The Stern v. Marshall case brings to the fore a long standing struggle between state and federal law with regard to bankruptcy matters. The case began in a Texas probate court. Howard Marshall provided for his wife, Vickie Lynn Marshall (a.k.a, Anna Nicole Smith) outside his will, but Anna Nicole brought an action against Pierce Marshall, Howard Marshall’s son, alleging fraudulent interference with the intervivos trust. After her husband’s death, Ms. Marshall filed for bankruptcy, including a claim for tortious interference with a testamentary gift against her late husband’s son. The Bankruptcy Court ruled in her favor, awarding $425 million dollars. Pierce Marshall alleged that the Bankruptcy Court lacked jurisdiction to hear the counterclaim, because it was not a “core proceeding.” The Bankruptcy Court determined it had the power to enter judgment on the counterclaim under § 157(b)(1).
The District Court found it was unconstitutional under Northern Pipeline Constr. Co. v. Marathon Pipeline, 458 U.S. 50, 79 n.31 (1982), for the Bankruptcy Court to enter any final judgment on the claim. (Marathon held that a bankruptcy court could not finally decided a state law claim against an entity that was not otherwise part of the bankruptcy proceeding.) The Court of Appeals in Stern reversed the District Court (on a different ground) but found that a counterclaim under § 157(b)(2)(C) is properly a “core proceeding arising in a case under the [Bankruptcy Code] only if the counterclaim is so closely related to [a creditor’s] proof of claim that the resolution of the counterclaim is necessary to resolve the allowance or disallowance of the claim itself.”
The United States Supreme Court then, likewise, determined the Bankruptcy court overstepped its jurisdictional power. Justice Roberts, writing for a 5-4 majority (J. Scalia concurring), held that though the Bankruptcy Court had statutory authority to enter judgment on the counterclaim under § 157(b)(2)(C), it lacked constitutional authority to do so. Relying on Marathon, Justice Roberts observed that since Bankruptcy Courts are not Article III courts, they are not vested with authority to decide state law tort (or contract) claims. Since the counterclaim at issue in the Stern case was “not a necessary part of the claims process,” as it involved “legal and factual questions that would not “necessarily” be resolved in connection with the adjudication of Pierce’s claim,” it could not be constitutionally adjudicated with finality by a bankruptcy court. The court discussed public rights (those rights so infused with a federal governmental action) versus private rights, and deemed the compulsory counterclaim at issue to be a matter of private rights. The Court was adamant about how this “narrow” holding would not “meaningfully change” the courts’ division of labor. “We are not convinced that the practical consequences of such limitations on authority of bankruptcy courts to enter final judgments are … significant.”
Though the Stern holding addresses a rather narrow issue – the question of whether a bankruptcy court has the constitutional authority to enter a final judgment on an otherwise non-core tort cause of action asserted as a compulsory counterclaim in a bankruptcy case – the case raises significant new matters for consideration by any business enterprise, or, individual that may end up engaged in litigation with a debtor entity – that is to say – all of us. Ultimately, Stern will serve to complicate the decision making tree for individual creditors contemplating the filing of a proof of claim in a bankruptcy case, as well as for parties who may find themselves enmeshed in litigation with a debtor.
Attorneys continue to represent Anna Nicole Smith’s estate and argued in federal California court Wednesday that Marshall Petroleum Inc., should be sanctioned tens of millions of dollars because the son of J. Howard Marshall II, Smith’s late husband, committed probate fraud nearly a decade ago, and swindled Smith out of a share of Marshall’s multimillion-dollar estate. (See below, Probate Battle Illustrates Value of Constitution’s Full Faith & Credit Clause) “If your honor doesn’t craft a sanctions motion, you’re probably going to have the largest swindle … take place right under this court’s nose, and it’s grotesque that that can occur,” Smith’s attorney Philip Boesch Jr., begged U.S. District Judge David O. Carter, “craft an order … you’re the court of last resort.”
April 8th, 2012
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