Cadwalader Clients & Friends Memo: Stern v. Marshall: How Big Is It?

On June 23, 2011, the Supreme Court ruled 5-4, in an opinion by Chief Justice Roberts, that a Bankruptcy Judge lacked constitutional authority to issue a final ruling on state law counterclaims by a debtor against a claimant. This is the latest round of a well-known case involving the estate of former model Anna Nicole Smith and the estate of her late husband, wealthy oil magnate J. Howard Marshall.

While Stern v. Marshall is probably the Court's most significant ruling on bankruptcy jurisdiction since its seminal Northern Pipeline1 case, the impact is not yet clear. It may create leverage for non-debtors in the form of potential delay of key litigation and may pave the way for more matters to be heard in the District Courts. However, in practice, District Courts have allowed Bankruptcy Courts to manage cases up to the point of trial and would likely permit the same process for a noncore counterclaim. To the extent District Courts are overburdened they may be inclined to defer to the Bankruptcy Court's findings and conclusions. Moreover, the opinion may be restricted by its facts to counterclaims with little or no relation to the underlying bankruptcy claim. Most counterclaims will have a closer relation to the underlying claim than was the case here and core jurisdiction for the Bankruptcy Court may remain constitutional in those cases, particularly with respect to compulsory counterclaims. Stern v. Marshall, No 10-179 (U.S. June 23, 2011).

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