Beverly Byrd and Ralph T. Byrd

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at GREENBELT
In re: 	*
* 	Case No. 	04-35620-TJC
Ralph T. Byrd 	*
Beverly S. Byrd 	*
*
Debtors 	* 	Chapter 7 (Consolidated
* 	with No. 01-25006)
*
* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	*
MEMORANDUM OF DECISION
Before the Court is the Emergency Motion for Relief Due to Violations of the
Automatic Stay (the “Motion”) filed by Gregory P. Johnson (the “Trustee”) on May 7,
2007. Docket No. 549. In the Motion the Trustee seeks, among other things, an
injunction and sanctions against Ralph T. and Beverly S. Byrd (the “Debtors”) and
Stanton P. Byrd, Ralph Trevor Byrd and Mark S. Byrd (collectively with the Debtors, the
“Respondents”). The Trustee seeks this relief for two reasons. First, the Trustee
contends that the Respondents violated the automatic stay by filing a complaint in state
court seeking, inter alia, to impose a constructive trust on the property known as 4901
Date signed May 18, 2007
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Sundown Rd, Laytonsville, MD 20882 (the “Property”). Second, the Trustee contends
that the Respondents violated the Barton Doctrine 1 by filing and maintaining the state
court action against the Trustee, Mr. Roger Schlossberg, the initial Chapter 7 trustee in
the predecessor bankruptcy case of Ralph Byrd, Case No. 01-25006, and Shulman,
Rogers, Gandal, Pordy & Ecker, P.A., which serves as counsel to the Trustee and served
as counsel to Mr. Schlossberg. 	The Trustee seeks compensatory and punitive damages
against the Respondents for their willful violations of the automatic stay and the Barton
Doctrine. The Debtors have filed an opposition to the Motion, and assert that they have
not violated the automatic stay, that the claims in the state court complaint do not violate
the Barton Doctrine, and that their claim for a constructive trust against the Property
survives this Court’s prior order authorizing the sale of the Property free and clear of all
liens, claims, interests and encumbrances.
The Trustee sought an emergency hearing on the Motion, alleging that
Respondents’ state law complaint, and a lis pendens they filed against the Property in
conjunction with the complaint, has disrupted the pending sale of the Property previously
authorized by this Court. The Trustee alleges that the sale is scheduled to close by May
18, 2007, but the sale is jeopardized by the Respondents’ actions.
On May 9, 2007 the Court entered an order granting the Trustee’s motion to
shorten the time to respond to the Motion to May 14, 2007, and initially set an emergency
hearing on the Motion for May 16, 2007. The Court then rescheduled the hearing for
May 23, 2007 to accommodate Mr. Byrd’s schedule. However, the Court has reviewed
the briefs, all of the exhibits submitted therewith, and the pertinent authorities. In
1 As discussed further herein, the Barton Doctrine holds that a bankruptcy trustee cannot be sued for claims
arising from his administration of the estate without the plaintiff first seeking leave of the bankruptcy court.
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particular, the Debtors do not dispute that they filed the state court complaint that is the
subject of the Motion. The only dispute between the parties for purposes of this ruling is
the legal consequence of that filing. Accordingly, oral argument is deemed unnecessary
because the facts and legal arguments are adequately presented in the parties’ briefs and
the exhibits submitted in support, and argument would not aid in the decisional process.
See Local Rule 9013-1(b)(4).
For the reasons stated herein, the Court finds and concludes that (1) this Court has
exclusive jurisdiction over the Property – which is unquestionably property of the
bankruptcy estate in this case – pursuant to 28 U.S.C § 1334(e); (2) Respondents’ effort
to obtain a constructive trust over the Property is a violation of the automatic stay of 11
U.S.C. § 362(a)(3); and (3) the Respondents’ lawsuit against the Trustee, the predecessor
trustee, and their counsel in state court for actions taken in the performance of the
trustees’ duties is a violation of the Barton Doctrine.
Accordingly, the Court will enter an order (1) enjoining the Respondents from
filing, pursuing or maintaining any action in state or federal court, seeking to obtain
possession, custody, control or any interest in or to the Property; (2) enjoining the
Respondents from taking any other action, including but not limited to, filing a lis
pendens against the Property, seeking directly or indirectly to obtain possession, custody,
control or any interest in or to the Property or otherwise taking any action that will
encumber the Property; (3) enjoining the Respondents from taking any other action,
including but not limited to, filing a lis pendens against the Property, that has the intent or
effect of hindering, delaying or preventing the sale of the Property by the Trustee
pursuant to the order of this Court; (4) enjoining the Respondents from filing, pursuing or
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maintaining any action in state or other federal court seeking a remedy against the
Trustee, the predecessor trustee or their counsel, for actions they have taken in the
performance of their duties in this bankruptcy proceeding, or in the predecessor
bankruptcy case of Ralph Byrd, Case No. 01-25006, without first seeking and obtaining
leave of this Court; and (5) that declares that the complaint filed in state court is void as a
violation of the automatic stay to the extent it seeks to impose a constructive trust against
the Property. The order shall provide, however, that the Respondents shall not be
prohibited from seeking relief in this Court in connection with any of the foregoing, or
review of orders of this Court in the United States District Court for the District of
Maryland, the United States Court of Appeals for the Fourth Circuit, or the United States
Supreme Court. Finally, the Court will set for hearing the Trustee’s request for damages
and sanctions for the violations of the Barton Doctrine and the automatic stay.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334, 157(a),
and Local Rule 402 of the United States District Court for the District of Maryland. This
is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (N) & (O). The following
constitutes the Court’s findings of fact and conclusions of law:
I. 	FINDINGS OF FACT
A. 	PROCEDURAL BACKGROUND
This case, and its predecessor bankruptcy case of Ralph Byrd, Case No. 01-
25006, has a long and protracted history that spans more than five years. The Court
previously entered a memorandum of decision that recounted much of the entire history
of this case. See, Memorandum of Decision Granting the Motion of Chapter 7 Trustee to
Authorize the Removal of Persons and Property from 4901 Sundown Road, Laytonsville,
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MD, Docket No. 480 (the “Memorandum of Decision”) at p. 2-7. Thus, only the
procedural background pertinent to the Motion will be repeated here.
On December 14, 2001, Platinum Financial Services Corp. filed an involuntary
petition against Mr. Byrd under Chapter 7 of the Bankruptcy Code, initiating Case No.
01-25006. On July 17, 2002, this Court entered an order for relief under Chapter 7 and
Mr. Roger Schlossberg was appointed the Chapter 7 Trustee the next day (the “First
Chapter 7 Trustee”). On January 24, 2003, the District Court reversed the entry of the
order for relief. Thereafter, this Court entered an Order Staying All Matters and
Continuing All Hearings on April 15, 2003. On February 11, 2004, the United States
Court of Appeals for the Fourth Circuit reversed and remanded the District Court’s
decision reversing the entry of the Order for Relief.
On June 25, 2004, this Court entered an order converting the case from Chapter 7
to Chapter 11 at Mr. Byrd’s request. Docket No. 183 in Case No. 01-25006. On July 23,
2004, the Trustee was appointed the Chapter 11 trustee. Beverly Byrd, Ralph Byrd’s
wife, filed her petition under Chapter 13 on November 11, 2004, thus initiating Case No.
04-35620. The Trustee, then serving as the Chapter 11 trustee in Mr. Byrd’s case, filed a
motion to substantively consolidate Ralph’s and Beverly’s bankruptcy proceedings into
Case No. 04-35620. That motion was granted with the consent of the Debtors on January
12, 2005, by the entry of the Consent Order. Docket No. 49 in Case No 04-35620. The
Debtors’ consolidated bankruptcy case was converted to Chapter 7 of the Bankruptcy
Code on March 20, 2006. Docket No. 249. The Trustee was subsequently appointed the
Chapter 7 trustee and continues to serve in that position.
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On September 18, 2006, the Trustee filed the Motion of Chapter 7 Trustee to
Authorize the Removal of Persons and Property from 4901 Sundown Road, Laytonsville,
MD (the “Removal Motion”). Docket No. 402. The Trustee sought a court order
requiring the Debtors to vacate the Property by a date certain and a writ of assistance
from the United States Marshall in the event the Debtors did not do so. On October 5,
2006, the Debtors filed an opposition to the Removal Motion. Docket No. 418. The
Court held a hearing on the Removal Motion on December 1, 2006.
At the hearing, Mr. Byrd, an attorney who is representing himself and his wife in
this case, cross-examined the Trustee but did not testify or submit any evidence or
exhibits. At the conclusion of the hearing, the Court announced that it would issue a
written decision, but informed Mr. Byrd that it was going to grant the Removal Motion
and that the Debtors would be required to vacate the Property by January 31, 2007. As a
result, on December 1, 2006, the Debtors were given 61-days notice of the need to vacate
the Property.
On December 11, 2006, the Court issued the Memorandum of Decision, Docket
No. 480, granting the Removal Motion and entered an order of removal. In the
Memorandum of Decision, the Court found and concluded, among other things, that:
(1) The Trustee is required to market and sell the Property pursuant to 11 U.S.C.
§704(a)(1).
(2) The Debtors had been advised in April 2006, and a number of times since then,
that they would be required to vacate the Property, and during that time were
implored on several occasion by the Trustee to move from the Property, including
moving Mr. Byrd’s law practice. Taking into account the additional 61 days given
to the Debtors at the December 1st hearing, the Debtors would have 10 months
from the time the case was converted to chapter 7 to turnover the Property to the
Trustee, which was a substantial and adequate amount of time to relocate.
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(3) The Property is in deplorable and deteriorating condition and the estate is being
harmed by delay.
(4) The Debtors failed to submit any probative evidence on the harm to the Debtors
from requiring them to vacate the Property, other than to simply state that moving
would negatively affect Mr. Byrd’s law practice.
(5) The Debtors failed to submit any probative evidence on what resources the
Debtors had available to them to relocate, which failure was illuminating
considering that the Debtors continued to contend that they can comply with their
previously-proposed Chapter 13 plan that requires them to make monthly
payments in excess of $6,000.00
The Debtors never appealed the Memorandum of Decision or the order approving the
Removal Motion.
On March 23, 2007 the Trustee filed the Motion for Order Authorizing Trustee to
Enter into Sales Agreement and Approving Sale of Certain Real Property Free and Clear
of All Liens, Claims, Interests and Encumbrances (the “Sale Motion”). Docket No. 527.
In the Sale Motion, the Trustee sought approval of a contract to sell the Property to
prospective purchasers, Richard and Jenine Clonch (the “Clonchs”) for $735,000. The
Debtors filed an opposition to the Sale Motion on April 12, 2007. Docket No. 537. A
hearing on the Sale Motion was held on April 23, 2007.
Prior to the hearing, another party, Fidos for Freedom, came forward and
expressed an interest in purchasing the Property. Consequently, the Trustee conducted an
auction to allow for competitive bidding on the Property. Upon completion of the
auction, the hearing on the Sale Motion commenced and the Trustee informed the Court
that the Clonchs were the winners of the auction with a bid of $805,000.
Notwithstanding the new sales price, the Debtors continued to object to the sale.
The Trustee testified that, in his business judgment, the proposed sale was in the best
interest of the estate. Among other reasons, the Trustee testified that (1) by not listing the
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Property, the estate did not have to pay a six percent brokers fee; 2 (2) the Property was
being sold “as is,” without any warranties; (3) the estate held no funds which could be
used to fix up the Property, which the Court had previously found was in deplorable and
deteriorating condition; (4) the first and second deed of trust loans against the Property
continued to accrue interest, thereby eroding the equity in the Property available to the
estate; and (5) after entering into the initial sale contract with the Clonchs, they provided
him with a copy of their appraisal of the Property, which reflected a fair market value of
less than the sale price, and which reinforced the Trustee’s view that the sale was in the
best interests of the estate.
At the conclusion of the hearing, the Court approved the sale over all of the
Debtors’ objections. The Court found that the Trustee had properly exercised his
business judgment in approving the sale, the sale of the Property as proposed was fair and
reasonable and was being proposed for a sound purpose and in good faith. The Court
entered the order approving the sale on April 25, 2007 (the “Sale Order”). The Sale
Order is on appeal.
B. 	FINDINGS OF FACT RELATED TO THE MOTION
On April 23, 2007, on the same day as the hearing on the Sale Motion but without
disclosing it to the Court or apparently the Trustee, the Respondents filed a Complaint for
Abuse of Process and Civil Conspiracy and Constructive Trust for 4901 Sundown Road,
2 The Trustee had previously employed, with Court approval, a real estate agent to assist him in
determining an appropriate sale price, a marketing strategy and the like. The Trustee is obligated to pay the
real estate agent $5,000 for these services even though the Property was not listed. The Trustee has
concluded this arrangement is in the best interest of the estate because the Trustee would have had to pay
the agent $48,300 ($805,000 x 0.06) if the Property had been listed. The Trustee concluded that, because
there was sufficient interest in the Property, listing it in the face of a bona fide contract would have
generated a broker’s commission without the attendant benefit to the estate.
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Laytonsville, MD and Demand for Jury Trial (the “Complaint”) in the Circuit Court for
Montgomery County.
Along with the Debtors’ opposition to the Motion, the Debtors filed as an exhibit
a document entitled Amended Complaint for Abuse of Process and Civil Conspiracy and
Constructive Trust for 4901 Sundown Road, Laytonsville, MD and Demand for Jury
Trial (the “Amended Complaint”). The Amended Complaint is not signed and it is not
clear if the Amended Complaint has been filed in the state court action. The Amended
Complaint adds several allegations to the Complaint which will be discussed herein as
appropriate.3
In both the Complaint and the Amended Complaint, the Respondents name,
among other defendants, the Trustee, the First Chapter 7 Trustee, and Shulman, Rogers,
Gandal, Pordy & Ecker, P.A., which serves as counsel to the Trustee and served as
counsel to the First Chapter 7 Trustee (collectively, the “Bankruptcy Defendants”). Both
the Complaint and the Amended Complaint assert three counts for relief.
In count one, the Respondents seek compensatory and punitive damages from the
defendants, including the Bankruptcy Defendants, for abuse of process. In particular, the
Debtors aver that “…the defendants [including the Bankruptcy Defendants] misused the
legal process for an improper purpose, namely as a device to disrupt and cripple Ralph
Byrd’s law practice in an effort to destroy Ralph Byrd’s ability to represent clients in
credit card collection cases…and to subject Ralph Byrd’s law practice to catastrophic
disruption just prior to oral argument in the Court of Appeals.” See Complaint at ¶ 51;
Amended Complaint, at ¶ 57.
3 As set forth herein, having reviewed both the Complaint and Amended Complaint in detail, the Court’s
conclusion that the Respondents violated the automatic stay and the Barton Doctrine would be no different
whether or not they have filed the Amended Complaint.
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In count two, the Respondents seek compensatory and punitive damages for civil
conspiracy. Specifically, the Respondents posit that “The Defendants [including the
Bankruptcy Defendants] acted in concert and with the common purpose of disrupting and
crippling Ralph Byrd’s law practice in an effort to destroy Ralph Byrd’s ability to
represent clients in credit card collection cases…and subject Ralph Byrd’s law practice to
catastrophic disruption just prior to oral arguments in the Court of Appeals.” Complaint
at ¶ 53; Amended Complaint at ¶ 59.
In count three, the Respondents seek to impose a constructive trust against the
Property as an equitable remedy. The Respondents aver that the Trustee “…is presently
preparing to sell it [the Property] below market value, without advertising the property, in
an effort to quickly consummate and make permanent the disruption and crippling of
Ralph Byrd’s law practice in an effort to destroy Ralph Byrd’s ability to represent clients
in credit card collection cases….” Complaint at ¶ 55; Amended Complaint at ¶ 61.
In addition, the Respondents seek an order requiring the Trustee “to convey all of
his right, title and interest in the property at 4901 Sundown Road, Laytonsville, Maryland
20882 to Plaintiffs Ralph and Beverly Byrd free from all liens, mortgages and other
encumbrances….” Complaint at p. 13; Amended Complaint at p. 14.
The Amended Complaint seeks compensatory damages of $1 million and punitive
damages of $10 million. Id.
On May 7, the Trustee filed the instant Motion. In the Motion the Trustee seeks a
declaration that the Respondents have violated the automatic stay by seeking to impose a
constructive trust on the Property. In addition, the Trustee contends that the Respondents
violated the Barton Doctrine and seeks to enjoin the Respondents from filing and/or
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maintaining lawsuits and appeals in state and federal courts regarding the liquidation or
administration of the bankruptcy estate without leave of the Court.
In the Debtors opposition to the Motion, they dispute that they have violated the
automatic stay or the Barton Doctrine. They also contend, for the first time in this case,
that their claim for a constructive trust against the Property survives this Court’s prior
order authorizing the sale of the Property free and clear of all liens, claims, interests and
encumbrances.4
II. 	CONCLUSIONS OF LAW
A. 	THE COMPLAINT VIOLATES THE AUTOMATIC STAY TO THE
EXTENT IT ASSERTS A CONSTRUCTIVE TRUST OVER THE
PROPERTY.
The Trustee contends that the Complaint violates the automatic stay to the extent
it seeks to obtain or assert a constructive trust over the Property. This Court agrees.
Commencement of a bankruptcy case creates an estate that is comprised of all of
the debtor’s legal and equitable interest in property. See 11 U.S.C. § 541(a)(1). The
district court, or the bankruptcy court to which the bankruptcy case is referred, has
exclusive jurisdiction over all property of the estate wherever located. 28 U.S.C.
§1334(e). Property of a bankruptcy estate receives significant levels of protection from
the post-petition reach of creditors and third parties through the automatic stay provisions
of the Bankruptcy Code. With some exceptions, the filing of a petition under the
bankruptcy code
4 Ralph Byrd is an attorney and signed the Complaint on behalf of all of the plaintiffs. In the Debtors’
opposition to the Motion, Mr. Byrd states that he is only representing himself and Mrs. Byrd in this
bankruptcy case, and not the remaining Respondents, Stanton P. Byrd, Ralph Trevor Byrd and Mark S.
Byrd, who have previously been identified to this Court as the Debtors’ adult sons. Because Stanton P.
Byrd, Ralph Trevor Byrd and Mark S. Byrd were parties to the filed Complaint and therefore were parties
to the violations of the automatic stay and the Barton Doctrine, the Court will include them in the
prospective relief granted herein. Whether they have received notice of these proceedings or the order
entered by this Court pursuant to this ruling will be addressed in further proceedings as necessary.
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(a)…operates as a stay, applicable to all entities, of—
***
(3) any act to obtain possession of property of the estate or of property
from the estate or to exercise control over property of the estate…
11 U.S.C. § 362(a)(3). “The purpose of the automatic stay is to preserve what remains of
the debtor's insolvent estate and to provide a systematic equitable liquidation procedure
for all creditors, secured as well as unsecured, thereby preventing a chaotic and
uncontrolled scramble for the debtor's assets in a variety of uncoordinated proceedings in
different courts.” United States v. Gold (In re Avis), 178 F.3d 718, 721 (4th Cir. 1999)
(quoting In re Holtkamp, 669 F.2d 505, 508 (7th Cir. 1982))
The filing of a complaint seeking a constructive trust against property of the estate
is a violation of the automatic stay. See, Amedisys, Inc. v. Nat'l Century Fin. Enters. (In
re Nat'l Century Fin. Enters.), 423 F.3d 567 (6th Cir. 2005). In Amedisys, a creditor
initiated a lawsuit in state court naming a non-debtor bank as the defendant. In that suit,
the creditor sought, among other things, the imposition of a constructive trust over
property of the estate, namely, accounts receivable that were being held by the bank. On
the motion brought by the debtor, the bankruptcy court found that the action violated the
automatic stay of Section 362(a)(3). As a result, the bankruptcy court found that the
action was void and enjoined the creditor from further prosecuting that action. The
district court affirmed the bankruptcy court’s ruling and the creditor appealed.
On appeal, the creditor argued that the bankruptcy court exceeded its jurisdiction
because the state court action was not related to the bankruptcy case under 11 U.S.C. §
1334(b). Further, the creditor argued that the bankruptcy court improperly enjoined it
from pursuing the state court action under Section 105(a) of the Bankruptcy Code
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because it made no findings warranting an injunction and the debtor did not bring an
adversary proceeding seeking that injunction.
The Court of Appeals for the Sixth Circuit affirmed the bankruptcy court and
district court’s rulings. Initially, the court found that a bankruptcy court has jurisdiction
to enforce the automatic stay and that such a motion constitutes a core proceeding under
28 U.S.C. § 157(b)(2). In addition, the court found that the action brought by the creditor
violated the automatic stay of Section 362(a)(3) because the creditor sought to exercise
dominion over property of the estate. The court further found that a bankruptcy court
may enjoin a party from prosecuting an action that violates the automatic stay as part of
its powers to enforce the stay without relying on Section 105(a) to impose an injunction.
In the instant case, the Respondents seek a constructive trust over the Property in
the Complaint. In particular, they seek an order requiring
Defendant Gregory P. Johnson, as constructive trustee, to convey all of
his right, title, and interest in the property at 4901 Sundown Road,
Laytonsville, MD 20882 to Plaintiffs Ralph and Beverly Byrd free
from all liens, mortgages and other encumbrances and upon such terms
as the Court considers appropriate.
Complaint at p. 13. The Court has no difficulty in determining that the Respondents
violated the automatic stay of Section 362(a)(3) by filing the Complaint to the extent it
asserts a constructive trust over the Property. Just like in Amedisys, the Respondents are
seeking to impose a constructive trust over property that is unquestionably property of the
estate. Such an action is clearly a violation of the automatic stay because the
Respondents are using the Complaint to “assert dominion over” property of the estate.
Amedisys, 423 F.3d at 575. Accordingly, the Court finds and concludes that the
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Respondents violated the automatic stay of 11 U.S.C. § 362(a)(3) by filing the Complaint
asserting a claim for constructive trust against the Property.
Further, the record reflects that the Respondents filed a lis pendens publicizing
their claim of constructive trust against the Property. There is some question as to
whether the filing of a lis pendens notifying potential purchasers of a valid and proper
claim against property of the estate is itself a violation of the automatic stay. See In re
Knightsbridge Dev. Co., Inc., 884 F.2d 145 (4th Cir. 1989). The Court need not address
this issue, however. In this case, the Court has found and concluded that the Respondents
violated the automatic stay by filing a Complaint seeking a constructive trust over the
Property. As such, whether or not the filing of the lis pendens alone would be a violation
of the automatic stay, the filing of the lis pendens served to publicize the violation, thus
exacerbating the effect of the violation of the stay. Accordingly, under the authority of
11 U.S.C. §§1055 and 362, the Court will enter an order declaring the lis pendens void
and of no effect in order to supplement the relief awarded for the violation of the
automatic stay resulting from the filing of the Complaint.
Therefore, the Court finds and concludes that the Complaint violates the
automatic stay to the extent the Respondents seek to impose a constructive trust over the
Property. The Court will enter an order declaring that the Complaint is void to the extent
it seeks to impose a constructive trust against the Property. Further, based on the
violation of the automatic stay as described above, the Court will enjoin the Respondents
from continuing to prosecute the Complaint or filing or prosecuting the Amended
Complaint with respect to their claim of constructive trust against the Property. The
5 11 U.S.C. § 105(a) provides in pertinent part that “The court may issue any order, process, or judgment
that is necessary or appropriate to carry out the provisions of this title.”
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Court will also enjoin the Respondents from taking any other action to assert dominion or
control over the Property or to hinder or delay the sale of the Property as authorized by
this Court. The order will declare the lis pendens void and of no effect. Finally, the
Court will set a hearing on the Trustee’s claim for sanctions for violating the automatic
stay.
B. 	THE RESPONDENTS VIOLATED THE BARTON DOCTRINE BY
FILING THE COMPLAINT WITHOUT LEAVE OF COURT.
The Trustee contends that Respondents violated the Barton Doctrine by filing the
Complaint against the Bankruptcy Defendants without first seeking leave of this Court.
This Court agrees.
In Barton v. Barbour, the Supreme Court established a long-standing rule that
before suit can be brought against a receiver, leave of the court that appointed the
receiver must be obtained. See Muratore v. Darr, 375 F.3d 140, 143 (1st Cir. 2004)
(citing Barton v. Barbour, 104 U.S. 126, 127 (1881)). This general principle has become
known as the “Barton Doctrine.” “[C]ircuit courts have extended the Barton Doctrine to
lawsuits against a bankruptcy trustee.” Darr, 375 F.3d at 143 (quoting Carter v. Rodgers,
220 F.3d 1249, 1252 (11th Cir. 2000); In re Linton, 136 F.3d 544, 545 (7th Cir. 1998);
Lebovits v. Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272, (2d Cir. 1996) Allard v.
Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir. 1993) (“It is well
settled 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 acts done in the
trustee's official capacity and within the trustee's authority as an officer of the court.”).6
6 Although the Fourth Circuit Court of Appeals has not adopted the Barton Doctrine in a published opinion,
it did so in an unpublished opinion. See Gordon v. Nick, 1998 U.S. App. LEXIS 21519, 5-6 (4th Cir.
1998) (unpublished)
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Indeed, “an unbroken line of cases” has imposed, as a matter of federal common law, the
requirement that leave must be obtained from the bankruptcy court before suit can be
brought against the bankruptcy trustee. Linton, 136 F.3d at 545. The Barton Doctrine
applies to suits brought against trustees in federal or state court.
The Barton Doctrine serves several important policy concerns. In Linton, the
United States Court of Appeals for the Seventh Circuit aptly articulated the importance of
the Barton Doctrine to bankruptcy proceedings.
At stake in the present case…is concern with the integrity
of the bankruptcy jurisdiction. If debtors, creditors,
defendants in adversary proceedings, and other parties to a
bankruptcy proceeding could sue the trustee in state court
for damages arising out of the conduct of the proceeding,
that court would have the practical power to turn
bankruptcy losers into bankruptcy winners, and vice versa.
A creditor who had gotten nothing in the bankruptcy
proceeding might sue the trustee for negligence in failing to
maximize the assets available to creditors, or to the
particular creditor. A debtor who had failed to obtain a
discharge might through a suit against the trustee obtain the
funds necessary to pay the debt that had not been
discharged.
Id. Similarly, as cited approvingly by the United States Court of Appeals for the Second
Circuit:
The Bankruptcy Court has overseen all aspects of the case
and the entire record here was developed under the court’s
supervision. . . . .The Bankruptcy Court is uniquely
situated to determine any issue regarding the appropriateness
or good faith of the trustee’s action. Because the trustee is an
officer of the Bankruptcy Court, the Bankruptcy Court and this
Court has an overriding interest in his administration of the
estate. We have an institutional interest in holding our trustees
fully responsible for breaches of their fiduciary duty, including
the duty to exercise due care.
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Scheffel, 101 F.3d at 277. At the same time, the courts “have an equally vital
institutional interest in protecting our trustees from being mulcted into another court on
frivolous or trumped up charges.” Id.
The Barton Doctrine protects not only the trustee, but also other court-appointed
officers who represent the bankruptcy estate, including the attorney of the trustee.
Weitzman, 991 F.2d at 1241. Counsel for trustees and court appointed officers who
represent the estate, are “the functional equivalent of a trustee” where they act at the
direction of the trustee and for the purpose of administering the estate or protecting its
assets. Id.
In this case, the Court finds and concludes that the Barton Doctrine applies to the
claims asserted in the Complaint against the Bankruptcy Defendants. The essence of the
Complaint is that the Bankruptcy Defendants conspired with other defendants to deprive
Ralph Byrd of his ability to practice law. The Complaint alleges counts based on abuse
of process and conspiracy, and asserts a count for constructive trust based on the alleged
abuse of process and conspiracy claims.
The Complaint contains allegations of fact based on the actions of the Bankruptcy
Defendants primarily in paragraphs 28, 31, 32, 33, 34, 40, 41, 43, 45 and 46. Paragraph
46 does not allege particular actions taken by the Bankruptcy Defendants, but asserts that
the parties acted in bad faith and with improper intent. All of the remaining above-listed
paragraphs assert particular actions taken by the Bankruptcy Defendants. Stripped of
their rhetoric, each of these paragraphs asserts or describes actions that were taken by the
Bankruptcy Defendants in the bankruptcy case and/or in the course of administering the
bankruptcy estate. As such, the claims fall squarely within the Barton Doctrine in that
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they assert causes of action based on actions taken by bankruptcy professionals in the
course of administering the estate.
Further, even if the Court were to consider the additional allegations contained in
the Amended Complaint, see supra at p. 8-9, those allegations do not relieve the
Amended Complaint from the application of the Barton Doctrine. As it relates to the
Bankruptcy Defendants, the Amended Complaint adds new paragraphs 35 and 37, neither
of which assert any different factual allegations and both of which allege essentially that
the Bankruptcy Defendants acted with improper intent and in bad faith.
The Court disagrees with the Debtors that the Barton Doctrine does not apply
because they have brought these claims as conspiracy and abuse of process claims.
Courts have not hesitated to apply the Barton Doctrine to such claims where the claims
are based on actions taken by the bankruptcy professionals in the course of administering
the bankruptcy estate. For example, in the Darr case, the plaintiff filed an action against
the bankruptcy trustee asserting claims remarkably similar to those raised by the
Respondents in the Complaint and Amended Complaint. There, the plaintiff claimed that
the trustee
committed abuse of process by committing waste so egregious that his
advisors and/or employees used Chapter 11 protection procedures to
put [plaintiff] out of business rather than assist in reorganizing
[plaintiff’s] business. [Plaintiff] further alleged that ‘such use of [the
trustee’s] powers constitutes use of judicial appointment and
proceedings in bankruptcy for an ulterior purpose, to wit, to make it
impossible for [plaintiff] to conduct business and to earn a living from
his business.’
Darr, 373 F.3d at 142-143 (emphasis added). The Court found that the Barton Doctrine
applied to the plaintiff’s claims and dismissed the complaint. See also Weitzman, 991
F.2d at 1239, 1241 (dismissing claims against the trustee’s counsel for abuse of process
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and malicious prosecution as a violation of the Barton Doctrine.)7 Similarly, this Court
concludes that the Barton Doctrine applies to the claims against the Bankruptcy
Defendants in the Complaint and the Amended Complaint, because the Bankruptcy
Defendants’ actions upon which the Respondents claims are based were taken in
furtherance of the administration of the estate.
Finally, the Court notes that the only question before it is whether the Barton
Doctrine applies to the claims against the Bankruptcy Defendants. For the reasons stated
above, the Court finds and concludes that the doctrine applies. If and when the
Respondents comply with the Barton Doctrine and seek the appropriate leave of Court,
all parties will have an opportunity to address whether such leave should be granted.
The Court further notes, however, that it appears that many, if not all, of the
Bankruptcy Defendants’ actions described the complaints were either (1) approved by the
bankruptcy court or, in the case of the appeal described in paragraph 28, granted by the
United States Court of Appeals for the Fourth Circuit; or (2) taken subject to bankruptcy
court order or rule. Moreover, on two prior occasions, the Debtors have filed motions to
remove the Trustee based on, among other reasons, their claim that the Trustee acted in
bad faith and with improper intent, engaged in unlawful conduct, lacked
disinterestedness, and was incompetent. See Docket No. 281 in Case No. 01-25006 and
Docket No. 287 in Case No. 04-35620. On both occasions, the Debtors were given a full
opportunity to present their claims. On each occasion the Court denied the motion. See
Docket No. 305 in Case No. 01-25006 and Docket No. 315 in Case No. 04-35620.
Neither of these orders has been appealed.
7 In a number of cases, the issue focuses on whether a well-known exception to the Barton Doctrine applies
as a result of 28 U.S.C. § 959(a) where the trustee is sued for actions taken in conducting the business of
the debtor. That section, 28 U.S.C. § 959(a), has no application to this case.
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Moreover, in the Removal Motion, the Debtors specifically contended that being
forced to move from the Property would destroy Ralph Byrd’s law practice. They
contended that they were being given an inadequate amount of time to move their
personality from the Property and for Ralph Byrd to move his law practice. Again, the
Debtors were given every opportunity to prove their claim. At the hearing, however, the
Debtors presented no probative evidence on these issues; instead Mr. Byrd merely argued
these points from the podium. At the hearing, the Trustee’s evidence established that the
Trustee had given the Debtors numerous notices during the previous eight months that he
would seek to have them vacate the Property, and on a number of occasions during that
period, implored them that they should commence moving Mr. Byrd’s law practice.
Memorandum of Decision, at p. 8-9. The Court gave the Debtors sixty additional days to
move from the Property, and ruled that, considering the prior eight months notice that
they had received from the Trustee, ten months was more than ample time to vacate the
Property and move Mr. Byrd’s law practice. Id. at 16. The Debtors did not appeal the
Memorandum of Decision or accompanying order requiring them to vacate the Property.
The claims against the Bankruptcy Defendants in the Complaint and Amended
Complaint appear to be very similar to the foregoing claims. The Court need not
determine here whether the claims in the Complaint or Amended Complaint are barred
for various reasons as a result of the extensive litigation in this case or the fact that many
of the Trustee’s actions were expressly approved by this Court or taken subject to Court
order. For purposes of this ruling, the Court holds only that the Barton Doctrine applies
to the claims against the Bankruptcy Defendants. If leave is requested to bring the claims
by appropriate motion, the Court will address these matters. Without reaching a decision
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on the merits of such a motion, however, the Court notes that while one of the “vital
institutional interests” served by the Barton Doctrine is “holding our trustees fully
responsible” for their actions, an “equally vital” interest is “protecting our trustees from
being mulcted into another court on frivolous or trumped up charges.” Scheffel, 101 F.3d
at 277.
The Court having determined that the Respondents have violated the Barton
Doctrine, the question remains what remedy should be granted. Where an action is
brought in district court in violation of the Barton Doctrine, the court in which the action
was brought must dismiss it for lack of subject matter jurisdiction. Carter, 220 F.3d at
1255; Darr, 375 F.3d at 148. A court may enjoin a party from prosecuting in another
forum an action that violates the Barton Doctrine. Scheffel, 101 F.3d at 277-278
(affirming an order enjoining a party from prosecuting an action in state court against the
bankruptcy trustee because the action violated the Barton Doctrine.). In addition, a court
may award damages to the trustee if it finds that a litigant violated the Barton Doctrine.
Weitzman, 991 F.2d at 1241.
The Court will enter an order enjoining the Respondents from prosecuting the
Complaint or the Amended Complaint against the Bankruptcy Defendants. Moreover,
the Court will set a hearing on the Trustee’s claim for sanctions for violating the Barton
Doctrine. The hearing will be combined with the hearing on sanctions for the violation of
the automatic stay, as determined in Section II. A. of this memorandum opinion.
C. 	SECTION 363 PROVIDES THE RESPONDENTS WITH NO
RELIEF.
In their opposition, the Debtors contend, for the first time, that their claim
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against the Property for constructive trust survives this Court’s order authorizing the sale
of the Property free and clear of all liens, claims and interests because Section 363(f)
“expressly permits such a sale free and clear only if applicable non-bankruptcy law so
permits.” Opposition at p.1. They contend, therefore, that the sale is subject to the
outcome of their state court action. Id. This new argument fails on both procedural and
substantive grounds.
In the Sale Motion filed on March 23, 2007, the Trustee sought Court approval to
sell the Property pursuant to 11 U.S.C § 363(b)(1) and (f) free and clear of all liens,
claims, interests and encumbrance. Docket No. 527. The Debtors filed an objection to
the sale (Docket No. 537) and actively prosecuted their objection at the sale hearing. The
Court overruled their objection and, in the Sale Order, authorized the sale of the Property
“free and clear of all liens, claims, interests and encumbrances pursuant to 11 U.S.C §
363(f).” Docket No. 544 at p. 2.
As stated above, the Debtors contend for the first time in their Opposition to the
Motion that their claim against the Property for constructive trust survives the Sale Order
authorizing the sale of the Property free and clear of all liens, claims interests and
encumbrances. In neither their objection to the sale nor at the sale hearing did the
Debtors contend either that they had a constructive trust claim against the Property - or
any other claim for that matter - or that such claim would survive the Sale Order under
Section 363(f). They certainly had ample notice of the Sale Motion, filed an objection to
the Sale Motion, actively participated at the sale hearing, and, to state the obvious, were
well aware at that time that they purportedly had a claim against the Property, as
evidenced by the fact that they filed the Complaint on the same day as the sale hearing
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was held. Under these circumstances, the Debtors have waived their contention that their
claim for a constructive trust against the Property survives the Sale Order. See First
Union CommerCorp.v. Nelson, Mullins, Riley, & Scarborough (In re Varat Enters.), 81
F.3d 1310, 1317 (4th Cir. 1996) (finding that a party in interest's failure to object to a
claim made on a debtor's assets prior to confirmation of the debtor's reorganization plan
may operate as a waiver, barring the party from asserting the objection later.)
Accordingly, the Debtors’ assertion that their alleged claim for constructive trust
against the Property will survive a sale of the Property, despite the clear language in the
Sale Order that the sale is free and clear of all liens, claims, interests and encumbrances,
is an improper collateral attack on the Sale Order.
Further, even if the Debtors had timely raised their contention under Section
363(f), it would have been summarily rejected. Section 363(f) provides:
(f) The trustee may sell property under subsection (b) or (c) of this section
free and clear of any interest in such property of an entity other than the
estate, only if—
(1) applicable nonbankruptcy law permits sale of such property and clear
of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be
sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to
accept a money satisfaction of interest.
11 U.S.C. § 363(f). The Debtors contend that, for reasons that are not especially clear,
Maryland state law would not permit the sale of the Property free and clear of their
constructive trust claim. In particular, they contend:
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Maryland state law provides a cause of action for abuse of
process. A claim for abuse of process does not require a showing
that the plaintiff prevailed in the underlying case and does not
seek to challenge the outcome of the underlying case. Rather,
it only requires what appears in the subject state court
complaint, i.e., a showing that the underlying case was
perverted to accomplish a purpose for which it was not
intended.
Opposition at p.1. The Debtors cite no authority for their contention that, under
Maryland law, real property cannot be sold free and clear of an inchoate claim for the
imposition of a constructive trust as a remedy for alleged wrong-doing. But the Court
need not dwell on this deficiency for long. The subsections of Section 363(f) are written
in the disjunctive. See In re Elliot, 94 B.R. 343, 345 (Bankr. E.D. PA 1988). The
Debtors ignore the plain language of Section 363(f)(4), which allows the sale to be free
and clear of an interest if the interest is in bona fide dispute.
In this case, it cannot seriously be contested that the Respondents’ constructive
trust claim is not subject to bona fide dispute. Accordingly, even if the Debtors had
timely raised their Section 363(f) argument – which they did not – their argument would
have failed because their constructive trust claim is subject to a bona fide dispute.
For the foregoing reasons the Court finds and concludes that the Debtors’
newfound assertion that their alleged claim for constructive trust against the Property
survives a sale of the Property, despite the clear language in the Sale Order that the sale is
free and clear of all liens, claims, interests and encumbrances, is an improper collateral
attack on the Sale Order. The Court finds and concludes that this issue was waived by
the Debtors when they failed to raise it at the sale hearing despite ample opportunity to do
so. The Court further concludes that this assertion fails as a matter of law on the merits
because their claim for a constructive trust is subject to a bona fide dispute.
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Accordingly, the Court will enter an order expressly providing that the sale of the
Property will be free and clear of any and all claims by the Respondents for constructive
trust or otherwise. In addition, because this Court has exclusive jurisdiction over the
Property pursuant to 28 U.S.C §1334(e), any claims by the Respondents against the
Property, or any disputes regarding the scope or applicability of the Sale Order, shall be
subject to the jurisdiction of this Court to the full extent allowed by 11 U.S.C. § 1334(a)
or (b).
III. 	CONCLUSION
For the reasons stated above, the Court will enter an order granting the Motion in
part and awarding relief consistent with this memorandum.
cc:
Debtors
Trustee
Trustee’s Counsel
U.S. Trustee’s Office
End of Memorandum.
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