Yellowstone Club Founder’s Claims Against Former Counsel May Survive

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By Diane Davis

Nov. 30 — The latest chapter in the long-running saga of Montana’s Yellowstone Mountain Club’s bankruptcy litigation may give its former owner a chance to move forward on claims that his former attorney used confidential information to his detriment in his bankruptcy proceedings ( Blixseth v. Brown (In re Yellowstone Mountain Club, LLC) , 2016 BL 393628, 9th Cir., No. 14-35363, 11/28/16 ).

Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit Nov. 28 concluded that plaintiff Timothy L. Blixseth needed the bankruptcy court’s permission before bringing his post-petition claims against his former counsel and chair of the Unsecured Creditor’s Committee (UCC), Stephen R. Brown.

Blixseth didn’t need the bankruptcy court’s permission to bring his prepetition claims against Brown, the court said.

The Ninth Circuit then remanded the case to the bankruptcy court to determine whether Brown is entitled to derived judicial immunity for Blixseth’s post-petition claims because his position on the UCC doesn’t “entitle him to immunity for all actions as Chair.” “Unless he is, we see no reason Blixseth couldn’t proceed to discovery on these claims,” the court said, signaling that the case might yet move forward.

The court relied on the Barton doctrine, which “bars a broad range of suits against bankruptcy trustees absent prior approval of the bankruptcy court,” according to Bloomberg Law: Bankruptcy Treatise, pt. IX, ch. 295 (D. Michael Lynn et al. eds., 2016). Under the Barton doctrine, plaintiffs must “first obtain authorization from the bankruptcy court before ‘initiat[ing] an action in another forum’ against certain officers appointed by the bankruptcy court for actions the officers have taken in their official capacities,” the court said.

The question is whether the Barton doctrine applies to lawsuits against creditors’ committee members because some courts of appeals have extended the doctrine to actors who aren’t bankruptcy trustees or receivers. The Ninth Circuit said it is the first court to extend the Barton doctrine’s application to protect creditor committee members.

Blixseth argued that Brown owed no duty to the estate and represented creditors seeking payment from the estate. According to Blixseth, the Barton doctrine doesn’t apply to his claims against Brown.

The Ninth Circuit rejected Blixseth’s view of the UCC’s interests as too narrow. “Because creditors have interests that are closely aligned with those of a bankruptcy trustee, there’s good reason to treat the two the same for purposes of the Barton doctrine,” the court said.

Long Saga of Bankruptcy Litigation

Blixseth and his former wife Edra developed the Yellowstone Mountain Club as an exclusive ski and golf resort for the “ultra-wealthy” in the late 1990s.

Later, Blixseth borrowed $375 million from Credit Suisse on behalf of Yellowstone but used some of the proceeds to pay for his personal debts. Blixseth said he relied on the advice of his attorney (Brown) before doing this.

The shareholders of the Yellowstone entities sued him in state court and Blixseth settled. He later divorced Edra and gave the Yellowstone entities to her in the marital settlement agreement under advice of counsel (Brown).

Edra filed bankruptcy petitions on behalf of the Yellowstone entities and the U.S. Trustee appointed Brown as chair of the UCC.

Blixseth sued Brown in district court, alleging that he used confidential information in the bankruptcy proceedings. The district court held it lacked jurisdiction because Blixseth hadn’t first obtained the bankruptcy court’s permission to sue as required by Barton.

Blixseth then asked the bankruptcy court for permission to bring his claims in district court. The bankruptcy court denied his request, saying that it was “impossible … to isolate Blixseth’s so-called ‘pre-petition malpractice and malfeasance’ claims from Brown’s activities as a member of the Unsecured Creditors Committee.”

The district court affirmed the bankruptcy court.

Barton Doctrine Applies to UCC Members

On appeal, the Ninth Circuit concluded that the Barton doctrine applies to UCC members like Brown who are sued for acts performed in their official capacities.

The court, however, distinguished between Blixseth’s pre- and post-petition claims, concluding that he only needed permission from the bankruptcy court on post-petition claims.

The court also rejected Blixseth’s argument that the bankruptcy court exceeded its authority under Stern v. Marshall, 564 U.S. 462, 131 S. Ct. 2594 (2011), by adjudicating his claims on the merits. Stern doesn’t preclude bankruptcy courts from adjudicating Barton claims, the court said.

Judges Richard A. Paez and Marsha S. Berzon joined the opinion.

John C. Doubek, Doubek Pyfer & Fox LLP, Helena, Mont.; Michael J. Ferrigno, Law Office of Michael J. Ferrigno, Boise, Idaho, represented Plaintiff/Appellant Timothy L. Blixseth.

Dale R. Cockrell and Mikel L. Moore, Moore Cockrell Goicoechea & Axelberg P.C., Kalispell, Mont., represented Defendants/Appellees Stephen R. Brown.

To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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