Muratore v. Darr

United States Court of Appeals
For the First Circuit

No. 03-2179

JOSEPH R. MURATORE, SR.,

Plaintiff, Appellant,

v.

STEPHEN DARR, IN HIS CAPACITY AS TRUSTEE
IN BANKRUPTCY ACTION 91-10365,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Mary M. Lisi, U.S. District Judge]

Before

Howard, Circuit Judge,

Coffin and Campbell, Senior Circuit Judges.

Robert A. Scott with whom Scott & Scott, P.C. was on brief for
appellant.
William J. Hanlon with whom Seyfarth Shaw LLP, Thomas S.
Hemmendinger, Brennan, Recupero, Cascinone, Scungio & McAllister,
LLP were on brief for appellee.

July 19, 2004
 CAMPBELL, Senior Circuit Judge. The question on appeal

is whether the Barton doctrine bars the bringing of this action in

the federal district court against a bankruptcy trustee without the

prior permission of the bankruptcy court. The district court

dismissed the complaint for lack of subject-matter jurisdiction,

and we affirm.

FACTS

The following facts, except a few that are undisputed,

are all alleged in Muratore's amended complaint. Plaintiff-

appellant, Joseph R. Muratore, Sr. owned and controlled Columbus

Mortgage Company, Inc. (Referred to herein as the "debtor"). On

February 15, 1991, the debtor filed a voluntary petition for

reorganization under Chapter 11 of the Bankruptcy Code. On

December 23, 1991, the bankruptcy court granted the U.S. Trustee's

application to employ defendant-appellee, Stephen Darr, as trustee.

On July 18, 1996, the bankruptcy court entered an order confirming

the Plan of Reorganization. Approximately four years later, the

bankruptcy court entered orders granting Darr's application for

final decree and approving his application for final compensation.

Muratore filed objections to these applications, which the

bankruptcy court considered and denied. Muratore did not appeal.

The bankruptcy court closed the case on November 9, 2000.

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 In September of 2002, Muratore brought the instant

lawsuit against Darr, in Darr's capacity as trustee, in the United

States District Court for the District of Rhode Island.

On September 30, 2002, apparently without relation to

Muratore's present action, the bankruptcy court reopened the

bankruptcy proceedings, and they were still open on October 18,

2002 when Muratore amended his complaint herein.1

In Count I of his amended complaint, Muratore alleged

that Darr "did not faithfully perform the duties of his office and

committed acts of misfeasance [and/or] malfeasance in the

performance of his duties in that . . . ":

1. he did not pay taxes and, as a result, lost six

properties at tax sale;

2. he defectively sold at a foreclosure rental

properties, generating three additional law

suits;

3. he defectively sold at a foreclosure income

properties, generating three additional law

suits;

4. he failed to file corporate returns, resulting in

forfeiture of charter and causing real estate to

revert to stockholders;

1
The reopening of the bankruptcy case was to allow Darr to
execute a release of mortgage after the underlying debt was paid.
The bankruptcy case was closed again on November 25, 2002.

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 5. he failed to file tax returns to the Rhode Island

Tax Administrator, resulting in the denial of

issuance of letters of good standing, causing

defective titles and defeating transfer of

titles; and

6. purchases of some properties were procured with

funds from the Gambino family in violation of 18

U.S.C. § 1956.

In Count II, Muratore alleged that Darr committed abuse of process

by committing waste so egregious that his advisors and/or employees

used Chapter 11 protection procedures to put Muratore out of

business rather than to assist in reorganizing Muratore's business.

He further alleged that "such use of his [Darr's] powers

constitutes use of judicial appointment and proceedings in

bankruptcy for an ulterior purpose, to wit, to make it impossible

for Muratore to conduct business and to earn a living from his

business." In Count III, Muratore alleged that Darr was negligent

because he breached his duty to protect the assets of the trust and

to serve the trust with diligence. In Count IV, Muratore alleged

that the purchase of certain trust property was financed either

directly or indirectly by funds obtained from the illegal interests

and enterprises of a notorious crime family in violation of 18

U.S.C. § 1956.

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 Muratore neither obtained leave of the bankruptcy court

nor sought bankruptcy court authority before commencing this

lawsuit in the district court. Citing Muratore's failure to obtain

such authority, Darr moved to dismiss the complaint for lack of

subject-matter jurisdiction. The district court allowed the

motion. Muratore appeals from the dismissal.

Discussion

"We review 'the grant of a motion to dismiss de novo,

taking the allegations in the complaint as true and making all

reasonable inferences in favor of plaintiff.'" Doran v. Mass. Tpk.

Auth., 348 F.3d 315, 318 (1st Cir. 2003) (quoting Rockwell v. Cape

Cod Hosp., 26 F.3d 254, 255 (1st Cir. 1994)). The central issue

here is whether the district court lacked subject-matter

jurisdiction because of Muratore's failure to have obtained leave

from the bankruptcy court to bring this action in the former court.

In determining whether a complaint alleges sufficient facts to

establish jurisdiction, we read the complaint holistically.

Leblanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196

F.3d 1, 5 (1st Cir. 1999).

In Barton v. Barbour, the Supreme Court ruled that the

common law barred suits against receivers in courts other than the

court charged with the administration of the estate. 104 U.S. 126,

127 (1881). The Supreme Court ruled that before suit is brought

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against a receiver, leave of the court by which the trustee was

appointed must be obtained. The Court stated:

So, in cases of bankruptcy, many incidental
questions arise in the course of administering
the bankrupt estate, which would ordinarily be
pure cases at law, and in respect of their
facts triable by jury, but, as belonging to
the bankruptcy proceedings, they become cases
over which the bankruptcy court, which acts as
a court of equity, exercises exclusive
control.

Id. at 134; see also Katchen v. Landy, 382 U.S. 323, 337 (1966).

"Barton involved a receiver in state court, but the circuit courts

have extended the Barton doctrine to lawsuits against a bankruptcy

trustee." Carter v. Rodgers, 220 F.3d 1249, 1252 (11th Cir. 2000).

A limited exception to the rule announced in Barton was

codified in 28 U.S.C. § 959(a). See, e.g., Allard v. Weitzman (In

re DeLorean Motor Co.), 991 F.2d 1236, 1240-41 (6th Cir. 1993)

(describing 959(a) exception as "limited"). Section 959(a) states:

[t]rustees, 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 ends of justice, but this shall not
deprive a litigant of his right to trial by
jury.

Muratore argues that section 959(a) applies here. In considering

this argument, we must ascertain whether Muratore's claims apply to

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the trustee's "acts or transactions in carrying on business

connected with" the bankruptcy estate.

There is little First Circuit case law on this issue, but

courts elsewhere have interpreted "acts or transactions in carrying

on business connected with" the bankruptcy estate to mean acts or

transactions in conducting the debtor's business in the ordinary

sense of the words or in pursuing that business as an operating

enterprise. See, e.g., Melvin v. Klein, 266 N.Y.S. 2d 533, 536-37

(N.Y. Spec. Term 1965). In interpreting section 959(a)'s

predecessor, 28 U.S.C. § 125,2 Learned Hand, writing for the Second

Circuit, concluded that "[m]erely to hold matters in statu quo; to

mark time, as it were; to do only what is necessary to hold the

assets intact; such activities" did not constitute carrying on

business. Vass v. Conron Bros. Co., 59 F.2d 969, 971 (2d Cir.

1932). Rather, section 959(a) "is intended to 'permit actions

redressing torts committed in furtherance of the debtor's business,

such as the common situation of a negligence claim in a slip and

fall case where a bankruptcy trustee, for example, conducted a

2
The predecessor to the section 959(a) exception, 28 U.S.C. §
125, was nearly identical:
Every receiver or manager of any property appointed by
any court of the United States may be sued in respect of
any act or transaction of his in carrying on the business
connected with such property, without the previous leave
of the court in which such receiver or manager was
appointed . . . .
Accordingly, we do not distinguish between cases that concern
section 959(a) and those that concern 28 U.S.C. § 125.

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retail store.'" Carter, 220 F.3d at 1254 (quoting Lebovits v.

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

1996)).

For example, section 959(a) applied where a trustee

continued the business of a debtor in operating a railroad, and the

trustee had been sued in his representative capacity for damages

for use of another's tracks, Thompson v. Texas Mexican Ry. Co., 328

U.S. 134, 138 (1946) (applying predecessor to section 959(a)), and

in a case for wrongful death and injury resulting to a member of

the public in a grade crossing accident, Valdes v. Feliciano, 267

F.2d 91, 94-95 (1st Cir. 1959). Also, the exception has been held

to apply to an employee's claims arising from injuries caused by

overwork at a railroad company operated by the trustee and the

trustee's withholding of an employee's pension. Haberern v.

Lehigh and New England Ry., Co., 554 F.2d 581, 585 (3d Cir. 1981).

On the other hand, courts have concluded that merely

holding and collecting the assets intact, Vass, 59 F.2d at 971,

collecting and liquidating the assets of the debtor, Austrian v.

Williams, 216 F.2d 278, 285 (2d Cir. 1954), and taking steps for

the care and preservation of the property, U. and I., Inc. v.

Fitzgerald, (In the Matter of Campbell), 13 B.R. 974, 976 (Bankr.

D. Idaho 1981), In re Kalb & Berger Mfg. Co., 165 F. 895, 896-97

(2d Cir. 1908), do not constitute "carrying on business."

Likewise, actions taken in the mere continuous administration of

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property under order of the court do not constitute an "act" or

"transaction" in carrying on business connected with the estate.

Field v. Kansas City Refining Co., 9 F.2d 213, 216 (8th Cir. 1925);

see also In re DeLorean Motor Co., 991 F.2d at 1241 (action against

trustee and representatives alleging abuse of process and malicious

prosecution in relation to prosecution of fraudulent conveyance

action is a suit for actions of trustee wholly unrelated to

carrying on debtor's business because trustee merely collected,

took steps to preserve, and/or held assets, as well as performed

other aspects of administering and liquidating estate); Carter, 220

F.3d at 1254.

We agree with the district court that section 959(a) does

not apply here. In his brief, Muratore represents that he was in

the business of "leasing to commercial and residential tenants, and

all required acts associated with maintaining such leases." His

complaint, however, does not specify the nature of the businesses

at issue. Darr contends that Muratore's business was actually "the

making of mortgage loans." We need not, however, resolve this

question. The allegations in the complaint focus upon Darr's

actions in the fulfillment or non-fulfillment of his fiduciary

responsibilities as trustee, as opposed to acts or transactions in

the furtherance of Muratore's business whatever it was. See 11

U.S.C. § 959(a).

-9-
 The accounting for and sale of property, the filing of

tax returns, and the payment of taxes were among Darr's statutory

responsibilities and powers as a Chapter 11 trustee. 11 U.S.C. §§

363 & 1106;3 see also Holywell Corp. v. Smith, 503 U.S. 47, 52-56

(1992) (Chapter 11 trustee is required to file tax returns and pay

taxes with respect to the debtor). Indeed, Muratore does not

appear to dispute that Darr had these responsibilities; rather, he

argues that Darr did not adequately respond to them --

3
11 U.S.C. § 363 states:
(b) (1) The trustee, after notice and a
hearing, may use, sell, or lease, other than
in the ordinary course of business, property
of the estate . . . .
(c) (1) If the business of the debtor is
authorized to be operated under section 721,
1108, 1203, 1204, or 1304 of this title and
unless the court orders otherwise, the trustee
may enter into transactions, including the
sale or lease of property of the estate, in
the ordinary course of business, without
notice or a hearing, and may use property of
the estate in the ordinary course of business
without notice or a hearing . . . .

11 U.S.C. § 1106 states:
(a) A trustee shall--
. . .
(6) for any year for which the debtor has not
filed a tax return required by law, furnish,
without personal liability, such information
as may be required by the governmental unit
with which such tax return was to be filed, in
light of the condition of the debtor's books
and records and the availability of such
information; and
(7) after confirmation of a plan, file such
reports as are necessary or as the court
orders . . . .

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specifically, that Darr did not liquidate the properties quickly

enough, improperly liquidated the properties, and did not pay taxes

or file tax returns.

The different counts in Muratore's complaint all allege

Darr's misconduct in discharging his trustee's administrative

responsibilities. Count I alleges that Darr did not "faithfully

perform the duties of his office" when he performed improper

liquidations, failed to file tax returns and pay taxes, and allowed

the purchase of property with illegal funds. Counts II, III, and

IV merely reiterate these allegations within claims for "abuse of

process," "negligence," and violations of 18 U.S.C. §§ 1961-1968

respectively.4 These allegations are very similar to ones made in

other cases holding the 959(a) exception did not apply. Carter,

220 F.3d at 1254 (holding section 959(a) exception did not apply to

claims arising from Chapter 7 trustee's allegedly improper

liquidation of estate assets at auction)5; In re DeLorean Motor

Co., 991 F.2d at 1240-41 (holding section 959(a) did not apply to

action against Chapter 7 trustee and representatives alleging abuse

4
Muratore does not appear to argue that the exception to the
Barton doctrine applies to Count IV.
5
For present purposes, we do not distinguish between cases
involving Chapter 11 trustees and those involving Chapter 7
trustees. See Corzin v. Fordu (In re Fordu), 201 F.3d 693, 706
n.18 (6th Cir. 1999) (stating, "[t]he duties and responsibilities
of either a Chapter 11 trustee or debtor-in-possession as a
fiduciary for the bankruptcy estate are virtually the same as those
imposed on a Chapter 7 trustee.").

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of process and malicious prosecution in relation to prosecution of

fraudulent conveyance action); Austrian, 216 F.2d at 285 (holding

in Chapter 11 case that section 959(a) did not apply and stating,

"[m]erely to attempt to collect and liquidate the assets of a

debtor is not to carry on its business in any proper sense of the

term.") (citations omitted); Kashani v. Fulton (In re Kashani), 190

B.R. 875, 884-85 (9th Cir. B.A.P. 1995) (holding section 959(a) did

not apply to breach of fiduciary duty and negligence claims arising

from, inter alia, Chapter 11 trustee's failure to sell or attempt

to sell estate property in timely manner so as to realize best

possible benefit to bankruptcy estate and trustee's engagement in

speculative real estate venture in which trustee had no prior

experience and without consultation and aid of experienced real

estate developer). Since Muratore bases his complaint on the

trustee's alleged misconduct in liquidating and administering the

estate's property, and not on tortious acts committed in the

furtherance of Muratore's leasing or mortgage and real estate

business, section 959(a) does not apply.

Muratore urges us to recognize as an additional or

expanded exception to the Barton doctrine the situation where the

trustee commits a tort of any sort. For this proposition, he

relies chiefly on a single case, In the Matter of Campbell, 13 B.R.

at 976. There, the district judge, in detailing the history of the

case, included a portion of the state district court's holding with

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respect to the plaintiff's state court action against the trustee,

which stated, inter alia:

"Apparently there are two situations in which
a trustee . . . may be sued in State Court
without leave of the federal bankruptcy court,
one being where the trustee has committed a
tort, and the other where the claim of
wrongful doing arises out of the trustee's
operating of the debtor's business."

Id. (citing Lawrence P. King, 2 Collier on Bankruptcy, § 23.20 at

642-45 (14th ed.))6. This language appears to be the only example

of a court having articulated so broad a tort exception to the

Barton doctrine.7 On the other side of the ledger, there are

numerous cases in which the Barton doctrine was held to bar tort

actions brought without permission of the bankruptcy court. See,

e.g., Carter, 220 F.3d at 1253 (applying Barton doctrine and

6
We find no mention of a tort exception to the Barton doctrine
in the most recent, fifteenth edition of Collier on Bankruptcy.
Cf. Lawrence P. King, 6 Collier on Bankruptcy ¶ 721.05 ("As a
general rule, however, leave of the appointing court must be
obtained to institute an action in a non-appointing forum for acts
done in the trustee's official capacity and within the trustee's
authority as an officer of the court. Section 959(a) of title 28
creates a limited exception to this general rule by granting state
courts jurisdiction over trustees in their official capacities
where the acts or transactions complained of relate to 'carrying on
business' connected to the property in trust.") (footnotes
omitted).
7
There is a case pre-dating Campbell that contains dicta
somewhat suggestive of a similar exception. In In the Matter of
Mercy-Douglass Hospital, Inc., 364 F. Supp. 1066, 1068 (E.D. Pa.
1973), the district court of the Eastern District of Pennsylvania
opined that litigants can bring "suits against the Trustee
personally for wrongs committed while performing the duties of his
office" (emphasis supplied) without the permission of the
bankruptcy court.

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stating, "There also is no merit to Carter's assertion that his

tort claims -- breach of fiduciary duty and reasonable care -- are

'unrelated to' and 'outside the scope' of the bankruptcy proceeding

because they do not arise directly from substantive provisions of

the Bankruptcy Code."); In re Lehal Realty Assocs., 101 F.3d at

275-77 (breach of fiduciary duty); In re Linton, 136 F.3d 544, 544-

46 (7th Cir. 1998) (malicious prosecution); Richman v. Batt, 265

B.R. 416, 417-19 (E.D. Pa. 2001) ("Plaintiff's allegations faintly

sound in breach of fiduciary duty and fraud."); Taraska v. Carmel,

223 B.R. 200, 202-3 (D. Ariz. 1998) (defamation); Bay Area Material

Handling, Inc. v. Broach (In re Bay Area Material Handling, Inc.),

No. C 95-01903CW, 1995 U.S. Dist. LEXIS 21958, at *9-*14 (N.D. Cal.

Dec. 6, 1995) ("damages for economic and emotional harm relating to

Defendants' alleged failure to pursue discovery properly,"

"mismanagement of Bay Area's real estate," and "the trustee's

noncollection of certain debts owed to the debtor by an outside

third party"). In the present context, we can find no basis for

recognizing some generalized tort exception to the Barton doctrine.

In addition, Muratore argues that the Barton doctrine

does not apply here because the bankruptcy case is closed and the

estate assets are no longer "in the receiver's hands" as they were

in Barton. Muratore is wrong. To be sure, one purpose of the

Barton doctrine is to prevent a party from obtaining "some

advantage over the other claimants upon the assets" in the

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trustee's hands, and that purpose would not necessarily be served

here. But the doctrine serves additional purposes even after the

bankruptcy case has been closed and the assets are no longer in the

trustee's hands. See Barton, 104 U.S. at 128. In In re Linton,

the Seventh Circuit held that the Barton doctrine applied to a

state court lawsuit filed eleven months after the bankruptcy case

was closed. 136 F.3d at 544-45. Writing for the court, Judge

Posner stated:

[w]ithout the requirement [of obtaining
leave], trusteeship will become a more irksome
duty, and so it will be harder for courts to
find competent people to appoint as trustees.
Trustees will have to pay higher malpractice
premiums, and this will make the
administration of the bankruptcy laws more
expensive (and the expense of bankruptcy is
already a source of considerable concern).
Furthermore, requiring that leave to sue be
sought enables bankruptcy judges to monitor
the work of the trustees more effectively. It
does this by compelling suits growing out of
that work to be as it were prefiled before the
bankruptcy judge that made the appointment;
this helps the judge decide whether to approve
this trustee in a subsequent case.

Id.; see also In re Krikava, 217 B.R. 275, 278-79 (Bankr. D. Neb.

1998) (applying Barton doctrine to closed bankruptcy case).8

8
Muratore's reliance upon In re Mailman Steam Carpet Cleaning
Corp., 196 F.3d at 4, for the proposition that applying the Barton
doctrine to closed bankruptcy cases is an improper expansion of its
purpose is misplaced. There, we merely held that, even though it
allows a certain category of suits to proceed without prior leave
from the appointing court, section 959(a) does not negatively imply
that leave is required in all other cases. Id. We did not hold
that the scope of the Barton doctrine should be restricted as
Muratore suggests.

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 In the alternative, Muratore requests that if this Court

concludes that it lacks subject-matter jurisdiction, it should

nevertheless refer this case to the bankruptcy court rather than

dismiss it. This court, however, does not have this option. Rule

12(h)(3) of the Federal Rules of Civil Procedure states that a

court "shall dismiss" an action over which it lacks subject-matter

jurisdiction. See also Mills v. State of Maine, 118 F.3d 37, 51

(1st Cir. 1997). If there is any basis for circumventing Rule

12(h)(3), Muratore does not point it out.

We AFFIRM the district court's dismissal of the case.

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