Eagan Avenatti, LLP
FOR PUBLICATION
Hearing held
Date: January 26, 2022
Time: 11:00 AM
Courtroom: 5C
Chapter 7 Trustee, Richard A. Marshack (“Mr. Marshack” or “Trustee“), filed an emergency motion for an order seeking authorization to use property of the Estate pursuant to
Mr. Marshack is the recipient of two subpoenas from the United States District Court for the Southern District of New York (SDNY) arising in the criminal proceeding of United States v. Michael Avenatti, Case No. 1:19-cr-00374-JMF, each
Debtor, Eagan Avenatti, LLP, is a law firm presently in Chapter 7 before this Court. Mr. Marshack, in his capacity as Chapter 7 Trustee of Debtor‘s Estate (the “Trustee“), has in his possession at least four terabytes of Debtor‘s financial and other data. In connection with the aforementioned SDNY criminal matter, two subpoenas were issued and served upon the Trustee, both demanding his appearance at trial and the production of certain data held in the possession of the bankruptcy Estate.
On an emergency basis, the Trustee moved for entry of an order from this Court authorizing the Trustee “to use property of the Estate pursuant to
issued without leave of this Court as required under Barton v. Barbour, 104 U.S. 126, 136-37 (1881) and its progeny (collectively, the “Barton Doctrine“), the Motion is DENIED.
I. Factual Background
On September 13, 2019, Debtor filed a Chapter 7 bankruptcy petition. Mr. Marshack was appointed trustee of the Estate. On August 27, 2020, this Court granted the Trustee‘s application to employ Force 10 Partners, LLC as the Estate‘s electronic document manager. Utilizing the services of Force 10 Partners, the Trustee is in possession and control of over four terabytes3 of financial and other data of Debtor.
Separately, Mr. Avenatti faced criminal action in the SDNY (United States v. Michael Avenatti, Case No. 1:19-cr-00373-PGG) (the “Nike Case“) in which a verdict was entered on or about July 15, 2021.
Additionally, the subject of this particular motion arises from a then-pending second criminal case which was brought against Mr. Avenatti in SDNY (United States v. Michael Avenatti, Case No. 1:19-cr-00374-JMF). Trial in that case began on January 24, 2022, and concluded with a verdict on February 4, 2022. The jury found Mr. Avenatti guilty of wire fraud and aggravated identity theft. Jury Verdict Form, United States v. Michael Avenatti, Case No. 1:19-cr-00374-JMF, Order entered February 4, 2022, Dk. 371, Exh. 8.
With respect to the second SDNY case, the Trustee received a subpoena from United States Attorneys for the SDNY on December 20, 2021. The subpoena commanded the production of “[a]ny data contained in the Quickbooks [sic] or TABS databases related to [Mr. Avenatti‘s client] Stephanie Clifford, a/k/a ‘Stormy Daniels.‘” Motion, Dk. 353, Exh. 1. The data was requested to be produced on or before January 24, 2022. Id.
On January 7, 2022, Federal Defenders of New York, Inc., representing Mr. Avenatti in the second SDNY criminal case, caused a subpoena to be issued upon the Trustee requesting the production of items in advance of the trial to be held on January 24, 2022. Motion, Dk. 353, Exh. 3. The requested items included “any and all communications” among Mr. Avenatti, Stephanie Clifford (“Ms. Clifford“), and Eagan Avenatti paralegal, Judy Regnier, related to Mr. Avenatti‘s representation of Ms. Clifford. Id. The subpoena also requested all documents and financial records related to such representation.
On January 24, 2022, the Trustee filed an emergency motion for entry of an order authorizing the Trustee to use property of the Estate to comply with the two subpoenas.
II. Discussion
a. The Trustee‘s Motion Did Not Request, Yet Necessitates, a Barton Determination
Before the Court is a Motion for an order authorizing the Trustee to use property of the Estate for the purpose of responding to two subpoenas from the District Court of the Southern District of New York seeking the Trustee‘s appearance, as well as specific information and physical data, either in digital or hard form. The Motion does not ask for a determination of the validity of the subpoenas. However, in considering the Motion, the Court must address issues that pertain to the Motion‘s essence; namely, those principles that make up the Barton Doctrine.
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b. The Barton Doctrine Was Developed to Protect the Integrity of Bankruptcy Proceedings and Eliminate Inefficiencies
Once a bankruptcy case is filed, “[t]he district court in which the bankruptcy case is commenced obtains exclusive in rem jurisdiction over all of the property in
In Barton v. Barbour, 104 U.S. at 136-37, the Supreme Court instituted an approach, further developed by circuit courts, for protecting the jurisdictional integrity of the bankruptcy court in light of proceedings in other fora (collectively, the “Barton Doctrine“).
The Barton Doctrine requires “that a party must first obtain leave of the bankruptcy court before it initiates an action in another forum against a bankruptcy trustee or other officer appointed by the bankruptcy court for acts done in the officer‘s official capacity.” In re Crown Vantage, Inc., 421 F.3d at 970. Without such leave, the other forum lacks subject matter jurisdiction over the suit. Barton, 104 U.S. at 136-37. A district court other than the appointing bankruptcy court is considered “another forum” for purposes of a Barton analysis. In re Kashani, 190 B.R. 875, 884 (9th Cir. B.A.P. 1995).
Specifically stated in Crown Vantage, “[t]he requirement of uniform application of bankruptcy law dictates that all legal proceedings that affect the administration of the bankruptcy estate be brought either in bankruptcy court or with leave of the bankruptcy court.” 421 F.3d at 971 (emphasis added).
This long-standing doctrine has since been expressly expanded to include other types of court-appointed parties, such as bankruptcy trustees and counsel for trustees. See Id. (granting liquidating trustee Barton protection); McDaniel v. Blust, 668 F.3d 153, 157 (4th Cir. 2012) (citing Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314, 321 (6th Cir. 2006)) (protecting trustee‘s attorneys).
In In re Linton, the Court of Appeals for the Seventh Circuit explained the rationale behind the Barton Doctrine as it relates to trustees:
If [the Trustee] is burdened with having to defend against suits by litigants disappointed by his actions on the court‘s behalf, his work for the court will be impeded ... Without the requirement [of 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 ... Furthermore, requiring that leave to sue be sought enabled 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.
136 F.3d 544, 545 (7th Cir. 1998).
By retaining exclusive control of the estate, the appointing court could better preserve assets and equitably distribute those assets to creditors. See Barton, 104 U.S. at 134.
c. The Barton Doctrine Includes Responding to Subpoenas
The Barton Doctrine applies to subpoenas issued by courts that are served upon trustees and other officers and agents owing their positions to bankruptcy court orders. See In re Circuit City Stores, Inc., 557 B.R. 443 (Bankr. E.D. Va. 2016) (applying the Barton Doctrine to subpoena where compliance directly impacted administration of the bankruptcy estate through costs of compliance). While the Ninth Circuit Court of Appeals has yet to
Media Group does not control in this case for several reasons. First, it is a BAP opinion and is therefore not binding precedent. See In re Grant, 423 B.R. 320 (Bankr. S.D. Cal. 2010) (observing that the Judicial Council of the Ninth Circuit has not amended the BAP authorization order to provide that BAP decisions are binding on the bankruptcy courts within the circuit). While the persuasiveness of BAP decisions is quite helpful on many occasions, sometimes they miss the mark.
Second, the BAP in Media Group did not correctly apply the rule of law developed either in the Supreme Court‘s 1881 decision in Barton or the Ninth Circuit‘s 2005 Crown Vantage decision. The BAP believed that the underlying bankruptcy court‘s application of the Barton Doctrine to a court-issued subpoena was an expansion of the doctrine.4 It was not; it was a proper application of the Barton and Crown Vantage decisions based on the facts in the Media Group case. In deciding Media Group, the BAP engaged in a too narrow, textual analysis of the Supreme Court‘s decision in Barton and took an approach which, respectfully, even narrowed the Ninth Circuit‘s Crown Vantage decision.
Crown Vantage references “all legal proceedings,” and under any common-sense interpretation, a court order to a bankruptcy trustee5 commanding her or him to appear in a court three thousand miles away and undertaking perhaps many thousands of dollars of bankruptcy estate dollars during the middle of bankruptcy administrative proceedings—to even challenge the subpoena‘s efficacy or otherwise face contempt from another court—involves a legal proceeding. 421 F.3d at 971 (emphasis added). Further, as questioned in footnote 2 above, while a federal or state court cannot violate the
automatic stay, the attempt of controlling assets of a bankruptcy estate raises serious issues regarding the in rem jurisdiction of this Court over property of the bankruptcy Estate.6
d. The Fulfillment of Barton‘s Purpose Requires Application to Subpoenas
Applying the Barton Doctrine where a trustee is subpoenaed follows the same principles as where the trustee becomes a party to a suit or adversary proceeding in a different forum. Along with protecting the in rem jurisdiction of the bankruptcy court over property of the estate, the purposes of the Barton Doctrine include reduction of needless costs and inefficiencies in the bankruptcy process and to allow the bankruptcy courts unimpeded supervision of the administration of estates.
That being said, and in the vernacular, what value is a subpoena if it can‘t be enforced? Can anyone seriously differentiate enforcement of a subpoena against a bankruptcy trustee with the “legal proceeding” described in Crown Vantage? A court issued subpoena targeting a bankruptcy professional or property within the bankruptcy estate without requiring leave of the bankruptcy court at the outset, is simply a waste of time and effort. For several practical reasons, a trustee cannot comply without leave of the bankruptcy court to expend estate funds to comply with a subpoena or to turn over
estate property.7
The Trustee‘s motion is the perfect example of this situation. Were the subpoena issuer to attempt to pursue a motion to compel or contempt charge against the Trustee, even under Media Group, the subpoena-issuing court would have no authority until the issuer came first to the Bankruptcy Court. See, e.g., In re Crown Vantage, Inc., 421 F.3d at 963. As all avenues to the desired discovery necessitate the Bankruptcy Court‘s leave, it is needlessly expensive and time-consuming not to require the approval of the Bankruptcy Court as a condition for the validity of the subpoena in the first instance.
The Court finds the Circuit City case particularly relevant and persuasive. 557 B.R. 448.8 In Circuit City, the Bankruptcy Court was faced with a subpoena requesting the trustee (of a post-confirmation trust)9 to attend and give deposition testimony in connection with a foreign proceeding under threat of punishment for contempt of court. Id. at 448. Complying with the subpoena required the trustee to hire and educate professional consultants at the expense of the bankruptcy assets.
Here, as was the case in Circuit City, the issuers of the subpoenas failed to ask for Barton approval before issuing a subpoena that threatened contempt action. The Trustee‘s motion sought permission to use property of the Estate without first allowing
this Court to engage in a Barton analysis to determine whether the use of the Estate property, or an imposition or burden on the professional. This was improper. The propriety of whether the Trustee may burden the Estate with the costs of complying with the subpoenas must be evaluated and authorized by this Court to decide whether it would place an undue burden on the administration of the Estate. The proponent of the subpoenas are the proper parties to seek permission to submit these subpoenas.10
This issue has already taken up considerable time and legal fees with appearances for the Estate. This is precisely the harm that the Barton Doctrine was created to prevent. In the absence of this Court‘s prior approval, the subpoenas commanding the Trustee to use Estate resources usurp the power and authority of this Court.
The issuers from the SDNY should have first sought leave of this Court prior to issuing subpoenas to the Trustee.11 It would not have been difficult for the issuers to come before this Court to explain why retrieval of the data would not interfere with the administration of the Estate. Accordingly, this Court cannot grant the
III. Conclusion
The Trustee‘s motion only asks this Court for an order to use Estate property; the Motion does not seek a determination under the Barton Doctrine or give proper
consideration to the potential effects on administration of this case. These considerations should be raised in the first instance by the issuers of the proposed subpoenas. To the Trustee‘s credit, the Barton Doctrine was noted in his Motion and during the hearing the doctrine was supported by the Trustee as applicable to subpoenas. Having considered all the pleadings, arguments of counsel and for the reasons stated on the record and explained above, this Court finds cause to DENY the Motion with prejudice.
IT IS SO ORDERED.
Date: March 3, 2022
Scott C. Clarkson
United States Bankruptcy Judge