In Re VistaCare Group, LLC

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

______

No. 11-2695

______

IN RE: VISTACARE GROUP, LLC, et al.,

Debtors

WILLIAM G. SCHWAB, Trustee,

Appellant

______

On Appeal from the United States District Court

for the Middle District of Pennsylvania

(D.C. No. 3-10-cv-02522)

District Judge: Honorable James M. Munley

______

Argued January 24, 2012

Before: McKEE, Chief Judge, FISHER and GREENAWAY,

JR., Circuit Judges.

(Filed: May 4, 2012)

Frank J. Lavery (Argued)

Sunshine J. Thomas

Lavery, Faherty, Young & Patterson

225 Market Street, Suite 304

P.O. Box 1245

Harrisburg, PA 17108

Counsel for Appellant

Barry W. Sawtelle (Argued)

Kozloff Stoudt

2640 Westview Drive

P.O. Box 6286

Wyomissing, PA 19610

Counsel for Appellee

John H. Doran

Doran & Doran

69 Public Square

700 Northeastern Bank Building

Wilkes-Barre, PA 18701

Barry A. Solodky

Blakinger, Byler & Thomas

28 Penn Square

Lancaster, PA 17603

Counsel for Debtor

2

Martin P. Sheehan (Argued)

Sheehan & Nugent

41 Fifteenth Street

Wheeling, WV 26003

Counsel for Amicus Appellant,

National Association of Bankruptcy Trustees

______

OPINION OF THE COURT

______

FISHER, Circuit Judge.

William Schwab appeals from an order of the District

Court affirming an order of the Bankruptcy Court granting

CGL, LLC’s motion for leave to sue Schwab in the Lancaster

County, Pennsylvania, Court of Common Pleas for actions

taken in his capacity as trustee of the bankruptcy estate of

VistaCare Group, LLC. The primary question on appeal is

whether the Barton doctrine, which requires a party seeking

to sue a court-appointed receiver, to first obtain leave of the

appointing court, applies to bankruptcy trustees in light of

changes in the bankruptcy laws. For the reasons set forth

below, we hold that (1) the Barton doctrine continues to apply

to bankruptcy trustees and (2) the Bankruptcy Court’s

decision to grant leave in this case was proper. Therefore, we

will affirm.

I.

William Schwab (“the Trustee”) was appointed as the

Chapter 7 trustee of the bankruptcy estate of VistaCare

3

Group, LLC (“VistaCare”). VistaCare’s bankruptcy estate

included Parkside Manor Retirement Community

(“Parkside”), a 12.2 acre parcel of land located in Lancaster

County, Pennsylvania. The parcel consisted of forty-five lots,

forty-four of which were subdivided and zoned for mobile

homes. The forty-fifth lot (“Lot 45”) contained a four-story

retirement and assisted living facility. All of the lots shared

common infrastructure, including roads, sewer lines, storm

lines, and water lines. The lots were subject to a subdivision

plan, which contained various restrictions, including

“Restriction No. 1,” which provided: “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.” The

subdivision plan was approved by East Cocalico Township

(“the Township”) and recorded in the Office of the Recorder

of Deeds of Lancaster County.

On July 25, 2008, the Trustee filed a motion in the

U.S. Bankruptcy Court for the Middle District of

Pennsylvania, seeking authorization to sell Parkside, either as

one parcel, or as two separate parcels, with one parcel

consisting of Lot 45 and the other containing the remaining

forty-four lots. The Trustee’s motion acknowledged the

existence of Restriction No. 1 and stated that a sale of

Parkside as two separate parcels “would be contingent upon

approval by East Cocalico Township of the modification of

Restriction No. 1 to allow the personal care home and the

mobile home park to be separated.” The Bankruptcy Court

granted the motion on August 21, 2008. On September 27,

2008, after a public auction, CGL, LLC (“CGL”) entered into

4

an agreement for the purchase of Lot 45. On November 14,

2008, the Township Solicitor confirmed that Restriction No. 1

did not prevent the sale of Lot 45, and in an order dated

March 10, 2009, the Bankruptcy Court stated, “[t]his sale

shall . . . be free and clear of Restriction #1 of the Subdivision

Plan.” The sale of Lot 45 closed on May 8, 2009.

During this time, the Trustee had determined that it

was necessary to liquidate the remaining forty-four lots on

Parkside. While making preparations to sell the lots, the

Trustee discovered that some residents in the mobile home

park had permanently affixed their mobile homes to the land.

The Trustee then instituted adversary actions against these

residents. To resolve the adversary actions, the Trustee and

the residents agreed that the lots could be sold to the

residents, despite Restriction No. 1’s prohibition on sales to

individuals “having residences constructed” on the land.

Most of the lots were subsequently sold to the individual

residents. For each sale, the Trustee filed a Report of Sale

with the Bankruptcy Court. On December 14, 2009, the

Trustee and the Township entered into an agreement

abrogating Restriction No. 1 as to the forty-four individual

lots. CGL was not a party to that agreement.

On July 30, 2010, CGL filed in the Bankruptcy Court a

motion for leave to file suit against the Trustee in the

Lancaster County, Pennsylvania, Court of Common Pleas.

CGL alleged that the sales of the individual lots were

unlawful and that such sales damaged its property interests in

Lot 45. CGL further alleged that the December 14 agreement

between the Trustee and the Township abrogating Restriction

No. 1 deprived CGL of its property rights without notice and

5

without due process of law. On August 12, 2010, the Trustee

filed a response, in which he asserted that under Barton v.

Barbour, 104 U.S. 126 (1881), CGL could not proceed in

state court without the permission of the Bankruptcy Court.

The Trustee urged the Bankruptcy Court to refuse to give

permission in this case, arguing that CGL’s proposed state

law claims were “frivolous.” The Trustee also asserted

various “affirmative defenses.”

On October 21, 2010, the Bankruptcy Court held a

hearing on CGL’s motion, in which Grant Wise, the sole

owner of CGL, and the Trustee, testified. During the hearing,

the Bankruptcy Court expressed doubt as to whether CGL

needed its permission to file suit against the Trustee in state

court, opining that Barton was “antiquated and probably not

controlling in the Third Circuit.” Nevertheless, the

Bankruptcy Court went on to determine whether it should

grant leave in this case. After hearing arguments, the

Bankruptcy Court concluded that although it could not predict

whether CGL would be successful on its state law claims,

such claims were not “on [their] surface, frivolous.” The

Bankruptcy Court added that state court was the appropriate

forum to resolve the dispute given that state courts “probably

ha[d] an expertise in th[e] area.” On October 22, 2010, the

Bankruptcy Court issued an order formally granting CGL’s

motion for leave.

The Trustee appealed to the U.S. District Court for the

Middle District of Pennsylvania. On May 26, 2011, the

District Court affirmed the Bankruptcy Court’s order. In re

Vistacare Grp., LLC, No. 10-2522, 2011 WL 2111997, at *5

(M.D. Pa. May 26, 2011). The District Court declined to

6

address the Trustee’s claim that the Bankruptcy Court

erroneously found that Barton did not apply, reasoning that

although the Bankruptcy Court questioned Barton’s

continued validity, the Bankruptcy Court did, in fact, examine

whether it should approve CGL’s motion for leave. Id. at *3.

The District Court then concluded that the Bankruptcy

Court’s decision to grant leave was proper. Id. at *3-4. The

Trustee filed a timely notice of appeal. 1

II.

The Bankruptcy Court had jurisdiction under 28

U.S.C. § 157(b). The District Court had jurisdiction over the

appeal from the Bankruptcy Court under 28 U.S.C. § 158(a),

and we have jurisdiction under 28 U.S.C. §§ 158(d) and 1291.

On appeal, “we ‘stand in the shoes’ of the District Court and

review the Bankruptcy Court’s decision.” In re Global Indus.

Techs., Inc., 645 F.3d 201, 209 (3d Cir. 2011) (en banc)

(citations omitted). We review the Bankruptcy Court’s legal

determinations de novo, and its factual findings for clear

error. Id. We review a bankruptcy court’s decision to grant a

motion for leave to sue a trustee under the deferential abuse

of discretion standard. In re Linton, 136 F.3d 544, 546 (7th

1

On June 24, 2011, while this appeal was pending,

CGL filed suit against the Trustee in the Lancaster County

Court of Common Pleas. On July 20, 2011, the case was

removed to the U.S. District Court for the Eastern District of

Pennsylvania, and is currently pending in that court. CGL,

LLC v. Schwab, Civ. No. 11-4593.

7

Cir. 1998); In re Beck Indus., Inc., 725 F.2d 880, 889 (2d Cir.

1984).

III.

A.

The first question presented by this case is whether a

party must first obtain leave of the bankruptcy court before it

brings an action in another forum against a bankruptcy trustee

for acts done in the trustee’s official capacity. We now join

our sister circuits in holding that, under the doctrine

established in Barton v. Barbour, leave of the bankruptcy

court is required before instituting such an action. See, e.g.,

Lawrence v. Goldberg, 573 F.3d 1265, 1269 (11th Cir. 2009)

(holding that the Barton doctrine is applicable to bankruptcy

trustees); In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th

Cir. 2005) (same); Muratore v. Darr, 375 F.3d 140, 143 (1st

Cir. 2004) (same); In re Linton, 136 F.3d at 545-46 (same); In

re Lehal Realty Assocs., 101 F.3d 272, 276 (2d Cir. 1996)

(same); In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th

Cir. 1993) (same); Anderson v. United States, 520 F.2d 1027,

1029 (5th Cir. 1975) (same). 2

Established by the Supreme Court over a century ago,

the Barton doctrine provides that “before suit is brought

against a receiver[,] leave of the court by which he was

2

The U.S. Courts of Appeals for the Fourth, Eighth,

Tenth, and District of Columbia Circuits have not spoken on

the issue, at least not in published precedential opinions.

8

appointed must be obtained.” 104 U.S. at 128 (citing Davis v.

Gray, 83 U.S. 203 (1872)). The Barton Court explained that

a court approval requirement was necessary to ensure a

consistent and equitable administration of the receivership

property. Id. at 128-29. Because a judgment against the

receiver in his capacity as receiver would be satisfied out of

the receivership property, the effect of a suit brought without

leave to recover such a judgment would be “to take the

property of the trust from [the receiver’s] hands and apply it

to the payment of the plaintiff’s claim, without regard to the

rights of other creditors or the orders of the court which [was]

administering the trust property.” Id. In other words, the

party bringing suit would be able to “obtain [an] advantage

over the other claimants” as to the distribution of “the assets

in the receiver’s hands.” Id. at 128. The Court further

observed that if the judgment “were recovered outside the

territorial jurisdiction” of the court administering the trust

assets (i.e., the appointing court), that court would be

“impotent” to prevent enforcement of the judgment. Id.

Thus, requiring a party with claims against the receiver to

obtain permission from the appointing court before filing suit

in another jurisdiction would prevent the “usurpation of the

powers and duties which belonged exclusively to [the

appointing] court” and protect “the duty of that court to

distribute the trust assets to creditors equitably and according

to their respective priorities.” Id. at 136.

As the Court explained ten years later in McNulta v.

Lochridge, 141 U.S. 327, 330 (1891), the Barton doctrine was

not dependent on any federal statute, but instead was based on

principles of common law. Accordingly, after Barton, courts

9

in “[a]n unbroken line of cases,” In re Linton, 136 F.3d at 545

(citations omitted), imposed as a matter of federal common

law, a requirement that a party seeking to sue an equity

receiver must first obtain the permission of the appointing

court. See, e.g., Porter v. Sabin, 149 U.S. 473, 478-80

(1893); Merryweather v. United States, 12 F.2d 407, 408 (9th

Cir. 1926); Vass v. Conron Bros. Co., 59 F.2d 969, 970-71

(2d Cir. 1932) (L. Hand, J.). Absent such permission, no

other court would have jurisdiction to hear the suit. Porter,

149 U.S. at 479 (“It is for [the appointing] court, in its

discretion, to decide whether it will determine for itself all

claims of or against the receiver, or will allow them to be

litigated elsewhere.”); Barton, 104 U.S. at 136-37. Although

Barton involved an equity receiver, subsequent courts

extended the Barton doctrine to bankruptcy trustees,

reasoning that much like a receiver, a trustee was appointed

by the court to oversee the debtor’s estate, and therefore was

“an officer of the court” whose “possession [was] protected

because it [was] the court’s.” Vass, 59 F.2d at 970 (citations

omitted). Although we have never explicitly held that

Barton’s leave-of-court requirement applies to bankruptcy

trustees, in In re National Molding Co., 230 F.2d 69, 70-71

(3d Cir. 1956), we examined whether a bankruptcy referee

erred in denying a party’s motion for leave to sue a trustee in

a “plenary action” in New Jersey state court. Thus, implicit

in our decision was that a party seeking to sue a trustee for

acts taken in his official capacity must obtain permission from

the court overseeing the bankruptcy proceeding. See id.

In this case, although the Bankruptcy Court did not

definitively hold that the Barton doctrine did not apply to

10

bankruptcy trustees, during the hearing on CGL’s motion for

leave, the Bankruptcy Court stated that the doctrine was

“antiquated and probably not controlling in the Third

Circuit.” The Bankruptcy Court opined that although courts

may have applied the Barton doctrine to bankruptcy trustees

under the bankruptcy system in place before 1978, the

Bankruptcy Reform Act of 1978, commonly known as the

Bankruptcy Code, 11 U.S.C. §§ 101-1527 (“the Bankruptcy

Code” or “the Code”), fundamentally overhauled the

bankruptcy laws, and in the process, raised doubts about the

continued applicability of Barton. During the hearing, the

Bankruptcy Judge echoed the concerns he had previously

raised in In re Lambert, 438 B.R. 523 (Bankr. M.D. Pa.

2010). In that case, the court concluded that the Bankruptcy

Code had superseded the common law Barton doctrine. Id. at

526. We disagree; as we explain below, the Barton doctrine

has continuing validity.

Although Congress has never expressly codified the

Barton doctrine, implicit in a provision of the Judicial Code,

28 U.S.C. § 959(a), is a general rule that a party seeking to

sue a receiver or trustee must first obtain permission from the

appointing court. Section 959(a) provides:

“Trustees, receivers or managers of any

property, including debtors in possession, may

be sued, without leave of the court appointing

them, with respect to any of their acts or

transactions in carrying on business connected

with such property. Such actions shall be

subject to the general equity power of such

court so far as the same may be necessary to the

11

ends of justice, but this shall not deprive a

litigant of his right to trial by jury.”

28 U.S.C. § 959(a) (emphasis added). 3

This provision, originally enacted in 1887, just six

years after Barton, seems to have been in direct response to

the concerns raised in Justice Miller’s dissent in Barton.

Criticizing the scope of the Court’s holding, Justice Miller

noted that the role of a receiver had expanded well beyond

winding up the affairs of a defunct corporation and

liquidating its assets, to in some situations, essentially

3

The original provision applied only to “receivers”

and “managers” of property. Act of Congress of Mar. 3,

1911, ch. 231, §§ 65, 66, 36 Stat. 1104 (repealed 1948). In

1948, Congress amended the statute and extended it to

“trustees” and “debtors in possession.” 62 Stat. 926 (June 25,

1948) (codified at 28 U.S.C. § 959(a)).

12

running the company. 4 Barton, 104 U.S. at 137-38 (Miller,

J., dissenting). Justice Miller opined that it would be

fundamentally unfair to require a party to obtain court

permission to pursue claims against the receiver arising out of

the receiver’s operation of the business. Id. at 138. Such a

system would render the everyday operations of the

corporation “exempt[] from the operation of common law”

and deprive potential litigants of the right “to have their

complaints tried by [a] jury or by the ordinary courts of

justice.” Id. Rather, a party’s only remedy against the

corporation would be in “the hands of . . . the court which

appointed [the receiver].” Id. In contrast, Justice Miller

agreed with the majority that “[w]hen a receiver [was]

appointed to wind up a defunct corporation . . . [and] his sole

4

Justice Miller was particularly worried about the

potential effect of the majority’s holding on suits against

railroad corporations. Barton v. Barbour, 104 U.S. 126, 137-

38 (1881) (Miller, J., dissenting). He noted that it had

become common for a railroad to place its daily operations in

the hands of a receiver. Id. The receiver would then “take[]

the property out of the hands of its owner, operate[] the road

in his own way, with an occasional suggestion from the court,

which he recognize[d] as a sort of partner in the business.”

Id. at 138. Although the receiver would pay some of the

corporation’s debts, he would also enter into new contracts,

incur new obligations, and frequently add to the corporation’s

debts. Id. For all intents and purposes, the receiver was

“performing the functions of a common carrier of goods and

passengers.” Id.

13

duty [was] to convert the property into a fund for the payment

of debts, . . . a very strong reason exist[ed] why the court

which appointed him should alone control him in the

performance of his duty.” Id.

When Congress enacts legislation, it is presumed to act

with knowledge of the “existing law and judicial concepts.”

Farina v. Nokia Inc., 625 F.3d 97, 112 (3d Cir. 2010)

(citation omitted). As Judge Learned Hand recognized, it is

readily apparent that Congress shared Justice Miller’s

concerns and, in enacting § 959(a), intended to create an

exception to the Barton rule for situations where the receiver

was “continu[ing]” the debtor’s business, rather than simply

administering the estate. See Vass, 59 F.2d at 971 (explaining

that the provision “was apparently passed to meet the doctrine

of Barton v. Barbour”). Our sister circuits have consistently

recognized § 959(a) as a limited exception to Barton. See,

e.g., In re Crown Vantage, Inc., 421 F.3d at 971; Muratore,

375 F.3d at 143; In re DeLorean Motor Co., 991 F.2d at

1240-41. We agree. Congress’s creation of what appears to

be a statutory exception to a common law rule strongly

suggests its acknowledgement and acceptance of the general

rule. Mindful that “Congress ‘does not, one might say, hide

elephants in mouseholes,’” Bilksi v. Kappos, 130 S. Ct. 3218,

3250 (2010) (Stevens, J., concurring in judgment) (quoting

Whitman v. Am. Trucking Assns., Inc., 531 U.S. 457, 468

(2001)), we believe that had Congress intended to abrogate

Barton in its entirety, it would have done so explicitly.

Especially when viewed in light of Justice Miller’s dissent in

Barton, it is abundantly clear that Congress intended to

narrow the scope of the Barton doctrine by creating an

14

exception for situations in which the policy rationales

underlying the Court’s creation of the doctrine were not

applicable. Under § 959(a), where a trustee or receiver is

actually operating the business, and the acts complained of

involved the trustee’s “conducting the debtor’s business in the

ordinary sense of the words or [his] pursuing that business as

an operating enterprise,” an aggrieved party need not seek

permission from the appointing court before filing suit in

another forum. In re Crown Vantage, Inc., 421 F.3d at 971-

72 (citation omitted). In contrast, where a trustee “acting in

his official capacity conducts no business connected with the

property other than to perform administrative tasks

necessarily incident to the consolidation, preservation, and

liquidation of assets in the debtor’s estate,” § 959(a) does not

apply, and leave of court is still required before filing suit

against the trustee. In re Lehal Realty Assocs., 101 F.3d at

276 (citations omitted). 5

Significantly, although the Bankruptcy Code

overhauled the bankruptcy system and replaced many of the

bankruptcy statutes, § 959(a) was left intact. Although 28

U.S.C. § 959 is technically part of the Judicial Code, we note

that the other subsection in § 959, subsection (b), was

5

It is important to note that 28 U.S.C. § 959(a) does

not apply here. VistaCare was not in the business of buying

and selling real estate. Thus, in selling the lots on the

Parkside property, the Trustee was not carrying on

VistaCare’s business, but rather performing his duty as trustee

to liquidate the assets of the estate.

15

amended when Congress enacted the Bankruptcy Code. 6

Thus, Congress was clearly aware of § 959 when it adopted

the Code, and its decision to leave subsection (a) intact is

telling. As the Supreme Court has explained, “[w]hen

Congress amends the bankruptcy laws, it does not write ‘on a

clean slate.’” Dewsnup v. Timm, 502 U.S. 410, 419 (1992)

(citation omitted). Accordingly, courts should be “reluctant

to accept arguments that would interpret the Code . . . to

effect a major change in pre-Code practice,” absent at least

some suggestion in the legislative history that such a change

was intended. Id. (citations omitted). Here, we can find no

indication that Congress intended to abrogate the Barton

doctrine. Rather, its decision to leave § 959(a), the exception

6

Section 959(b) of Title 28 of the U.S. Code provides:

Except as provided in section 1166 of

title 11, a trustee, receiver or manager appointed

in any cause pending in any court of the United

States, including a debtor in possession, shall

manage and operate the property in his

possession as such trustee, receiver or manager

according to the requirements of the valid laws

of the State in which such property is situated,

in the same manner that the owner or possessor

thereof would be bound to do if in possession

thereof.

In 1978, Congress substituted “Except as provided in

section 1166 of title 11, a trustee” for “A trustee.” Act of

Congress of Nov. 6, 1978, Pub. L. 95-958.

16

to Barton, intact strongly suggests that Barton’s general rule

remains valid.

Moreover, the policies underlying the Barton doctrine

continue to apply with full force to bankruptcy proceedings.

Upon the filing of a bankruptcy petition, a bankruptcy estate

is created, which consists of, with certain exceptions, all of

the debtor’s legal or equitable interests in property, wherever

located and by whomever held. 11 U.S.C. § 541(a). The

district court in which a bankruptcy case is commenced has

exclusive jurisdiction over all of the property of the estate, 28

U.S.C. § 1334(e)(1), and the bankruptcy court within such

district may hear and determine all cases under the

Bankruptcy Code and all “core proceedings” arising under the

Code, 28 U.S.C. § 157(b)(1). Because a judgment against the

trustee, whether ultimately satisfied out of the assets of the

estate or out of the trustee’s pockets, may affect the

administration of the estate, “[t]he requirement of uniform

application of bankruptcy law dictates that all legal

proceedings that affect the administration of the bankruptcy

estate” be either brought in the bankruptcy court or with the

permission of the bankruptcy court. In re Crown Vantage,

Inc., 421 F.3d at 971. “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, [the state] court

would have the practical power to turn bankruptcy losers into

17

bankruptcy winners, and vice versa.” In re Linton, 136 F.3d

at 546. 7

Although the Bankruptcy Court did not address the

impact of § 959(a), it opined that several other changes

implemented by the Code have raised questions about the

continued applicability of the Barton doctrine. First, the

Bankruptcy Court noted that under the Code, trustees are no

longer appointed by the bankruptcy court, but instead are

7

Citing McNulta v. Lochridge, 141 U.S. 327 (1891),

and Reading Co. v. Brown, 391 U.S. 471 (1968), the Trustee

argues that a suit against a trustee based on acts taken in his

official capacity will always be a suit against the estate,

satisfied out of the assets of the estate. We disagree with the

Trustee’s interpretation of McNulta and Brown insofar as he

argues that those cases established a categorical rule that

judgments against a trustee will always be satisfied out of the

assets of the estate. In Brown, the Supreme Court

acknowledged its previous statement in McNulta that actions

against a receiver “are official and not personal, and

judgments against him as receiver are payable only from the

funds in his hands,” but classified that statement as dicta.

Brown, 391 U.S. at 477 n.7 (quoting McNulta, 141 U.S. at

332). The Brown Court explained that it would be wrong to

infer from McNulta that “an action against the receiver

personally . . . would never lie under any circumstances.” Id.

Therefore, like the Bankruptcy Court, we express no opinion

as to whether a judgment against the Trustee in this case will

ultimately be satisfied out of the assets of the estate or out of

the Trustee’s pockets.

18

appointed by a United States Trustee. Second, the

Bankruptcy Court observed that 11 U.S.C. § 362 provides for

the automatic stay of all suits and lien enforcement efforts

against the debtor or the debtor’s estate, thus making it more

difficult for a third party to drain the assets of the estate.

Finally, although the Bankruptcy Judge did not raise this

concern here, in his decision in In re Lambert, he noted that

11 U.S.C. § 323(b) provides that a trustee “has capacity to sue

and be sued,” but says nothing about a leave-of-court

requirement. 438 B.R. at 525-26. We will discuss these

points in turn.

We first address the contention that changes in the way

in which trustees are appointed undermined the basis for the

Barton doctrine. Under the Bankruptcy Act of 1898, ch. 541,

30 Stat. 544 (1898) (superseded 1978) (“the Bankruptcy

Act”), and the Chandler Act, ch. 575, 52 Stat. 840 (1938)

(superseded 1978), the predecessors to the Code, trustees

were appointed by the courts. However, when the Code was

adopted in 1978, a pilot program was initiated, under which

the power to appoint bankruptcy trustees was vested in the

United States Department of Justice. 2 Norton Bankr. L. &

Prac. 3d § 26:1 (3d ed. 2012). The program was “designed to

remove the . . . awkward relationship between bankruptcy

judges and private trustees, whom they appoint[ed], which

ha[d] generated great disrespect for the bankruptcy system.”

H.R. Rep. No. 95-595, at 113 (1977), reprinted in 1978

U.S.C.C.A.N. 5963, 6074. In 1986, Congress added 28

U.S.C. § 581, which established the United States Trustee

System on a national basis. Pub. L. No. 99-554, 100 Stat.

19

3088, 3091 (1986). 8 Under the current system, the U.S.

Attorney General is charged with the appointment of United

States Trustees, who, among other things, “establish,

maintain, and supervise [] panel[s] of private trustees that are

eligible and available to serve as trustees in cases under

chapter 7.” 28 U.S.C. § 586(a)(1). Upon the commencement

of a Chapter 7 case, the U.S. Trustee selects an individual

from the panel to serve as the trustee in that case. 11 U.S.C.

§ 701(a)(1). 9

CGL argues that because the Barton doctrine

specifically requires leave of the appointing court, and there

is no appointing court under the modern bankruptcy system,

Barton is no longer valid. We disagree. A bankruptcy trustee

is the “statutory successor to the equity receiver” and “[j]ust

like an equity receiver, a trustee in bankruptcy is working in

effect” for the court overseeing the bankruptcy proceeding,

“administering property that has come under the court’s

control by virtue of the Bankruptcy Code.” In re Linton, 136

8

The only exceptions are Alabama and North

Carolina, which are not part of the United States Trustee

System, and in the judicial districts in those states, bankruptcy

courts retain the power of appointment and direct supervision.

2 Norton. Bankr. L. & Prac. 3d § 26:1 (3d ed. 2012).

9

Under 11 U.S.C. § 701, a member of the panel of

private trustees is initially appointed to serve on an interim

basis. Eligible creditors subsequently have an opportunity to

elect a trustee, and if no trustee is elected, the interim trustee

serves as trustee in the case. 11 U.S.C. § 702.

20

F.3d at 545. In changing the way in which trustees are

appointed, Congress did not alter the fundamental role of the

bankruptcy trustee as a fiduciary, overseen by the bankruptcy

court. Although U.S. Trustees now “aid[] bankruptcy judges

in monitoring certain aspects of bankruptcy proceedings,”

United Artists Theatre Co. v. Walton, 315 F.3d 217, 225 (3d

Cir. 2003) (citations omitted), the bankruptcy court is the

entity primarily responsible for authorizing acts by the

trustee. See, e.g., 11 U.S.C. § 363(b)(1) (providing that sale

or other disposition of property by the trustee is subject to

review by the bankruptcy court); Fed. R. Bankr. P. 6004(c)

(requiring trustee to file with the bankruptcy court a motion to

sell property free and clear of all liens). Additionally,

bankruptcy courts retain the ability to remove a trustee (other

than the U.S. Trustee) for cause. 11 U.S.C. § 324(a). We

therefore disagree with the Bankruptcy Court’s statement that

a trustee is “really just another advocate that appear[s]

before” it. The trustee remains, for all intents and purposes,

an officer of the bankruptcy court. Thus, the fact that

bankruptcy trustees are no longer appointed by the court does

not persuade us that the Barton doctrine has been superseded

by statute.

The Bankruptcy Court further opined that the Barton

doctrine is no longer necessary in light of 11 U.S.C. § 362,

which provides for the automatic stay of any attempt to

collect against property of the estate. We disagree. First, as

the U.S. Court of Appeals for the Seventh Circuit explained

in In re Linton, there are several rationales for the Barton

doctrine unrelated to the concern that a suit against the trustee

could directly threaten the assets of the estate. 136 F.3d at

21

545-46. If a trustee is burdened by having to defend against

suits in other courts, the trustee’s actions on behalf of the

bankruptcy court, the estate, and the estate’s creditors will

likely be impeded. Id. at 545. Moreover, without a court

approval requirement, trusteeship would become a “more

irksome duty,” thereby discouraging qualified people from

serving as trustees. Id. (noting that trustees would likely have

to pay higher malpractice premiums). Finally, requiring

prospective plaintiffs to set forth to the bankruptcy court the

basis of their claims against the trustee would allow the

bankruptcy court to monitor the work of the trustee more

effectively, and ensure that the trustee is satisfying his

obligations. Id.

Second, assuming a suit against a bankruptcy trustee in

another forum would jeopardize the assets of the estate,

Congress’s adoption of § 362 still does not convince us that it

intended to abrogate Barton. 10 The power of a court to stay

collection efforts against the debtor has always been an

integral part of bankruptcy law. See 1A Collier on

Bankruptcy § 11, at 130 (1898 ed.) (“The power to stay suits

concerning the person or property of the bankrupt is essential

to the orderly administration of a bankruptcy law.”). Mindful

of the Supreme Court’s admonition that we should not read a

10

We emphasize that we are assuming, for the purpose

of addressing the Bankruptcy Court’s point, that the assets of

the estate will be affected. As we noted in Footnote 7, supra,

we express no opinion as to whether a judgment against the

Trustee in this case will be satisfied out of the assets of the

estate.

22

Bankruptcy Code provision to “effect a major change in pre-

Code practice” absent clear congressional intent, Dewsnup,

502 U.S. at 419, we will briefly review the history of the

automatic stay in bankruptcy.

Section 11 of the Bankruptcy Act of 1898 provided

that a lawsuit pending when a bankruptcy petition was filed

would be stayed if the suit was based on a claim that would

be subject to discharge. § 11, 30 Stat. at 549. However, the

Act’s stay provision was not “self-executing” and therefore

some affirmative action by the court was required to invoke

the stay. Frank Kennedy, The Automatic Stay in Bankruptcy,

11 U. Mich. J.L. Ref. 175, 184-85 (1978) (citations omitted).

In 1938, Congress passed the Chandler Act, which provided

for automatic stays under Chapters X and XII. §§ 148, 428,

52 Stat. at 888, 918. There was confusion, however,

regarding the scope of the Chandler Act’s provisions,

including whether they applied to other chapters of the

Bankruptcy Act. Mark Shaiken & Cindi Woolery, Automatic

Stay Litigation in Bankruptcy 3 (1996). Therefore, when the

former Federal Rules of Bankruptcy Procedure were adopted,

a separate automatic stay provision was included for each

chapter. See Fed. R. Bankr. P. 10-601(a) (1977) (superseded

1978) (“A petition filed under [Chapter X] shall operate as a

stay of the commencement or the continuation of any court or

other proceeding against the debtor, or the enforcement of

any judgment against it, or of any act or the commencement

or continuation of any court proceeding to enforce any lien

against its property . . . .”); Fed. R. Bankr. P. 11-44(a) (1977)

(superseded 1978) (same for Chapter XI); Fed. R. Bankr. P.

12-43(a) (1977) (superseded 1978) (same for Chapter XII);

23

Fed. R. Bankr. P. 13-401(a) (1977) (superseded 1978) (same

for Chapter XIII).

In 1978, as part of the new Bankruptcy Code,

Congress enacted 11 U.S.C. § 362, which provides that upon

the filing of a voluntary or involuntary case, all suits and lien

enforcement efforts against the debtor or the debtor’s estate

shall be automatically enjoined, subject to certain exceptions

for repeat bankruptcy filers. The legislative history

accompanying § 362 explains that its primary purpose was to

give the debtor a “breathing spell” from creditors, to allow the

debtor to begin the process of discharging his debts, and

where applicable, to develop a repayment or reorganization

plan. H.R. Rep. No. 95-595, at 174, reprinted in 1978

U.S.C.C.A.N. at 6135. Section 362 was also intended to

protect creditors by preventing one creditor from obtaining

payment of its claims to the detriment of others. Id. The

legislative history noted that the existing automatic stay

provisions were “inadequate, both from the standpoint of the

debtor . . . and of the creditor.” Id. Therefore, § 362

“expand[ed] coverage in some areas, reduce[d] it in others,

and clarifie[d] many uncertain aspects of the [old]

provisions.” Id. Given that the applicability of the Barton

doctrine under the pre-Code system has not been questioned,

despite the existence of automatic stay provisions under the

Bankruptcy Act and the former Rules of Bankruptcy

Procedure, we decline to interpret the changes implemented

24

by § 362 as eliminating the long-standing common law

Barton doctrine. 11

Finally, we address CGL’s argument that because 11

U.S.C. § 323(b) provides that a trustee has the “capacity to

sue and be sued,” but mentions no leave-of-court

requirement, no such requirement exists. In In re Lambert,

the bankruptcy court stated, “[s]hould Congress have wanted

to subject lawsuits against the trustee to preliminary court

approval, it clearly could have used language that [it] inserted

in multiple other provisions directing the need for court

authorization.” 438 B.R. at 525-26 (citations omitted); see

also In re Reich, 54 B.R. 995, 997 (Bankr. E.D. Mich. 1985)

(concluding that because court approval is not mentioned as a

prerequisite, “[t]he implication is that none is required”).

This is an overly simplistic analysis. “As the Supreme Court

has often noted, ‘statutory construction is a holistic

11

We also note that the availability of one mechanism

to protect against depletion of the assets of the bankruptcy

estate does not necessarily foreclose others. Bankruptcy

courts have broad powers (in addition to 11 U.S.C. § 362) to

protect the property of the estate. For example, under 11

U.S.C. § 105(a), a bankruptcy court may issue injunctive

relief “where parties are pursuing actions pending in other

courts that threaten the integrity of a bankrupt’s estate.” In re

DeLorean Motor Co., 991 F.2d 1236, 1242 (6th Cir. 1993)

(internal marks and citations omitted). Here, the Bankruptcy

Court left open the possibility that it could enjoin CGL’s

proposed state court case “should property of the estate be

threatened.”

25

endeavor,’ and this is especially true of the Bankruptcy

Code.” In re Cybergenics Corp., 330 F.3d 548, 559 (3d Cir.

2003) (en banc) (quoting United Sav. Ass’n of Tex. v. Timbers

of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988)).

We must “not be guided by a single sentence or member of a

sentence, but look to the provisions of the whole law, and to

its object and policy.” In re Price, 370 F.3d 362, 369 (3d Cir.

2004) (quoting Kelly v. Robinson, 479 U.S. 36, 43 (1986))

(additional citations omitted). Here, this requires us to look at

Federal Rule of Bankruptcy Procedure 6009, which provides:

“[w]ith or without court approval, the trustee . . . may

prosecute or may enter an appearance and defend any pending

action or proceeding by or against the debtor, or commence

and prosecute any action or proceeding in behalf of the estate

before any tribunal.” This rule establishes only that a trustee

may, with or without court approval, act as a representative of

the estate in litigation; it does not address the circumstances

under which a third party may bring suit against the trustee.

See id. “When the interpretation of federal statutes fails to

yield specific answers to procedural issues, federal courts

have implicit authority to supply the answers.” In re Linton,

136 F.3d at 545. Thus, although § 323(b) recognizes that a

trustee has the capacity to be sued, the procedures which must

be followed before commencing any suit against the trustee

not otherwise authorized by 28 U.S.C. § 959(a) have been left

to case law. See In re Kashani, 190 B.R. 875, 884 n.9

(B.A.P. 9th Cir. 1995) (explaining that § 323(b) “merely

indicates the proper party to sue for purposes of standing”).

We therefore reject CGL’s argument that the text of § 323(b)

indicates a congressional intent to abrogate the Barton

doctrine.

26

In sum, we hold that the Barton doctrine remains valid,

and therefore, subject to the exception in § 959(a), a party

must first obtain leave of the bankruptcy court before it brings

an action in another forum against a bankruptcy trustee for

acts done in the trustee’s official capacity.

B.

Although the Bankruptcy Court expressed skepticism

as to whether Barton applied, it nevertheless held a hearing

on CGL’s motion for leave, 12 and ultimately granted the

motion. The Bankruptcy Court therefore complied with

Barton and we will consider whether its decision to grant

CGL’s motion for leave constituted an abuse of discretion. In

re Linton, 136 F.3d at 546; In re Beck Indus., 725 F.2d at 889.

Under the deferential abuse of discretion standard, we will

reverse “only where the . . . court’s decision is arbitrary,

fanciful, or clearly unreasonable—in short, where no

reasonable person would adopt the . . . court’s view.” United

States v. Green, 617 F.3d 233, 239 (3d Cir. 2010) (internal

marks and citation omitted).

A party seeking leave of court to sue a trustee “must

make a prima facie case against the trustee, showing that its

claim is not without foundation.” In re Nat’l Molding Co.,

230 F.2d at 71 (citations omitted). Although, as CGL

12

Our holding should not be read as requiring a

bankruptcy court to conduct a hearing on a party’s motion for

leave in every case. Whether to hold a hearing is within the

sound discretion of the bankruptcy court.

27

observed at oral argument, the “not without foundation”

standard is similar to the standard courts employ when

evaluating a motion to dismiss under Federal Rule of Civil

Procedure 12(b)(6), we emphasize that the former involves a

greater degree of flexibility. Compare Barefoot Architect,

Inc. v. Bunge, 632 F.3d 822, 826 (3d Cir. 2011) (“To

withstand a Rule 12(b)(6) motion to dismiss, ‘a complaint

must contain sufficient factual matter, accepted as true, to

state a claim to relief that is plausible on its face.’”) (quoting

Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)), with In re

Nat’l Molding Co., 230 F.2d at 71. Reviewing courts should

accord significant deference to the determinations of the

bankruptcy court, which, given its familiarity with the

underlying facts and the parties, is uniquely situated to

determine whether a claim against the trustee has merit. The

bankruptcy court is also uniquely situated to determine the

potential effect of a judgment against the trustee on the

debtor’s estate. As the Ninth Circuit Bankruptcy Appellate

Panel noted in In re Kashani, the decision whether to grant

leave may involve a “balancing of the interests of all parties

involved” and consideration of whether another tribunal may

have expertise regarding the issues in the proposed suit. 190

B.R. at 886, 887 (citation omitted). We will not second-guess

the bankruptcy court’s judgment unless it is clear from the

record that the proposed suit is wholly lacking in factual or

legal support. See Anderson, 520 F.2d at 1029 (explaining

that permission to sue a trustee “ordinarily should be granted

unless it is clear that the claim is without foundation”).

In this case, the Bankruptcy Court did not abuse its

discretion in concluding that CGL had met its burden of

28

establishing that its claims against the Trustee were “not

without foundation.” CGL’s motion for leave alleged that

(1) “[t]he sales of individual lots in violation of Restriction

No. 1 [were] unlawful and . . . caused damage to CGL’s

property interests in Lot 45” and (2) the agreement between

the Trustee and the Township was “an attempt to deprive

CGL of its property rights without notice and without due

process of law.” Although CGL’s motion did not specify a

particular state law cause of action, as the Bankruptcy Court

observed, the proposed state court action would be a property

dispute involving the status of Restriction No. 1, and whether

the owner of a lot in the subdivision could enforce the

restriction against another owner.

CGL’s motion set forth the following factual

allegations: (1) the Parkside subdivision plan included a

recorded restriction prohibiting the sale of lots to “parties

having residences constructed” on the lots; (2) in purchasing

Lot 45, CGL relied on assurances from the Township

Solicitor that Restriction No. 1 did not prevent the sale of Lot

45, and the Bankruptcy Court’s March 10, 2009 order

confirming that the sale was “free and clear of Restriction

#1”; (3) after the sale of Lot 45, the Trustee filed motions

with the Bankruptcy Court seeking authorization to sell the

individual lots in the mobile home park, but none of those

motions advised the court of Restriction No. 1’s applicability

to the individual lots; (4) the Trustee then sold most of the

lots in the mobile home park to individual residents who had

affixed their mobile homes to the land; and (5) on

December 14, 2009, the Trustee and the Township entered

into an agreement which purported to abrogate Restriction

29

No. 1 as to the forty-four individual lots, and CGL was not a

party to that agreement. During the hearing on CGL’s

motion, Grant Wise, the owner of CGL, testified that he was

under the assumption when he purchased Lot 45 that

Restriction No. 1 remained in place with respect to the forty-

four individual lots, and explained that single ownership was

crucial to his decision to purchase.

As the District Court noted, CGL had presented

“evidence of a restriction on the deeds to the individual lots

that had been recorded,” and there was “a legitimate

disagreement about the status of those restrictions.” In re

Vistacare Grp., LLC, 2011 WL 2111997, at *4. The

Bankruptcy Court determined that a state court would

“probably ha[ve] expertise in [the] area,” and therefore state

court was the appropriate forum in which to resolve the

dispute. This was not an abuse of discretion. Under

Pennsylvania law, a restriction in a subdivision plan creates

an enforceable restrictive covenant, even if the restriction is

not specifically set forth in the deeds conveying the lots

created by the subdivision. Ballard v. Heppe, 589 A.2d 266,

268-69 (Pa. Super. Ct. 1991); Doylestown Twp. v. Teeling,

635 A.2d 657, 661 (Pa. Commw. Ct. 1993). A land owner in

a subdivision may institute an action against the developer or

another owner in the subdivision to enforce restrictive

covenants that appeared in the recorded subdivision plan.

Berg v. Georgetown Builders, Inc., 822 A.2d 810, 819-20 (Pa.

Super. Ct. 2003) (discussing Perrige v. Horning, 654 A.2d

1183 (Pa. Super. Ct. 1995)). For example, in Perrige v.

Horning, the Pennsylvania Superior Court held that an owner

in a subdivision could bring suit to enforce a restrictive

30

covenant in a previously approved subdivision plan, and to

enjoin an attempt by another owner and the municipality to

alter that plan in a way that violated the existing restrictions.

654 A.2d at 1186-87; see also Gey v. Beck, 568 A.2d 672,

673, 679 (Pa. Super. Ct. 1990) (issuing injunction to protect

lot owners who were granted “protective covenants” to

preserve the residential nature of a development); Teeling,

635 A.2d at 661 (finding that conditions attached to a

subdivision plan could be enforced in equity by an owner of

other lots in the subdivision).

Here, CGL purchased Lot 45, a parcel within the

Parkside subdivision. The subdivision was subject to a

restrictive covenant barring the sale of lots to individuals with

residences constructed on the lots. Nevertheless, the Trustee

sold many of the forty-four individual lots to such

individuals, and together with the Township, attempted to

remove the restrictive covenant to allow for the sales.

Although we express no opinion regarding CGL’s likelihood

of success on its claims once it gets to state court, the

Bankruptcy Court did not err in concluding that the claims

were “not without foundation.” See In re Nat’l Molding Co.,

230 F.2d at 71. Admittedly, “[r]estrictive covenants must be

construed in light of their language, their subject matter, the

intent or purpose of the parties, and the conditions

surrounding their execution.” Perrige, 654 A.2d at 1188

(citation omitted). However, in determining whether a

proposed suit related to the enforcement of a restrictive

covenant is “not without foundation,” a bankruptcy court

need not make factual findings regarding the parties’ intent.

See In re Nat’l Molding Co., 230 F.2d at 71; Perrige, 654

31

A.2d at 1188. It is within the discretion of the bankruptcy

court to determine that such questions are most appropriately

answered by a state tribunal.

On appeal, the Trustee maintains that the Bankruptcy

Court erred in failing to consider his arguments that he was

entitled to immunity for the challenged actions, or

alternatively, that the proposed suit was barred under

preclusion principles. 13 We disagree. A bankruptcy court is

not required to consider immunities and defenses raised by a

trustee when evaluating a motion for leave. A bankruptcy

court cannot be expected to conduct a trial on the merits of a

party’s proposed state law claim against a trustee simply to

decide whether to grant leave to pursue such a claim in state

court. The bankruptcy court need only satisfy itself that the

claim is “not without foundation.” In re Nat’l Molding Co.,

230 F.2d at 71. The trustee, of course, will retain the right to

raise immunities and defenses in state court.

13

At oral argument, CGL asserted that the immunity

issue was never raised before the Bankruptcy Court and thus

we should consider it waived. Although CGL is correct that

the issue was not addressed during the October 21, 2010

hearing before the Bankruptcy Court, the Trustee did raise

immunity as a defense in his response to CGL’s motion for

leave. This was sufficient to preserve the issue for appellate

review.

32

IV.

For the foregoing reasons, we will affirm the order of

the District Court affirming the order of the Bankruptcy Court

granting CGL’s motion for leave. We hold that: (1) the

Barton doctrine continues to apply to bankruptcy trustees;

and (2) the Bankruptcy Court did not abuse its discretion in

determining that CGL’s proposed claims were “not without

foundation.”

33