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.