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Steve Jakubowski: Supreme Court's Ruling In Stern v. Marshall A 'Bombshell'


In my last post, I posited whether the Court's decision in Stern v. Marshall would be a bombshell or a dud.  It certainly was no dud.  And after reading the 5-4 opinion, I'd say that it's a bombshell in several respects, both from a bankruptcy and constitutional perspective.  Here's four reasons why:

  • First, Justice Roberts' masterfully written majority opinion (joined by Justices Scalia, Kennedy, Scalia, Thomas, and Alito) declared Pierce Marshall's estate the final victor and blew poor Anna Nicole Smith's estate completely out of the water.  The fact that this litigation is finally over is itself cause for celebration everywhere, except among Anna Nicole's heirs.
  • Second, bankruptcy courts will no longer be able to enter final judgments "on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime ... [and] is not resolved in the process of ruling on a creditor's proof of claim."  (Op. at 29, 38.)  This holding will likely be applauded-at least in part-by Bankruptcy Court judges, who already are severely overworked by a bloated chapter 7 and 13 individual debtor docket.  (One Chicago judge recently commented at the end of a day's hearing that he was retiring to his chambers to review the 546 motions in individual chapter 7 and 13 cases set for status the next day.)  Being a nearly zero-sum game, however, District Court judges are equally likely to be distraught by the prospect of now having to hear innumerable counterclaims (and corresponding creditor claims that should accompany them as a matter of judicial economy) commenced by zealous debtors and trustees (who themselves can't relish the prospect of losing their perceived "home-court" advantage).  Expect to see a flurry of motions filed in the coming days, weeks, months, and years attempting to establish (perhaps through a game of judicial "hot potato") the appropriate timing, protocol, and venue for these newly minted "non-core" proceedings.
  • Third, the Court's opinion at pages 33-34 makes pretty clear that Section 157(b)(2)(H)-which provides that fraudulent conveyance actions are "core proceedings"-is also unconstitutional.  ("We see no reason to treat Vickie's counterclaim any differently from the fraudulent conveyance action in Granfinanciera.")  This will mandate a sea-change in current litigation practice along the lines discussed above, though I expect many Bankruptcy Judges will long for the "good old days" when they could enter final judgments in these more interesting proceedings.

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To read more items by Steve Jakubowski, visit the Bankruptcy Litigation Blog

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