Summer 2014 • Issue 52, page 13

Suing a Federal Receiver: The Barton Doctrine

By Morgan, Nick*

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:

  1. whether refusing to lift the stay genuinely preserves the status quo or whether the [movant] will suffer substantial injury if not permitted to proceed;
  2. the time in the course of the receivership at which the motion for relief from the stay is made; and
  3. 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.