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In Re Vistacare Group, LLC, Debtor v. Cgl

May 26, 2011

IN RE VISTACARE GROUP, LLC, DEBTOR
WILLIAM J. SCHWAB, APPELLANT
v.
CGL, LLC, APPELLEE



The opinion of the court was delivered by: Judge Munley

Bankruptcy Appeal

MEMORANDUM

Before the court is Trustee William G. Schwab's ("Trustee") appeal of the ruling of Bankruptcy Judge John J. Thomas's order entered on October 22, 2010. (Doc. 1). The order granted the motion of Appellee CGL for leave to file suit against the Trustee. Background

The bankruptcy estate of Debtor Vistacare Group ("Vistacare") owned a parcel of land in Lancaster County Pennsylvania known as Parkside Manor Retirement Community. The parcel contained 45 lots, 44 of which were zoned and subdivided for mobile homes. The forty-fifth lot ("Lot 45") contained a retirement and assisted living facility. The subdivision plan that covered the lots contained certain restrictions, including a restriction that provided that "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." (See Doc. 2 at ¶ 7).

On July 25 2008, the Trustee filed a motion in the bankruptcy court seeking authorization to sell Parkside Manor, either as one parcel or as two separate parcels. The court granted this motion on August 21, 2008. On September 27, 2008, after a public auction, CGL entered into an agreement for the purchase of Lot 45. Lot 45 contained the retirement and assisted living facility. As part of the terms of sale, CGL sought and received confirmation that the restriction described above did not prevent sale of Lot 45 to CGL, and that the restriction would be removed from Lot 45. The bankruptcy court approved the terms of the sale on February 17, 2009. A court order issued on March 10, 2009 confirmed that the restriction had been removed. The purchase of the lot closed on May 8, 2009.

The Trustee concluded that his administration of the estate required liquidating the remaining 44 lots in the parcel. The bankruptcy court approved the sale of these lots in an order issued August 21, 2008. Before such sales could be made, the Trustee discovered that some lot owners had permanently affixed mobile homes to the debtor's property. The Trustee filed adversary actions against these homeowners. The parties resolved these actions by agreeing that the lots could be sold to the homeowners in violation of the above-mentioned restriction. The estate sold all but one of these lots to the residents after providing separate notice to all necessary parties, including CGL. On December 14, 2009, the Trustee and the township with jurisdiction over the land entered into an agreement abrogating the restrictions in the subdivision plan, including the restriction here in question. Though CGL received notice of the sale and an opportunity to object, CGL did not do so. During bankruptcy proceedings, CGL and its attorney admitted they were aware of the pending sale and did not attempt to restrict it. The trustee then sold the 44 lots.

On July 30, 2010, after these sales, CGL filed in the bankruptcy court a Motion for Leave to file suit against the Trustee in the Lancaster County Court of Common Pleas. CGL alleged that the sale of the 44 lots was unlawful because of the above-discussed restriction, and that this sale damaged CGL's property interest in Lot 45; as a second claim, CGL allged that the Trustee had attempted to deprive CGL of its property rights without due process through the Trustee's efforts to remove the restriction.

On October 22, 2010, Judge Thomas granted this motion and permitted CGL to file suit against the Trustee in the Lancaster County Court of Common Pleas. That decision led to the instant appeal.

Legal Standard

This court reviews the bankruptcy court's conclusions of law de novo. In re O'Brien Environmental Energy, Inc., 188 F.3d 116, 122 (3d Cir. 1999). The bankruptcy court's findings of fact will only be set aside if clearly erroneous. Bank. Rule 8013 ("On appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses."); In re O'Brien, 188 F.3d at 122. Discussion

The question here is whether the Bankruptcy Court properly granted CGL leave to sue the Trustee in Lancaster County court.

At issue in part is the Barton Doctrine, which provides that, as a general matter, "before suit is brought against a receiver leave of the court by which he was appointed must be obtained." Barton v. Barbour, 104 U.S. 126, 128 (1881). Some courts have applied this doctrine to federal bankruptcy cases and required leave of court before suit can be brought in another form against the bankruptcy trustee. See, e.g., Carter v. Rodgers, 220 F.3d 1249, 1252 (11th Cir. 2000) (holding that "a debtor must obtain leave of the bankruptcy court before initiating an action in district court when that action is against the trustee or other bankruptcy-court-appointed officer, for acts done in the actor's official capacity."); In re Linton, 136 F.3d 544, 545 (7 th Cir. 1998) ("the trustee in bankruptcy is a statutory successor to the equity receiver, and it had long been established that a receiver could not be sued without leave of the court that appointed him."); Lebovits v. Scheffel, 101 F.3d 272, 276 (2d Cir. 1996) (noting that courts have "requir[ed] leave of the appointing court before a suit may go forward in another court against the trustee."). The Third Circuit Court of Appeals has, however, been silent on this issue.

The Bankruptcy Judge found that CGL should be allowed to sue the Trustee in state court for two reasons. First, he found that the prohibitions in Barton against suits against the trustee were "antiquated" and "probably not controlling in the Third Circuit." (Transcript of October 21, 2010 Proceedings in Bankruptcy Court (hereinafter "T.") (Doc. 3) at 68). He pointed the parties to a written decision he had issued in In re Lambert, 438 B.R. 523 (M.D. Pa. 2010), as grounds for this conclusion. Id. At the hearing in this case, Judge Thomas pointed out that Barton, "a pretty old case[,] . . . identified the general rule that before a suit is brought against a receiver, somebody like Mr. Scwhab, that leave of the court by which he was appointed must be obtained." Id. at 69. The Bankruptcy Judge distinguished the Trustee in this case from the receiver in Barton, however. Unlike a receiver in earlier times, a bankruptcy judge does not appoint the trustee under the version of the Bankruptcy Code in place since 1978. Id. Thus, "the trustee is no longer, in a sense, an agent of the Court." Id. Instead, the Trustee is appointed by the Attorney General, a member of the executive branch, and is "really just another advocate that appear[s] before me, and I have no control over their appointment."*fn1 Id. Moreover, the purpose of the rule against suits without permission--to prevent draining of the estate through litigation in multiple forms--is now met by the "automatic stay of any attempt to collect against property of the estate" established under the Bankruptcy Code. Id. at 70. As such, the Judge Thomas concluded that the Barton doctrine no longer applied.

Despite concluding that the Barton doctrine did not preclude CGL from filing a state lawsuit against the Trustee without leave of court, the Bankruptcy Judge still examined whether he should approve such a suit if permission were required. The Bankruptcy Judge concluded that a lawsuit alleging the Trustee had sold property in violation of the restrictions in the deeds and development plan was not "on its surface, frivolous." Id. at 76. Moreover, Judge Thomas found that "the State Court probably has an expertise in this area, and it's probably appropriate to go forward in State Court." Id. If CGL were to obtain a money judgment against the trustee, the Bankruptcy Court would not "assume it would drain the estate because I don't know whether the trustee would have to take it out of his own pocket, or out of the estate." Id. The court thus decided to allow the state-court litigation without prejudice to the Bankruptcy Court ...


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