section 1515(a), which provides that "[a] foreign representative applies to the court for recognition of a foreign proceeding in which the foreign representative has been appointed by filing a petition for recognition"; and (iii) section 1515(b)(1), which provides that an application for recognition of a foreign proceeding must be accompanied by "a certified copy of the decision … appointing the foreign representative" (emphasis added).
The district court noted that "application of the Barton [D]octrine to the facts here constitutes an issue of first impression." The court did not fault the bankruptcy court's interpretation of the Barton Doctrine in a manner supported by the express language of the Bankruptcy Code. However, the district court declined to decide the issue, including whether the Barton Doctrine applies extraterritorially, because it concluded that the bankruptcy court committed no error in extending the stay to preclude the litigation against the foreign representatives and denying the plaintiffs' stay relief motion.
The district court noted that the plaintiffs misplaced reliance on In re Qimonda AG, 482 B.R. 879 (Bankr. E.D. Va. 2012), and In re World Mktg. Chicago, LLC, 584 B.R. 737 (Bankr. N.D. Ill. 2018). In Qimonda, the court declined to apply the Barton Doctrine to stay a lawsuit against a non-debtor subsidiary of a chapter 15 debtor. Because the foreign representative of the debtor in that case did not act in that capacity for the non-debtor, the court did not decide whether the foreign representative was appointed by the German court or the U.S. court. See Qimonda, 482 B.R. at 896 (noting in dicta that "[a]ccepting the Foreign Administrator's argument that it makes no difference whether the Foreign Administrator was appointed initially by the German Court or by this Court (once a U.S. court has recognized the foreign main proceeding), it is still true that [the Foreign Administrator] was appointed by that Court with respect to [the debtor], and not with respect to [the non-debtor subsidiary]"). The district court distinguished World Marketing because that case involved an adversary proceeding commenced in a chapter 11 case against a liquidating trustee appointed by the same bankruptcy court.
In affirming the decision to extend the automatic stay to the foreign representatives in Irish Bank, the Delaware district court noted that the plaintiffs' complaint sought "relief in the form of modification of the bankruptcy court's recognition order to remove the foreign representatives." Because a U.S. bankruptcy court lacks the authority to appoint a replacement foreign representative, such relief would essentially make it impossible to administer IBRC's U.S. assets and defeat the entire purpose of its chapter 15 case. According to the district court, "such an immediate adverse economic consequence" for the debtor constitutes an "unusual circumstance" justifying extension of the automatic stay.
Finally, the district court found no fault in the bankruptcy court's conclusion that the plaintiffs failed to demonstrate that there was cause for relief from the stay. According to the Delaware district court, the bankruptcy court correctly found that the harm to IRBC from allowing the litigation to be filed outweighed the harm to the plaintiffs and that the plaintiffs were not likely to prevail in the litigation due to the court's lack of jurisdiction over the proposed adversary proceeding.
Irish Bank is notable principally because the bankruptcy court and the district court sanctioned expansion of the scope of the automatic stay to protect foreign representatives in a chapter 15 case. As with non-debtor affiliates in some other bankruptcy cases, litigation against a foreign representative has the potential to undermine or frustrate chapter 15 as a mechanism to provide assistance to a foreign bankruptcy or insolvency proceeding. It may also discourage competent individuals or entities from serving as foreign representatives in chapter 15 cases.
The district court's demurrer on adjudicating whether the Barton Doctrine applies extraterritorially is of little practical significance. As framed, the issue before the district court—namely, whether a U.S. common law doctrine could be applied to require potential plaintiffs to obtain the approval of a foreign court to sue a foreign representative or other official appointed by such court—has apparently not arisen in other cases and would be unlikely to do so.
Moreover, it is doubtful that a foreign court would accede to a U.S. bankruptcy court's determination that such permission is necessary. See In re MF Glob. Holdings Ltd., 562 B.R. 55, 63 (Bankr. S.D.N.Y. 2017) (noting that "this Court cannot force [a Bermuda court] to recognize and enforce a decision of this Court based on a well-recognized doctrine of U.S. law, first set forth in the 1881 Supreme Court decision in Barton"). Cases addressing the extraterritoriality of U.S. bankruptcy laws generally involve statutory provisions (e.g., the Bankruptcy Code's automatic stay and transfer avoidance and recovery provisions) rather than court-made common law doctrines. Indeed, some such statutory provisions expressly provide that they have extraterritorial effect (see, e.g., 11 U.S.C. § 541, which provides that the bankruptcy estate "is comprised of all of the following property, wherever located and by whomever held" (emphasis added)).