Frances Barton suffered two rude
awakenings as a passenger in a sleeping car operated by the Washington
City, Virginia Midland, and Great Southern Railroad Company. The first
rude awakening was allegedly caused by a defective rail which caused the
car poor Frances was riding in to be “thrown from the track and turned
over down an embankment, and . . . her bodily health [was] permanently
injured” to the tune of $5,000. The second rude awakening occurred when
Frances tried to file a lawsuit against John Barbour, the court appointed
receiver over the railroad company. Although much has changed since
Frances pursued her case all the way to the Supreme Court in 1881, one
thing has not, the so-called Barton Doctrine: An equity receiver generally
cannot be sued unless leave is first obtained from the appointing court.
Barton v. Barbour (1881) 104 U.S. 126.
into. The nature of their role makes
receivers a natural target for litigation. Fortunately, the Barton
Doctrine has been affirmed and elaborated upon numerous times since the
19th Century. When Federal Rule of Civil Procedure 66 was amended in 1946,
which states that it governs an action in which “a receiver sues or is
sued,” the amendment authors made explicit reference to the Barton
Doctrine. The authors noted that “the practice in administering an estate
by a receiver . . . must accord with the historical practice in federal
courts or with a local rule.”
Less explicitly helpful is the operative federal statute at 28 USC §
959(a). That statute provides that: “receivers . . . 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 ends of justice, but this shall not
deprive a litigant of his right to trial by jury.”
While that statutory provision recognizes that
receivers may be sued without leave of court, subjecting such actions to
the courts’ equity authority empowers federal courts to continue to follow
the Barton Doctrine. So the Barton Doctrine lives on and requires leave of
court before suits are filed against receivers. Indeed, the SEC and other
federal agencies, aware of the court’s equitable powers, include
protective “stay of litigation” language in proposed orders appointing
receivers requiring leave to be sought before an action is commenced.
However, such protection is not without limits.
Plaintiffs can, and often do, seek relief from such stays. In one of the
many Ninth Circuit opinions arising from the SEC v. Wencke litigation, the
Court set forth the factors a court should consider when determining
whether to lift a stay:
- whether refusing to lift the stay genuinely
preserves the status quo or whether the [movant] will suffer substantial
injury if not permitted to proceed;
- the time in the course of the receivership at
which the motion for relief from the stay is made; and
- the merit of the [movant's] underlying claim.|
SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984).
In short, federal courts sitting in equity will
require most claimants to seek leave of court before filing suit against a
receiver. But such protection will not be infinite and does not provide
absolute immunity from 21st Century Frances Bartons.
*Nick Morgan is a
partner and West Coast Chair, Securities Enforcement Practice group at
DLA Piper in Los Angeles. He practices complex securities litigation in
state and federal courts with representations in connection with
Securities and Exchange commission and financial industry regulatory
authority investigations, litigation and arbitration. |