Blixseth v. Brown (In Re Yellowstone Mountain Club, LLC)

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE YELLOWSTONE MOUNTAIN No. 14-35363
CLUB, LLC,
Debtor, D.C. No.
2:13-cv-00032-SEH
TIMOTHY L. BLIXSETH,
Plaintiff-Appellant, OPINION
v.
STEPHEN R. BROWN;
GARLINGTON, LOHN &
ROBINSON, PLLP,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Montana
Sam E. Haddon, District Judge, Presiding
Argued and Submitted February 25, 2016
Pasadena, California
Filed November 28, 2016
Before: Alex Kozinski, Richard A. Paez
and Marsha S. Berzon, Circuit Judges.
Opinion by Judge Kozinski
2 IN RE YELLOWSTONE MOUNTAIN CLUB
SUMMARY*
Bankruptcy
The panel affirmed in part and vacated in part the district
court’s affirmance of (1) the bankruptcy court’s denial of
plaintiff’s request for permission, pursuant to Barton v.
Barbour, 104 U.S. 126 (1881), to sue a member of an
Unsecured Creditors’ Committee in district court, and (2) the
bankruptcy court’s dismissal of plaintiff’s claims on the
merits.
Under the Barton doctrine, plaintiffs must obtain
authorization from the bankruptcy court before initiating an
action in district court against certain officers appointed by
the bankruptcy court for actions the officers have taken in
their official capacities. The panel held that Barton applies
to UCC members who are sued for acts performed in their
official capacities. Any such suit must be brought in the
bankruptcy court, or in another court only with the express
permission of the bankruptcy court.
The panel held that claims alleging misconduct by the
defendant prior to the bankruptcy proceedings could be
brought without permission from the bankruptcy court. The
panel held that the bankruptcy court erred in holding that
these pre-petition claims were so intertwined with the
defendant’s actions as a member of the UCC that they could
not be separated from the post-petition claims.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE YELLOWSTONE MOUNTAIN CLUB 3
As to claims challenging defendant’s conduct related to
his actions after he was appointed UCC chair, the panel held
that the bankruptcy court did not abuse its discretion in
denying plaintiff’s Barton motion to bring these post-petition
claims in district court.
The panel held that the bankruptcy court did not exceed
its Article I jurisdiction by adjudicating on the merits
plaintiff’s post-petition claims, which stemmed from the
bankruptcy. The panel held that the bankruptcy court erred in
dismissing post-petition claims on the ground of derivative
judicial immunity for defendant’s actions taken as UCC
chair. The panel remanded for the bankruptcy court to
consider whether defendant was entitled to derived judicial
immunity because he acted within the scope of his authority,
he candidly disclosed his proposed acts to the bankruptcy
court, the debtor had notice of his proposed acts, and the
bankruptcy court approved the proposed acts.
COUNSEL
John C. Doubek (argued), Doubek Pyfer & Fox LLP, Helena,
Montana; Michael J. Ferrigno, Law Office of Michael J.
Ferrigno, Boise, Idaho; for Plaintiff-Appellant.
Dale R. Cockrell (argued) and Mikel L. Moore, Moore
Cockrell Goicoechea & Axelberg P.C., Kalispell, Montana,
for Defendants-Appellees.
4 IN RE YELLOWSTONE MOUNTAIN CLUB
OPINION
KOZINSKI, Circuit Judge:
We consider whether, under Barton v. Barbour, 104 U.S.
126 (1881), a plaintiff must obtain a bankruptcy court’s
permission before suing a member of the Unsecured
Creditors’ Committee (UCC) in district court, and whether
bankruptcy courts have authority to enter a final judgment on
Barton claims.
BACKGROUND
This is but the latest chapter in the long-running saga of
the Yellowstone Mountain Club bankruptcy litigation. See
Blixseth v. Yellowstone Mountain Club, LLC, 742 F.3d 1215
(9th Cir. 2014) (per curiam); In re BLX Grp., Inc., 419 B.R.
457 (Bankr. D. Mont. 2009). In the late 1990s, Timothy
Blixseth and his wife, Edra, developed the Yellowstone
Mountain Club, an exclusive ski and golf resort in Montana
that caters to the “ultra-wealthy.” Blixseth, 742 F.3d at 1218;
see also In re BLX Grp., 419 B.R. at 460.
As part of his business-development efforts, Blixseth
borrowed $375 million from Credit Suisse on behalf of the
Yellowstone entities1 but used some of the proceeds to pay
off personal debts. In re BLX Grp., 419 B.R. at 461. Blixseth
alleges that he relied on the advice of his attorney, Stephen
Brown, who assured him that his actions were lawful.
1
These entities were Yellowstone Mountain Club, LLC, Yellowstone
Development, LLC and Big Sky Ridge, LLC.
IN RE YELLOWSTONE MOUNTAIN CLUB 5
When shareholders of the Yellowstone entities caught
wind of Blixseth’s actions, they sued in Montana state court.
On Brown’s advice, Blixseth settled. Around the same time,
Blixseth and Edra divorced. Represented by Brown, Blixseth
divided his property pursuant to a marital settlement
agreement (MSA) that gave the Yellowstone entities to Edra.
Id.
In November 2008, Edra filed bankruptcy petitions on
behalf of the Yellowstone entities. Id. at 462. A month later,
the U.S. Trustee appointed nine individuals to serve as the
UCC. One of the UCC members—the chairman, no
less—was Blixseth’s former counsel, Stephen Brown.
Blixseth suspected that Brown used confidential
information to Blixseth’s detriment in the bankruptcy
proceedings. Accordingly, he sued Brown in district court.
The district court held that it lacked jurisdiction because
Blixseth hadn’t first obtained the bankruptcy court’s
permission to sue, as required by Barton.
Under Barton, plaintiffs must obtain authorization from
the bankruptcy court before “initiat[ing] an action in another
forum” against certain officers appointed by the bankruptcy
court for actions the officers have taken in their official
capacities. In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th
Cir. 2005). A district court is considered to be “another
forum,” requiring leave of the bankruptcy court before a
lawsuit can be brought. In re Kashani, 190 B.R. 875, 885
(B.A.P. 9th Cir. 1995).
The district court recognized that Barton normally applies
to suits against receivers and bankruptcy trustees but
discerned a broader purpose: to “centralize bankruptcy
6 IN RE YELLOWSTONE MOUNTAIN CLUB
litigation” and “keep a watchful eye” on court-appointed
officers. Accordingly, it applied Barton to lawsuits against
UCC members and dismissed the complaint. In the district
court’s view, all of Blixseth’s claims were “based on Brown’s
alleged misconduct as Chair of the Unsecured Creditors
Committee,” and the bankruptcy court never authorized the
lawsuit. We previously dismissed Blixseth’s appeal from this
decision in an unpublished order, determining that it wasn’t
taken from a “final order.”
Blixseth then asked the bankruptcy court for permission
to bring his claims in district court. In his Barton motion,
Blixseth explained that a number of his claims against Brown
were based on pre-petition conduct that arose before the
bankruptcy litigation began so they didn’t relate to Brown’s
actions on the UCC. The bankruptcy court found it
“impossible . . . to isolate Blixseth’s so-called ‘pre-petition
malpractice and malfeasance’ claims from Brown’s activities
as a member of the Unsecured Creditors Committee.” In a
final order, the bankruptcy court denied Blixseth permission
to bring his claims in district court and dismissed the claims
on the merits. Blixseth appealed to the district court, which
affirmed the bankruptcy court. He now appeals to us.
DISCUSSION
We review the bankruptcy court’s order denying leave to
sue for abuse of discretion. See In re Crown Vantage,
421 F.3d at 977. And we review de novo whether the
bankruptcy court had authority to resolve Blixseth’s claims
on the merits. See In re Ray, 624 F.3d 1124, 1130 (9th Cir.
2010).
IN RE YELLOWSTONE MOUNTAIN CLUB 7
I. Applicability of Barton
1. The Barton doctrine traditionally applies to actions
against receivers and bankruptcy trustees. See In re Crown
Vantage, 421 F.3d at 970–71 (quoting Barton, 104 U.S. at
128); Leonard v. Vrooman, 383 F.2d 556, 560 (9th Cir.
1967). The touchstone of the Barton inquiry is whether a suit
challenges “acts done in [a trustee’s] official capacity and
within his authority as an officer of the Court.” In re Crown
Vantage, 421 F.3d at 974 (quoting Leonard, 383 F.2d at 560);
In re Castillo, 297 F.3d 940, 945 (9th Cir. 2002) (“[W]ithout
leave of the bankruptcy court, no suit may be maintained
against a trustee for actions taken in the administration of the
estate.” (quoting 3 Collier on Bankruptcy ¶ 323.03[3] (15th
ed. rev. 2001))).
No court of appeals has held that Barton applies to suits
against UCC members, but some have extended Barton to
actors who aren’t bankruptcy trustees or receivers. The Sixth
Circuit held that counsel for the trustee is entitled to Barton
protection because he is the “functional equivalent of a
trustee” for purposes of administering the estate. In re
DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993).
And the Eleventh Circuit bestowed Barton protection on
individuals approved to conduct sales of estate property,
adopting the “functional equivalent” test announced in In re
DeLorean. Carter v. Rodgers, 220 F.3d 1249, 1251, 1252 n.4
(11th Cir. 2000).
Blixseth argues that the In re DeLorean line of cases is
inapposite because the defendants in those cases aided the
trustee in maximizing the value of the estate. Brown,
Blixseth claims, owes no duty to the estate; rather, he
represents creditors seeking payment from the estate. But
8 IN RE YELLOWSTONE MOUNTAIN CLUB
Blixseth’s view of the UCC’s interests is too narrow. The
UCC can only maximize recovery for the creditors by
increasing the size of the estate. This alignment of interests
may explain why the bankruptcy code permits UCCs to
initiate the appointment of trustees. See 11 U.S.C.
§ 1103(c)(4); see also 7 Collier on Bankruptcy
§ 1103.05[1][e] (16th ed. 2016) (implying that the duties of
the committee and trustee overlap because “the role of the
committee may be reduced if a chapter 11 trustee is
appointed”). Because 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
doctrine.
UCC members are statutorily obliged to perform tasks
related to the administration of the estate: They “investigate
the acts, conduct, assets, liabilities, and financial condition of
the debtor, the operation of the debtor’s business and the
desirability of the continuance of such business.” 11 U.S.C.
§ 1103(c)(2). They “participate in the formulation of a plan.”
Id. § 1103(c)(3). And they examine the debtor. Id. § 343; see
also 3 Collier on Bankruptcy § 341.02[5][d]. A lawsuit
challenging any of these actions could seriously interfere with
already complicated bankruptcy proceedings. Even the fear
that such a lawsuit could be filed—and UCC members would
have to answer for their actions in a court unfamiliar with
bankruptcy proceedings—may cause UCC members to be
timid in discharging their duties. This is doubtless why the
Commission to Study the Reform of Chapter 11
recommended extending the Barton doctrine to “estate
neutrals, and statutory committees and their members.” Am.
Bankr. Inst., Comm’n to Study the Reform of Chapter 11,
2012–2014 Final Report and Recommendations 43 (2014),
available at https://abiworld.app.box.com/s/vvircv5xv83aa
IN RE YELLOWSTONE MOUNTAIN CLUB 9
vl4dp4h. We conclude that Barton applies to UCC members
like Brown who are sued for acts performed in their official
capacities. See In re Crown Vantage, 421 F.3d at 970. Any
such suit must be brought in the bankruptcy court, or in
another court only with the express permission of the
bankruptcy court. Id. at 970–71.
2. Some of Blixseth’s claims allege misconduct by
Brown prior to the bankruptcy proceedings. For example,
Blixseth alleges that Brown gave dubious legal advice in
2005 about how he could use funds from the Credit Suisse
loan, and, as a result, Blixseth became the target of a
shareholder lawsuit. Blixseth also alleges that Brown
provided subpar representation during the shareholder
litigation and divorce by overlooking key defenses and
drafting provisions in the MSA that were later deemed
unenforceable.
The bankruptcy court held that these claims are “so
intertwined with and dependent upon Brown’s actions as a
member of the Unsecured Creditors Committee” that it is
“impossible” to separate the pre-petition claims from
Brown’s activities on the UCC. But Blixseth’s pre-petition
claims have nothing to do with Brown’s position on the UCC.
These claims sound in tort, contract and fraud, and are
untethered to Brown’s position as Chair of the UCC. And in
his Barton motion, Blixseth clearly separated his pre-petition
claims from the post-petition claims that implicated Brown’s
activities on the UCC. Accordingly, Blixseth didn’t need
permission from the bankruptcy court before bringing his pre-
petition claims in district court. See id. at 974. The courts
below erred in concluding otherwise.
10 IN RE YELLOWSTONE MOUNTAIN CLUB
3. Blixseth’s remaining claims challenge conduct related
to Brown’s actions after he was appointed UCC chair.2 These
claims challenge “acts done . . . within [Brown’s] authority as
an officer of the Court.” Id. (quoting Leonard, 383 F.2d at
560). Blixseth needed the bankruptcy court’s permission
before bringing these claims in district court.
Bankruptcy courts have applied a five-factor test to decide
whether to grant leave to sue in another forum pursuant to
Barton, or to retain jurisdiction over the claims in bankruptcy
court. See id. at 976. These factors are: (1) whether the acts
complained of “relate to the carrying on of the business
connected with the property of the bankruptcy estate,”
(2) whether the claims concern the actions of the officer while
administering the estate, (3) whether the officer is entitled to
quasi-judicial or derived judicial immunity, (4) whether the
plaintiff seeks a personal judgment against the officer and
(5) whether the claims seek relief for breach of fiduciary
duty, through either negligent or willful conduct. In re
Kashani, 190 B.R. at 886–87. Even satisfying “one . . .
factor[] may be a basis for the bankruptcy court to retain
jurisdiction.” Id. at 887.
2
Blixseth alleges that Brown used confidential information that he
learned while representing Blixseth. He also claims that Brown drummed
up support for a bankruptcy plan that made Blixseth liable to the debtors
but exculpated Brown. Finally, Blixseth claims that Brown testified
against him in an adversary proceeding, thereby breaching his fiduciary
duty.
IN RE YELLOWSTONE MOUNTAIN CLUB 11
Blixseth sought a personal judgment against Brown,
thereby satisfying the fourth Kashani factor.3 The bankruptcy
court didn’t abuse its discretion in denying Blixseth’s Barton
motion to bring his post-petition claims in district court.
II. Final Adjudication of Claims
Blixseth also claims that the bankruptcy court lacked
authority to decide his claims against Brown.
1. Brown argues that we need not resolve the question of
the bankruptcy court’s authority because Blixseth consented
to having his claims resolved on the merits and, even if he
hadn’t consented, the district court’s de novo review cured
any error. But Blixseth never expressly consented and, at the
hearing on the Barton motion, he maintained that he had a
“right to litigate his legal malpractice claims against Mr.
Brown in district court.” And the district court’s de novo
review didn’t cure any error resulting from the bankruptcy
court entering a final judgment on Blixseth’s claims. Though
the district court claimed to conduct a de novo review, it
didn’t undertake a meaningful “claim-by-claim analysis.”
Dunmore v. United States, 358 F.3d 1107, 1114 (9th Cir.
2004). The district court’s order didn’t afford Blixseth
anything close to an independent decision by an Article III
adjudicator. See Wellness Int’l Network, Ltd. v. Sharif, 135 S.
Ct. 1932, 1946 (2015).
3
The bankruptcy court also concluded that Brown satisfied the third
Kashani factor because he was entitled to derived judicial immunity. But
if Brown were entitled to judicial immunity, he couldn’t be sued in any
court. We question Kashani to the extent it suggests that an officer
entitled to judicial immunity may be sued in the bankruptcy court that
appointed him.
12 IN RE YELLOWSTONE MOUNTAIN CLUB
2. Blixseth argues that the bankruptcy court exceeded its
Article I jurisdiction under Stern v. Marshall by adjudicating
his claims on the merits. Stern prohibits bankruptcy courts
from adjudicating “common law cause[s] of action, [that]
neither derive[] from nor depend[] upon any agency
regulatory regime.” 564 U.S. 462, 494 (2011). Blixseth
points out that his claims sound in tort and contract and thus
are “the stuff of the traditional actions at common law” that
must be litigated in an Article III forum. N. Pipeline Constr.
Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90 (1982)
(Rehnquist, J., concurring in the judgment).
Blixseth reads Stern too broadly. Stern dealt with claims
that didn’t “stem[] from the bankruptcy itself” and wouldn’t
“necessarily be resolved in the claims allowance process.”
564 U.S. at 499. Stern thus precludes bankruptcy courts from
deciding common law claims that have no connection to the
bankruptcy estate other than that they happen to be assets of
the estate. Barton claims are different; they concern actions
taken in a trustee’s or officer’s official capacity. See In re
Crown Vantage, 421 F.3d at 970.
Because Barton claims could not “exist independently of
[a] bankruptcy case,” In re Harris, 590 F.3d 730, 738 (9th
Cir. 2009), they are not the “stuff of the traditional actions at
common law tried by the courts at Westminster in 1789,”
Stern, 564 U.S. at 484 (quoting N. Pipeline, 458 U.S. at 90
(Rehnquist, J., concurring in the judgment)). A suit against
a bankruptcy court officer for actions undertaken in his
official capacity necessarily “stems from the bankruptcy
itself.” Id. at 499. We conclude that Stern doesn’t preclude
bankruptcy courts from adjudicating Barton claims.
IN RE YELLOWSTONE MOUNTAIN CLUB 13
3. We review de novo the bankruptcy court’s dismissal
of Blixseth’s claims on the merits. See Barrientos v. Wells
Fargo Bank, N.A., 633 F.3d 1186, 1188 (9th Cir. 2011).
Blixseth raised three post-petition claims that relate to
Brown’s actions as Chair of the UCC. See supra p. 10 note
2. The bankruptcy court held that Brown, as an officer of the
court, was entitled to derivative judicial immunity for actions
taken as Chair of the UCC. But Brown’s position on the
UCC doesn’t entitle him to immunity for all actions as Chair.
See In re Castillo, 297 F.3d at 953. For derived judicial
immunity to apply, Brown must have acted within the scope
of his authority and “candidly disclosed [his] proposed acts
to the bankruptcy court.” In re Harris, 590 F.3d at 742
(citations omitted). Additionally, the debtor must have had
notice of his proposed acts and the bankruptcy court must
have approved these acts. Id.
We remand for the bankruptcy court to consider whether
Brown is entitled to derived judicial immunity for Blixseth’s
post-petition claims. Unless he is, we see no reason Blixseth
couldn’t proceed to discovery on these claims.4
4
Brown argues that Blixseth’s claims are barred by the exculpation
clause of the bankruptcy plan. The clause covers any “act or omission in
connection with, relating to or arising out of the Chapter 11 cases, [and]
the formulation, negotiation, implementation, confirmation or
consummation of this Plan.” Blixseth challenged the validity of the
exculpation clause in a previous appeal. We held that his challenge wasn’t
equitably moot and remanded for the district court to consider it in the first
instance. See Blixseth v. Yellowstone Mountain Club, LLC, 609 F. App’x
390 (9th Cir. 2015). On remand, the district court upheld the clause, and
Blixseth again appealed. Blixseth v. Yellowstone Mountain Club, LLC,
No. 2:11-cv-00065-SEH, Dkt. Nos. 163, 164 (D. Mont. Mar. 23, 2016 &
Apr. 19, 2016). The validity of the exculpation clause will be decided in
that appeal so we express no view of the matter here.
14 IN RE YELLOWSTONE MOUNTAIN CLUB
* * *
Because Barton never applied to Blixseth’s pre-petition
claims, he can bring them in district court as he originally
intended. We remand Blixseth’s post-petition claims for
further proceedings consistent with this opinion.
AFFIRMED IN PART; VACATED IN PART;
REMANDED IN PART.
The parties shall bear their own costs.