After fifteen years of litigation, two trips to the
Supreme Court and the deaths of both of the original antagonists, the Supreme
Court decided Stern v. Marshall, 2011 U.S. LEXIS 4791 (Jun. 23, 2011). While Vickie Lynn
Marshall, better known as Anna Nicole Smith, made a splash during her lifetime
as a Playboy Playmate who married an aging oil billionaire, her posthumous
legacy is the most important Supreme Court case on bankruptcy court
jurisdiction since Northern Pipeline Construction Co. v. Marathon Pipe Line
Co., 459 U.S. 813 (1982) [an enhanced version of this opinion is available to lexis.com
subscribers / unenhanced version available from lexisONE Free Case Law]. It may also sow as much confusion as the latter
The issue in Marshall was straightforward: does 28
U.S.C. §157(b)(2)(C) mean what it says, namely that counterclaims to proofs of
claim are core proceedings, and if so, is that grant of jurisdiction
constitutional? In a 5-4 decision authored by Chief Justice Roberts, the Court
concluded that §157(b)(2)(C) did authorize the bankruptcy court to determine a
counterclaim to a proof of claim as a core proceeding, but that the statutory
grant was unconstitutional. In doing so, the Chief laid out a manifesto on the
meaning of Article III.
The Executive Summary
While the three opinions in the case make for compelling
reading, the following two quotes from the beginning of the opinion carry the
gist of it:
Chief Justice Roberts opened his opinion with a reference
to Dickens' Bleak House:
This "suit has, in course of time, become so complicated,
that . . . no two . . . lawyers can talk about it for five minutes, without
coming to a total disagreement as to all the premises. Innumerable children
have been born into the cause: innumerable young people have married into it;"
and, sadly, the original parties "have died out of it." A "long procession of
[judges] has come in and gone out" during that time, and still the suit "drags
its weary length before the Court."
Those words were not written about this case, see C.
Dickens, Bleak House, in 1 Works of Charles Dickens 4-5 (1891), but they could
have been. This is the second time we have had occasion to weigh in on this
long-running dispute between Vickie Lynn Marshall and E. Pierce Marshall over
the fortune of J. Howard Marshall II, a man believed to have been one of the
richest people in Texas.
Although the history of this litigation is complicated,
its resolution ultimately turns on very basic principles. Article III, §1, of
the Constitution commands that "[t]he judicial Power of the United States,
shall be vested in one supreme Court, and in such inferior Courts as the Congress
may from time to time ordain and establish." That Article further provides that
the judges of those courts shall hold their offices during good behavior,
without diminution of salary. Ibid. Those requirements of Article III
were not honored here. The Bankruptcy Court in this case exercised the judicial
power of the United States by entering final judgment on a common law tort
claim, even though the judges of such courts enjoy neither tenure during good
behavior nor salary protection. We conclude that, although the Bankruptcy Court
had the statutory authority to enter judgment on Vickie's counterclaim, it
lacked the constitutional authority to do so.
Opinion, pp. 1-2.
For those who want the nitty, gritty details, here are
several thousand more words about the opinion.
A Billionaire's Death Paves the Way for the
Destruction of Many Trees
On June 27, 1994, Vickie Lynn Smith married Howard
Marshall. She was 26 and had been Playboy's Playmate of the Year the prior
year. He was 89. Howard passed away thirteen months later on August 4, 1995.
However, the parties did not wait for his death to begin their legal battle.
In April 1995, Vickie filed suit in Probate Court in
Texas seeking to invalidate Howard's living trust and asserting that Howard
son, Pierce, had tortuously interfered with her property rights in Howard's
assets. Pierce then filed suit against Vickie and two of her lawyers in Texas
state court asserting that they had defamed him.
In January 1996, Vickie did what any destitute
ex-stripper would have done and filed for chapter 11 relief in California.
Pierce filed a dischargeability adversary and a proof of claim against Vickie.
Vickie counterclaimed for tortuous interference with an inter vivos gift,
contending that Pierce had forged Howard's name to a living trust and destroyed
or suppressed a trust that Howard had asked his lawyers to draw up for Vickie's
Things did not go well for Pierce in bankruptcy court.
The Bankruptcy Court found that he had engaged in "massive discovery abuse."
Pierce then asked the District Court to withdraw the reference. The District
Court initially indicated it would grant the motion but then reconsidered based
on the fact that Pierce had voluntarily chosen the Bankruptcy Court forum.
The Bankruptcy Court commenced a trial on the adversary
proceeding on October 25, 2009. It rendered a final judgment awarding Vickie
$447 million on December 29, 2000.
Meanwhile, back in Texas, Vickie filed a parallel claim
against Pierce in January 2000. Pierce defended asserting that there was not an
agreement to be tortuously interfered with. After recovering a judgment against
Pierce in Bankruptcy Court, Vickie non-suited her claims against Pierce in
Texas Probate Court. The Bankruptcy Court initially ordered Pierce not to
proceed, but changed its mind after Pierce represented that there was no risk
of inconsistent judgments.
After a five month trial, the jury in the Probate Court
returned a verdict adverse to Vickie on March 7, 2001. Among other things, the
jury found that Howard had not agreed to make a gift to Vickie. The Probate
Court entered a final judgment on December 27, 2001.
The two trials were a contrast in the evidence
considered. The Bankruptcy Court did not allow Pierce to present any evidence
because of his discovery abuse. On the other hand, the Probate Court heard 40
witnesses, including six days of testimony from Vickie Lynn and resulted in a
Up to the Supreme Court Round One
Pierce appealed the Bankruptcy Court judgment, contending
among other things that the dispute was a non-core proceeding which must be
reviewed de novo by the District Court. The District Court agreed that the
claim was non-core and conducted additional hearings. It entered a judgment
which affirmed the Bankruptcy Court's findings on liability but reduced the
damage award. This judgment was entered on March 7, 2002.
Pierce appealed to the Ninth Circuit which vacated the
judgment, finding that the "probate exception" deprived the Bankruptcy Court of
jurisdiction. Marshall v. Marshall, 392 F.3d 1118 (9th Cir.
2004). The Supreme Court disagreed and remanded the case to the Ninth Circuit. Marshall
v. Marshall, 547 U.S. 293 (2006).
Shortly after the remand, both Pierce and Vickie passed
away within a few months of each other. This left the contest over the assets
of Howard as a battle between the estates of Pierce and Vickie.
The Ninth Circuit Tangles With Jurisdiction
Having gotten the jurisdiction issue wrong on the
When the case went back to the Ninth Circuit, it reached
the same result although for different reasons. Stern v. Marshall, 600
F.3d 1037 (9th Cir. 2010). (The caption of the case changed because
Howard K. Stern was the executor of Vickie's estate. However, it is Howard
Stern the lawyer, rather than Howard Stern the radio shock jock). The Ninth
Circuit basically held that 28 U.S.C. §157(b)(2)(C) did not mean what it said.
While 28 U.S.C. §157(b)(2)(C) expressly provides that counterclaims to proofs
of claim constitute core proceedings, the Ninth Circuit held that it only
extended to counterclaims to the extent necessary to determine the proof of
claim, but not to an affirmative recovery. Alternatively, it held that if §157(b)(2)(C)
did extend to counterclaims in their entirety, that it was unconstitutional.
This set the stage for a second trip to the Supreme
Bankruptcy Jurisdiction 101
As an introduction, Chief Justice Roberts summarized
eight principles of Bankruptcy Court jurisdiction:
* District Judges have "original and exclusive
jurisdiction of all cases under title 11."
* Bankruptcy proceedings fall into three categories:
those that arise under title 11, that that arise in a case under title 11 and
those that are related to a case under title 11.
* District Courts may refer "any or all such proceedings
to the bankruptcy judges of their district" and may withdraw the reference "for
* Since 1984, Bankruptcy Judges "have been appointed to
14-year terms by the courts of appeals for the circuits in which their district
* Bankruptcy Judges may enter final orders in "all core
proceedings arising under title 11, or arising in a case under title 11."
* Core proceedings include but are not limited to sixteen
enumerated categories, including "counterclaims by [a debtor's] estate against
persons filing claims against the estate."
* If the Bankruptcy Court can enter a final judgment, an
aggrieved party has a right of appeal to the U.S. District Court.
* If a matter is not a core proceeding, then the
Bankruptcy Court must submit proposed findings of fact and conclusions of law
to the District Court for de novo review unless the parties consent to entry of
a final judgment by the Bankruptcy Court.
Opinion, pp. 7-8.
Section 157(b)(2)(C) Means What It Says
Chief Justice Roberts found that Vickie's counterclaim
against Pierce was a core proceeding "under the plain text of §157(b)(2)(C)."
This was a rebuke to the Ninth Circuit which had adopted the rather magical
reasoning that a counterclaim was only a core proceeding to the extent that it
reduced a claim against the estate, but not to the extent that it granted
The Chief then analyzed what the phrase "all core
proceedings arising under title 11, or arising in a case under title 11" meant.
This phrase is important because it identifies the types of proceedings that
Bankruptcy Judges can enter final orders in. Pierce had suggested that the
phrase was ambiguous and that there could be some core proceedings which
neither arose under title 11 or in a case under title 11. The Court
acknowledged that the phrase was ambiguous but concluded that "core proceedings
are those that arise in a bankruptcy case or under Title 11." Opinion, p. 10.
The Court also rejected the argument that core
proceedings that did not arise under Title 11 nor in a Title 11 case should be
"related to" proceedings.
Pierce argues that we should treat core matters that
arise neither under Title 11 nor in a Title 11 case as proceedings "related to"
a Title 11 case. Brief for Respondent 60 (internal quotation marks omitted). We
think that a contradiction in terms. It does not make sense to describe a
"core" bankruptcy proceeding as merely "related to" the bankruptcy case;
oxymoron is not a typical feature of congressional drafting.
Opinion, p. 10.
Concluding its discussion of statutory interpretation,
Chief Justice Roberts stated, "We agree with Vickie that §157(b)(2)(C) permits
the bankruptcy court to enter a final judgment on her tortious interference
counterclaim." Opinion, p. 11.
The Court also shot down Pierce's argument that the
Bankruptcy Court lacked jurisdiction on Vickie's defamation claim because it
was a "personal injury tort claim." Under §157(b)(5), "The District Court shall
order that personal injury tort and wrongful death claims shall be tried in the
district court in which the bankruptcy case is pending, or in the district
court in the district in which the claim arose." Pierce contended that this
meant that the Bankruptcy Court lacked jurisdiction to hear these claims.
Vickie contended that defamation was not a "personal injury tort" and that the
statute was not jurisdictional. The Court declined the invitation to define the
term "personal injury tort" and instead found that the section was not
jurisdictional and could be waived. When Pierce waited 27 months to file his
motion to withdraw reference, he waived his ability to seek a trial in the
All About Article III
If the Opinion had stopped here, there would have been
much rejoicing on Vickie's side. However, it did not. "Although we conclude
that§157(b)(2)(C) permits the Bankruptcy Court to enter final judgment on
Vickie's counterclaim, Article III of the Constitution does not."
Article III of the Constitution vests the judicial power
of the United States in the supreme court and "such inferior Courts as the
Congress may from time to time establish." While I am sure that District Court
Judges don't like to think of themselves as "inferior Courts," at least the
Constitution guaranties them life tenure and protection against reduction in
pay. Bankruptcy Judges, being appointed under Article I of the Constitution, do
not enjoy these protections.
The Chief described Article III as "an inseparable
element of the constitutional system of checks and balances that both defines
the power and protects the independence of the Judicial Branch." Opinion, p.
16. It also "protects liberty." Opinion, p. 17. In the Declaration of
Independence , one of the grievances of the colonists was that King George
"made Judges dependent on his Will alone, for the tenure of their offices and
the amount and payment of their salaries."
The Framers undertook in Article III to protect citizens
subject to the judicial power of the new Federal Government from a repeat of
those abuses. By appointing judges to serve without term limits, and
restricting the ability of the other branches to remove judges or diminish
their salaries, the Framers sought to ensure that each judicial decision would
be rendered, not with an eye toward currying favor with Congress or the Executive,
but rather with the "[c]lear heads . . . and honest hearts" deemed "essential
to good judges." 1 Works of James Wilson 363 (J. Andrews ed. 1896).
Opinion, p. 18. Thus, the Court's consideration of the
constitutionality of §157(b)(2)(C) is not just about which person in a black
robe will decide a particular case or which estate of a dead person will
receive a lot of money, but rather, it is a mighty bulwark protecting us
against a new King George and his corrupt judges.
Public Rights and Private Lawsuits
While Article III jurisdiction is important in preventing
tyranny, there is an exception for "public rights."
The plurality in Northern Pipeline recognized that
there was a category of cases involving "public rights" that Congress could
constitutionally assign to "legislative" courts for resolution. That opinion
concluded that this "public rights" exception extended "only to matters arising
between" individuals and the Government "in connection with the performance of
the constitutional functions of the executive or legislative departments . . .
that historically could have been determined exclusively by those" branches. Id.,
at 67-68 (internal quotation marks omitted). A full majority of the Court,
while not agreeing on the scope of the exception, concluded that the doctrine
did not encompass adjudication of the state law claim at issue in that case.
Opinion, p. 19.
After Northern Pipeline, Congress tried again,
creating bankruptcy courts appointed by the Court of Appeals and allowing them
to enter final judgments in "core" proceedings only. Judgments in core
proceedings were subject to only traditional appellate review with deference to
judicial fact finding.
The Chief Justice then found that the Vickie Lynn
Marshall case was just like the Northern Pipeline case in that
the Bankruptcy Court in this case exercise the "judicial
Power of the United States" in purporting to resolve and enter final judgment
on a state common law claim, just as the court did in Northern Pipeline.
No "public right" exception excuses the failure to comply with Article III in
doing so, any more than in Northern Pipeline.
Opinion, p. 21. The Court found that "Vickie's claim is a
state law action independent of the federal bankruptcy law and not necessarily
resolvable by a ruling on the creditor's proof of claim in bankruptcy." Id. .
So, what is a public right? We know that it is not a suit
between two creditors, since that was the case in Northern Pipeline. We
know that it is not a state law counterclaim by a debtor against a person
filing a claim against the estate, since that is the holding in this case.
The public rights doctrine goes back to Murray's
Lessee v. Hoboken Land & Improvement Co., 18 How. 272 (1856). Here is
how Chief Justice Roberts described the decision:
"To avoid misconstruction upon so grave a subject," the
Court laid out the principles guiding its analysis. Id., at 284. It
confirmed that Congress cannot "withdraw from judicial cognizance any matter
which, from its nature, is the subject of a suit at the common law, or in
equity, or admiralty." Ibid. The Court also recognized that "[a]t the
same time there are matters, involving public rights, which may be presented in
such form that the judicial power is capable of acting on them, and which are
susceptible of judicial determination, but which congress may or may not bring
within the cognizance of the courts of the United States, as it may deem
Opinion, p. 22. Thus, the distinction was between public
rights defined as
those arising "between the Government and persons subject
to its authority in connection with the performance of the constitutional
functions of the executive or legislative departments"
and private rights which are the liability of one individual to another under the law
Opinion, p. 23. While it is not necessary for the
government to be a party to an action to invoke the public rights doctrine, the
has continued . . . to limit the exception to cases in
which the claim at issue derives from a federal regulatory scheme, or in which
resolution of the claim by an expert government agency is deemed essential to a
limited regulatory objective within the agency's authority.
Opinion, p. 25.
While the discussion thus far was fairly general, the
Court brought it back to the bankruptcy realm in discussing Granfinanciera,
S.A. v. Nordberg, 492 U.S. 33 (1989). That case involved whether a
defendant who had not filed a proof of claim was entitled to a jury trial in a
fraudulent conveyance case.
In Granfinanciera we rejected a bankruptcy
trustee's argument that a fraudulent conveyance action filed on behalf of a
bankruptcy estate against a noncreditor in a bankruptcy proceeding fell within
the "public rights" exception. We explained that, "[i]f a statutory right is
not closely intertwined with a federal regulatory program Congress has power to
enact, and if that right neither belongs to nor exists against the Federal
Government, then it must be adjudicated by an Article III court." Id., at
54-55. We reasoned that fraudulent conveyance suits were "quintessentially
suits at common law that more nearly resemble state law contract claims brought
by a bankrupt corporation to augment the bankruptcy estate than they do
creditors' hierarchically ordered claims to a pro rata share of the bankruptcy
res." Id., at 56. As a consequence, we concluded that fraudulent
conveyance actions were "more accurately characterized as a private rather than
a public right as we have used those terms in our Article III decisions." Id.,
Opinion, at 26-27.
Applying the Law to This Case
The Court clicked off the following reasons that Vickie
Lynn's counterclaim did not fall within the public rights exception:
* It was not a claim which could be pursued only by grace
of the other branches of government.
* It was not a matter that historically could be
determined only by the other branches.
* It did not flow from a federal regulatory scheme.
* It was not "completely dependent upon" adjudication of
a claim created by federal law.
* It was a claim under state common law between two
The Court made an interesting observation about why
consent to trial in the Article I court:
Pierce did not truly consent to resolution of Vickie's
claim in the bankruptcy court proceedings. He had nowhere else to go if he
wished to recover from Vickie's estate.
Opinion at 27. In Granfinanciera, the Supreme
Court found that the defendant was entitled to a jury trial because he had not
consented to the Bankruptcy Court's jurisdiction by filing a proof of claim.
Here, however, the Supreme Court is saying that even filing a claim does not
constitute consent. More on this below.
Finally, this was not a case involving an
expert and inexpensive method for dealing with a class of
questions of fact which are particularly suited to examination and
determination by an administrative agency specially assigned to that task.
Opinion, p. 28.
The "experts" in the federal system at resolving common
law counterclaims such as Vickie's are the Article III courts, and it is with
those courts that her claim must stay.
In summing up his public rights discussion, the Chief
What is plain here is that this case involves the most
prototypical exercise of judicial power: the entry of a final, binding judgment
by a court with broad substantive jurisdiction, on a common law cause of
action, when the action neither derives from nor depends upon any agency
regulatory regime. If such an exercise of judicial power may nonetheless be
taken from the Article III Judiciary simply by deeming it part of some
amorphous "public right," then Article III would be transformed from the
guardian of individual liberty and separation of powers we have long recognized
into mere wishful thinking.
Opinion, p. 29. I think what the court was trying to say
here was, "You don't have jurisdiction. We really, really mean it."
No Proof of Claim Waiver
In Katchen v. Landy, 382 U.S. 323 (1966) and Langenkamp
v. Culp, 498 U.S. 42 (1990), the Supreme Court had held that a creditor who
filed a proof of claim could be sued to recover a preference. The Court
distinguished these cases on two grounds. First, the Court argued that the
preference could be a ground for disallowing the claim, so that the preference
claim was tied into allowance of the claim. Second, it found that the
preference claim was created by the Bankruptcy Code and was part of the process
of determining an equitable allocation of the assets of the debtor.
What's the Big Deal?
Responding to concerns that its decision would radically
change the workload of the Courts, Chief Justice Roberts stated:
We do not think the removal of counterclaims such as
Vickie's from core bankruptcy jurisdiction meaningfully changes the division of
labor in the current statute; we agree with the United States that the question
presented here is a "narrow" one. Brief for United States as Amicus Curiae 23.
Article III of the Constitution provides that the
judicial power of the United States may be vested only in courts whose judges
enjoy the protections set forth in that Article. We conclude today that
Congress, in one isolated respect, exceeded that limitation in the Bankruptcy
Act of 1984. The Bankruptcy Court below lacked the constitutional authority to
enter a final judgment on a state law counterclaim that is not resolved in the
process of ruling on a creditor's proof of claim. Accordingly, the judgment of
the Court of Appeals is affirmed.
Opinion, pp. 37, 38.
Justice Scalia Would Throw the Whole System
In a brief concurrence, Justice Scalia reaffirmed his
prior concurrence in Granfinanciera that at a minimum, a public rights case
must arise between the government and others, a conclusion that would render
most bankruptcy court jurisdiction unconstitutional. He mused that it could
possibly be constitutional for bankruptcy judges to adjudicate claims against
the estate, but demurred that "the subject has not been briefed, and so I state
no position on the matter."
In a vigorous dissent, Justice Breyer, joined by Justices
Ginsburg, Sotomayor and Kagan, argued that counterclaim jurisdiction is
constitutional. The dissent placed a different emphasis upon the Court's prior
precedents to arrive at the opposite conclusion. In particular, the dissent
took the majority to task for relying so heavily on the plurality opinion in Northern
Pipeline instead of the more recent decisions in Thomas v. Union Carbide
Agricultural Products Co., 473 U.S. 568 (1985) [enhanced version / unenhanced version] and Commodity Futures
Trading Commission v. Schor, 478 U.S. 833 (1986) [enhanced version / unenhanced version] .
The dissent also questioned the majority's view that the
opinion does not change all that much.
The majority predicts that as a "practical matter"
today's decision "does not change all that much." Ante, at 36-37. But I
doubt that is so. Consider a typical case: A tenant files for bankruptcy. The
landlord files a claim for unpaid rent. The tenant asserts a counterclaim for
damages suffered by the landlord's (1) failing to fulfill his obligations as
lessor, and (2) improperly recovering possession of the premises by
misrepresenting the facts in housing court. (These are close to the facts
presented in In re Beugen, 81 B. R. 994 (Bkrtcy. Ct. ND Cal. 1988).)
This state-law counterclaim does not "ste[m] from the bankruptcy itself," ante,
at 34, it would not "necessarily be resolved in the claims allowance process," ibid.,
and it would require the debtor to prove damages suffered by the lessor's
failures, the extent to which the landlord's representations to the housing
court were untrue, and damages suffered by improper recovery of possession of
the premises, cf. ante, at 33-33. Thus, under the majority's holding,
the federal district judge, not the bankruptcy judge, would have to hear and
resolve the counterclaim.
Why is that a problem? Because these types of disputes
arise in bankruptcy court with some frequency. See, e.g., In re CBI
Holding Co., 529 F. 3d 432 (CA2 2008) [enhanced version / unenhanced version] (statelaw claims and counterclaims); In
re Winstar Communications, Inc., 348 B. R. 234 (Bkrtcy. Ct. Del. 2005)
(same); In re Ascher, 128 B. R. 639 (Bkrtcy. Ct. ND Ill. 1991) (same); In
re Sun West Distributors, Inc., 69 B. R. 861 (Bkrtcy. Ct. SD Cal. 1987)
(same). Because the volume of bankruptcy cases is staggering, involving almost
1.6 million filings last year, compared to a federal district court docket of
around 280,000 civil cases and 78,000 criminal cases. Administrative Office of
the United States Courts, J. Duff, Judicial Business of the United States
Courts: Annual Report of the Director 14 (2010). Because unlike the "related"
non-core state law claims that bankruptcy courts must abstain from hearing, see
ante, at 36, compulsory counterclaims involve the same factual disputes as
the claims that may be finally adjudicated by the bankruptcy courts. Because
under these circumstances, a constitutionally required game of jurisdictional
ping-pong between courts would lead to inefficiency, increased cost, delay, and
needless additional suffering among those faced with bankruptcy.
Dissent, pp. 16-17.
What Does It All Mean?
The difficulty with the Stern opinion is that it
is a narrow opinion with a very broad rationale. While the holding merely
invalidates 28 U.S.C. §157(b)(2)(C), it does so with a broad reading of the
importance of the Article III judiciary and a narrow reading of the public
rights exception. Lying underneath the opinion, there is a palpable feeling
that Congress has gone too far in giving power to non-Article III adjuncts. To
paraphrase a song, the majority's lips say no, no, no (practical effect), but
their eyes say yes, yes, yes.
Here are a few conclusions that can be drawn:
1. The opinion will have its greatest impact on adversary
proceedings. Contested matters, such as plans of reorganization and motions to
lift stay would not be affected.
2. State law causes of action against non-debtor parties
are non-core proceedings even if the other party has filed a proof of claim.
3. Fraudulent conveyance actions, even those arising
under Section 548, may prove to be non-core.
4. Preference actions remain as core proceedings.
5. Even Justice Scalia would probably allow the
Bankruptcy Court to determine an objection to claim on a good day.
For more opinions about what all this means, tune in to
the State Bar of Texas's Webinar, Stern v. Marshall: Handling State Claims
After the Supremes Make It All Clear on July 12, 2011 at 10:00 a.m. Speaking
will be Bankruptcy Judge Harlin "Cooter" Hale, former judge and law professor
Glen Ayers and yours truly.
more at A Texas Bankruptcy Lawyer's Blog
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