James McDaniel Jr. v. John Blust ( 2012 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JAMES MARK MCDANIEL, JR.; DR. 
C. RICHARD EPES,
Plaintiffs-Appellants,
v.
JOHN M. BLUST; EDWIN RAY

GATTON; DIRK W. SIEGMUND; IVEY,
MCCLELLAN, GATTON AND TALCOTT, No. 10-1776
LLP,
Defendants-Appellees,
and
WILLIAM STANALAND, III,
Defendant.

Appeal from the United States District Court
for the Middle District of North Carolina, at Greensboro.
James A. Beaty, Jr., Chief District Judge.
(1:09-cv-00507-JAB-PTS)
Argued: December 9, 2011
Decided: February 9, 2012
Before TRAXLER, Chief Judge, and GREGORY and
WYNN, Circuit Judges.
Affirmed by published opinion. Chief Judge Traxler wrote the
opinion, in which Judge Gregory and Judge Wynn joined.
2 MCDANIEL v. BLUST
COUNSEL
ARGUED: Douglas Stephen Harris, Greensboro, North Caro-
lina, for Appellants. Jeffrey Edward Oleynik, BROOKS,
PIERCE, MCLENDON, HUMPHREY & LEONARD,
Greensboro, North Carolina, for Appellees. ON BRIEF: John
W. Ormand III, Julia C. Ambrose, BROOKS, PIERCE,
MCLENDON, HUMPHREY & LEONARD, Raleigh, North
Carolina, for Appellees.
OPINION
TRAXLER, Chief Judge:
James Mark McDaniel, Jr. and C. Richard Epes
("Appellants") appeal a district court order dismissing several
of their claims in a suit regarding conduct that occurred dur-
ing bankruptcy proceedings. Finding no error, we affirm.
I.
Appellants filed this suit in Guilford County Superior
Court, alleging several causes of action. Their complaint
alleges that they are former officers of EBW Laser, Inc., a
company that entered bankruptcy in 2005 in the Middle Dis-
trict of North Carolina. After the case was converted to Chap-
ter 7, the court appointed attorney Charles Ivey as trustee.
Ivey subsequently retained his firm, Ivey, McClellan, Gatton,
Talcott, LLP ("IMGT"), to serve as his counsel and to prose-
cute an adversary proceeding ("the adversary proceeding") he
had filed against Appellants. The adversary proceeding com-
plaint alleged that Appellants had preferentially transferred or
fraudulently conveyed property belonging to EBW Laser
worth hundreds of thousands of dollars and had also engaged
in breaches of fiduciary duty and unfair and deceptive trade
practices.
MCDANIEL v. BLUST 3
Named as defendants in the present action are IMGT attor-
neys John M. Blust, Edwin R. Gatton, and Dirk Siegmund, as
well as IMGT itself and CPA William Stanaland, III. The
complaint alleges that during discovery for the adversary pro-
ceeding, Gatton presented documents to certain deponents
that he claimed were tax returns of EBW Laser, Inc., when
Gatton in fact knew or should have known that the documents
were not EBW Laser’s returns. The complaint further alleges
that Gatton allowed expert witnesses to rely on these docu-
ments to conclude that Appellants had committed fraud in
their capacity as EBW Laser’s officers. On the basis of these
allegations, Appellants asserted a cause of action for civil
obstruction of justice.
The complaint also alleges that IMGT sought court orders
to obtain McDaniel’s personal income tax records twice dur-
ing the adversary proceeding and that both times the bank-
ruptcy court denied IMGT’s request, ruling that the returns
had no relevance to the proceeding. The complaint alleges
that IMGT nevertheless was able to obtain McDaniel’s returns
for the 1997 through 2001 tax years without McDaniel’s
knowledge or permission and that Gatton refused McDaniel’s
request to return them. On this basis, the complaint asserts a
cause of action for conversion.
Finally, the complaint alleges that IMGT’s source for the
aforementioned returns was Stanaland, who had himself
obtained them from McDaniel to assist him in preparing
McDaniel’s 2002 tax returns. This allegation is the basis of
claims for invasion of privacy, breach of fiduciary duty, and
civil conspiracy.
Defendants Blust, Gatton, Siegmund, and IMGT ("the
IMGT Defendants") removed the case to federal district court
based on federal-question and bankruptcy jurisdiction. See 28
U.S.C. §§ 1331, 1334. They subsequently moved to dismiss
the claims against them, see Fed. R. Civ. P. 12(b)(1), contend-
ing that, under the Barton doctrine, the district court lacked
4 MCDANIEL v. BLUST
subject-matter jurisdiction since Appellants had failed to
obtain leave of the bankruptcy court that appointed Ivey to be
trustee. See Barton v. Barbour, 104 U.S. 126 (1881). Appel-
lants opposed the motion, denying that the Barton doctrine
barred their action. Appellants further asked that the court
remand the action to state court or abstain from hearing the
case.
Defendant Stanaland also sought dismissal of the claims
against him, asserting that the Barton doctrine barred the
claims against him and that the claims failed to state a claim
upon which relief could be granted. See Fed. R. Civ. P.
12(b)(1), (6).
These motions were referred to a United States magistrate
judge, who recommended granting the motion to dismiss the
claims against the IMGT Defendants and remanding the
claims against Stanaland to state court. Regarding the alleg-
edly false returns, the magistrate judge concluded that "[i]t
was within the context of the adversary proceeding which the
trustee filed against [Appellants], and for which the IMGT
firm and its attorneys were hired to represent the trustee, that
the allegedly false corporate tax returns of EBW Laser, Inc.
were presented and improperly relied upon to implicate
[Appellants] in alleged wrongdoing." J.A. 300. Given that
"[t]he prosecution of the trustee’s adversary proceeding was
a function properly within the scope of duties of the trustee’s
counsel," the judge determined that the Barton doctrine
applied. J.A. 300.
Regarding the acts relating to the alleged improper receipt
and possession of McDaniel’s personal income tax returns,
the judge noted that the "motive according to [Appellants]
was to establish tax fraud by . . . McDaniel to bolster the trust-
ee’s contention that . . . McDaniel had created and engaged
in the fraudulent scheme outlined in the complaint in the
adversary proceeding." J.A. 301. The judge concluded that
because "[p]roving the adversary action was a function within
MCDANIEL v. BLUST 5
the scope of duties of the trustee’s counsel," the Barton doc-
trine applied to those actions as well. J.A. 301.
The district court adopted the magistrate judge’s recom-
mendation over Appellants’ objections.
II.
Appellants argue that the district court erred in dismissing
their claims against the IMGT Defendants under the Barton
doctrine. We disagree. See JTH Tax, Inc. v. Frashier, 624
F.3d 635, 637 (4th Cir. 2010) (stating that we review de novo
a district court’s dismissal of a complaint for lack of subject-
matter jurisdiction).
The Supreme Court established in Barton that before
another court may obtain subject-matter jurisdiction over a
suit filed against a receiver for acts committed in his official
capacity, the plaintiff must obtain leave of the court that
appointed the receiver.1 See Muratore v. Darr, 375 F.3d 140,
143 (1st Cir. 2004). This principle has been extended to suits
against bankruptcy trustees, see id.; Beck v. Fort James Corp.
(In re Crown Vantage, Inc.), 421 F.3d 963, 971 (9th Cir.
2005), and to suits against trustees’ attorneys, see Lowen-
braun v. Canary (In re Lowenbraun), 453 F.3d 314, 321 (6th
Cir. 2006). To determine whether a complained-of act falls
under the Barton doctrine, courts consider the nature of the
function that the trustee or his counsel was performing during
commission of the actions for which liability is sought. See
Heavrin v. Schilling (In re Triple S Rests., Inc.), 519 F.3d 575,
578 (6th Cir. 2008). When trustees act "within the context" of
their role of "recovering assets for the estate," leave must be
obtained. Id. Acts are presumed to be part of the duties of the
1
"[W]hile permission to prosecute an action against a trustee can
involve discretion, such permission ordinarily should be granted unless it
is clear that the claim is without foundation." Anderson v. United States,
520 F.2d 1027, 1029 (5th Cir. 1975).
6 MCDANIEL v. BLUST
trustee or his counsel "unless Plaintiff initially alleges at the
outset facts demonstrating otherwise." In re Lowenbraun, 453
F.3d at 322 (internal quotation marks omitted).2
The Barton doctrine serves the principle that a bankruptcy
trustee "is an officer of the court that appoints him," and
therefore that court "has a strong interest in protecting him
from unjustified personal liability for acts taken within the
scope of his official duties." Lebovits v. Scheffel (In re Lehal
Realty Assocs.), 101 F.3d 272, 276 (2d Cir. 1996). "Without
the requirement [of obtaining leave], trusteeship w[ould]
become a more irksome duty, and so it w[ould] be harder for
courts to find competent people to appoint as trustees. Trust-
ees w[ould] have to pay higher malpractice premiums, and
this w[ould] make the administration of the bankruptcy laws
more expensive." In re Linton, 136 F.3d 544, 545 (7th Cir.
1998). The doctrine also enables bankruptcy courts to monitor
the work of the trustees they have appointed so that the courts
may be fully informed when they make future appointments.
See id.A.
Appellants argue that the Barton doctrine does not apply to
their claims because Ivey did not specifically direct the chal-
lenged actions and because the allegedly wrongful actions
exceeded the scope of the IMGT Defendants’ authority.
Initially, for the Barton doctrine to apply to a suit against
a bankruptcy trustee’s attorneys, we know of no reason why
the trustee must have directed counsel to take the specific
actions that are the subject of the suit. Nor do Appellants
point to any case imposing such a requirement.
2
28 U.S.C. § 959(a) provides a statutory exception to the Barton doc-
trine for suits challenging actions of trustees in "carrying on business con-
nected with" the property of the estate. Appellants do not argue that this
exception applies in this case.
MCDANIEL v. BLUST 7
Regarding the scope of the IMGT Defendants’ authority,
Ivey employed the IMGT Defendants to prosecute the adver-
sary proceeding. Even assuming that the challenged actions
were wrongful, Appellants do not seriously dispute that the
actions were taken in the context of attempting to prove the
adversary action. The allegations that the challenged conduct
was wrongful, certainly not unexpected in a lawsuit, do not
preclude application of the Barton doctrine. Such allegations
can be considered by the bankruptcy court both in its role as
gatekeeper, see In re Lehal Realty Assocs., 101 F.3d at 276,
and in the context of gathering information that may shape its
future appointments, see In re Linton, 136 F.3d at 545.
We note that the result we reach in this case is similar to
one reached by the Sixth Circuit on similar facts. See In re
Triple S Rests., Inc., 519 F.3d at 578. In that case, Schilling
was appointed trustee when a company went bankrupt. He
sought to obtain through the bankruptcy court some money
from Heavrin and threatened to report Heavrin to the United
States Attorney for particular criminal charges if he did not
pay the money in settlement. Heavrin filed suit against Schil-
ling in state court asserting state-law claims; the case was
removed to federal bankruptcy court under the Barton doc-
trine. Schilling moved to dismiss and for sanctions under Rule
11. The bankruptcy court granted both motions, and the dis-
trict court affirmed.
On appeal to the Sixth Circuit, Heavrin contended "that
Schilling was not acting in his official capacity when he stated
he would refer the matter for criminal investigation if Heavrin
would not agree to the settlement, and therefore the Barton
doctrine does not apply." Id. at 578. The Sixth Circuit
acknowledged that Heavrin was suggesting that "Schilling
necessarily acted outside the scope of his authority as a
trustee" by wrongfully "suggesting he might breach his duty
to report a criminal violation relating to the bankruptcy" if
Heavrin agreed to the settlement. Id. However, "[b]ecause the
negotiations were within the context of recovering assets for
8 MCDANIEL v. BLUST
the estate," the Sixth Circuit concluded that the bankruptcy
court’s determination that Schilling acted within the scope of
his authority as trustee was not clearly erroneous. Id.B.
Appellants offer an additional argument for their position
that the Barton doctrine does not bar their claim regarding the
allegedly false tax returns of EBW Laser. They contend that
their allegations of intentional misconduct, and fraud in par-
ticular, necessarily make the Barton doctrine inapplicable.3
However, bankruptcy trustees and their counsel require pro-
tection against suits that are based on unfounded allegations
regardless of whether there is a claim that the alleged wrong-
doing was intentional. See, e.g., In re Linton, 136 F.3d at 544-
46 (holding leave was required for malicious prosecution suit
against trustee alleging that trustee "had known from the out-
set that the adversary proceeding had no merit"). And, the
need for bankruptcy courts to be "kept in the loop" so that
they make appropriate appointments in the future is arguably
even greater when intentional misconduct has occurred. We
therefore conclude that the district court properly dismissed
this claim as well.
III.
In sum, because we conclude that the district court properly
applied the Barton doctrine, we affirm the district court’s
order.
AFFIRMED
3
Many of the cases Appellants cite in support of their argument actually
pertain to the question of whether trustees are entitled to immunity, a
question not before us today.