Stern v. Marshall (10-179)

Oral argument: Jan. 18, 2011

Appealed from: United States Court of Appeals for the Ninth Circuit (Mar. 19, 2010)

BANKRUPTCY, JURISDICTION, CHAPTER 11, COUNTERCLAIMS

In 1994, J. Howard Marshall II, a very wealthy oil executive, married Vickie Lynn Marshall (“Vickie”), a model and actress who worked under the name Anna Nicole Smith. J. Howard Marshall died shortly thereafter, leaving the bulk of his estate to his son E. Pierce Marshall (“Pierce”). Vickie filed for Chapter 11 bankruptcy protection in 1996, and Pierce brought a defamation claim against her in the bankruptcy court. Vickie made a compulsory counterclaim, alleging that Pierce had tortiously interfered with J. Howard Marshall’s intent to give her part of his estate. The bankruptcy court rendered a judgment in favor of Vickie. Pierce eventually appealed to the Ninth Circuit, which reversed the bankruptcy court’s decision on the grounds that Vickie’s counterclaim was not a “core” proceeding, and therefore was improperly before the bankruptcy court. Vickie’s estate, represented by her executor Howard K. Stern, argues that the Ninth Circuit erroneously applied 28 U.S.C. § 157(b)(2)(C) because the provision categorically establishes compulsory counterclaims as core proceedings. The estate of Pierce Marshall asserts that the counterclaim raised in this case deals with a tort claim that arises under state law, and is therefore not part of the core proceedings. The Supreme Court’s decision in this case will determine whether Congress intended for 28 U.S.C. § 157(b)(2)(C) to categorize all compulsory counterclaims as core proceedings and, if this was Congress’ intent, whether this intent is constitutional.

· [Questions presented]

· [Issue]

· [Facts]

· [Discussion]

· [Analysis]

Questions presented

1) Whether the Ninth Circuit opinion, which renders §157(b)(2)(C) surplusage in light of §157(b)(2)(B), contravenes Congress’ intent in enacting §157(b)(2)(C).

2) Whether Congress may, under Articles I and III, constitutionally authorize core jurisdiction over debtors’ compulsory counterclaims to proofs of claim.

3) Whether the Ninth Circuit misapplied Marathon and Katchen and contravened this Court’s post-Marathon precedent, creating a circuit split in the process, by holding that Congress cannot constitutionally authorize non-Article III bankruptcy judges to enter final judgment on all compulsory counterclaims to proofs of claim.

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Issue

Is it constitutional for a United States bankruptcy court to issue a final decision regarding a compulsory counterclaim based on state law, or is the bankruptcy court limited to only issuing final decisions regarding counterclaims which are based on “core” issues of the bankruptcy proceeding?

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Facts

In 1994, J. Howard Marshall II, a very wealthy retired oil executive, married Vickie Lynn Marshall (hereinafter “Vickie”); at the time of their marriage, she was 26 and he was 89. See In re Marshall, 600 F.3d 1037, 1041–42 (9th Cir. 2010). Vickie worked as a model and actress under the name Anna Nicole Smith. See New York Times, Anna Nicole Smith is Found Dead in Florida (Feb. 9, 2007). Just one year later, J. Howard Marshall died. See id. During his lifetime, J. Howard Marshall gave gifts and presents to Vickie, but he did not bequeath any property to her under his will. See id. at 1042. Instead, the primary beneficiary of J. Howard Marshall’s will was his son E. Pierce Marshall (hereinafter “Pierce”). See id. at 1041–42.

In 1996, Vickie filed for Chapter 11 bankruptcy protection before the United States Bankruptcy Court for the Central District of California. See In re Marshall, 600 F.3d at 1043. Pierce sought a declaratory judgment from the bankruptcy court regarding whether proceeds from his defamation suit against Vickie could be discharged through bankruptcy. See id. at 1043–44. Pierce alleged that Vickie was smearing Pierce’s name in public in order to recover money from J. Howard Marshall’s estate. See id. at 1043. In response, Vickie filed a counterclaim of tortious interference against Pierce, alleging that Pierce had fraudulently caused J. Howard Marshall to leave Vickie out of his estate. See id. at 1044–45. The bankruptcy court found in Vickie’s favor and awarded her approximately $475 million in damages. See id. at 1046.

Simultaneous to the bankruptcy proceeding, J. Howard Marshall’s will was being probated in the Statutory Probate Court of Texas. See In re Marshall, 600 F.3d at 1046. In the probate proceeding, Vickie also challenged the validity of the will by alleging tortious interference with J. Marshall Howard’s alleged intent to give her “half of everything he had.” See id. at 1047. However, Vickie consequently withdrew her claims on the apparent belief that the bankruptcy court’s ruling regarding her tortious interference counterclaim was a final judgment. See id. at 1046. Meanwhile, Pierce filed multiple counterclaims, seeking a declaratory judgment regarding Vickie’s rights to the estate and the validity of J. Howard Marshall’s will. See id. at 1046–47. The probate court ruled in Pierce’s favor, holding that Vickie was not entitled to anything from J. Howard Marshall’s estate. See id. at 1047.

Pierce next filed an appeal before the United States District Court for the Central District of California, arguing that issue preclusion and claim preclusion mandate that the probate court’s ruling applies to the bankruptcy proceedings. See In re Marshall, 600 F.3d at 1047–48. The district court held that the bankruptcy court was not permitted to enter a final judgment regarding Vickie’s tortious interference counterclaim because Vickie’s counterclaim was “non-core.” See id. at 1048. According to the district court, Vickie’s counterclaim was “non-core” because the underlying factual basis of Vickie’s counterclaim was only weakly related to the facts underlying Pierce’s claim and because Vickie’s counterclaim was much broader than Pierce’s. See id. However, the district court later ultimately ruled in favor of Vickie, finding that Pierce had committed tortious interference. See id.

The United States Supreme Court had previously received this case on certiorari, but remanded the case back to the United States Court of Appeals for the Ninth Circuit in order to determine whether Vicki’s counterclaim was “core” and whether the probate court’s ruling precluded the bankruptcy court’s ruling. See In re Marshall, 600 F.3d at 1049. The Ninth Circuit held that Vickie’s claim was “non-core,” such that the bankruptcy court was not allowed to enter a final ruling regarding her counterclaim. See id. at 1064. As a result, the Ninth Circuit held that the probate court’s ruling, which was entered first, should have been given preclusive effect by the bankruptcy court. See id.

The Supreme Court has received this case again, on certiorari, regarding the issues heard by the Ninth Circuit on remand. See Stern v. Marshall, 131 S.Ct. 63, 63 (2010). Both Vickie and Pierce are now deceased and are represented by their executors, Howard K. Stern and Elaine T. Marshall, respectively; to avoid confusion, the parties will be referred to as if they remain living. See In re Marshall, 600 F.3d at 1041.

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Discussion

The Supreme Court will decide whether all compulsory counterclaims are considered “core” proceedings and thus within the jurisdiction of bankruptcy courts. Petitioner Vickie Lynn Marshall (“Vickie”) argues that the United States Constitution does not always guarantee litigants the right to air their claims before an Article III court, as opposed to a bankruptcy court. Vickie further argues that efficiency concerns are very important to bankruptcy proceedings because bankruptcy trustees often have very complex caseloads, and therefore bankruptcy courts require the ability to make final decisions regarding counterclaims.

Respondent E. Pierce Marshall (“Pierce”) argues that cases involving private rights must be heard before Article III courts. According to Pierce, filing a counterclaim to achieve jurisdiction in this case is unfair because a final decision normally would not be issued by a bankruptcy court over such an issue. Pierce also argues that considerations of fairness are superior to those of efficiency, and that Congress never intended for bankruptcy courts to hear state law claims.

Constitutionality of Bankruptcy Courts Deciding Counterclaims

An important issue is whether Congress may constitutionally authorize a bankruptcy court to enter a final decision regarding a compulsory counterclaim. See Brief of Amicus Curiae the United States of America in Support of Petitioner at 2. The United States argues that allowing bankruptcy courts to enter final judgments on counterclaims does not conflict with a person’s constitutional rights because parties are not always entitled to a hearing before an Article III court. See id. at 22–23. Further, the United States maintains that the constitutionality of a bankruptcy court’s actions depends on the bankruptcy court’s ability to make decisions “free from potential domination by other branches of government.” See id. at 30. Here, the United States argues, allowing bankruptcy courts to issue adjudicative decisions would not threaten the independence of the judiciary because bankruptcy judges are chosen by federal appeals courts, not by the executive or legislative branch. See id. at 31. Also, if a party wished to appeal a bankruptcy decision, the party would still be entitled to file a de novo legal appeal before an Article III court. See id. at 32.

On the other hand, Pierce argues that allowing the bankruptcy court to rule in this case would unconstitutionally remove some “private right” suits from the purview of Article III courts. See Brief for Respondent at 37–38. According to Pierce, Congress may determine the scope of Article III courts’ jurisdiction over public rights, but Congress may not remove Article III courts’ jurisdiction over private rights controversies, which are “sheltered at the heart of Article III.” See id. at 38–39. Pierce maintains that because Vickie’s tortious interference claim is paradigmatic of the private right controversies over which Article III courts have jurisdiction, it would be unconstitutional for Congress to authorize non-Article III courts, such as bankruptcy courts, to hear Vickie’s claim. See id. at 40.

Efficiency v. Fairness Concerns in Bankruptcy Proceedings

Pierce also argues that, with respect to bankruptcy proceedings, public policy concerns of fairness and federalism, as opposed to mere administrative efficiency, are of paramount importance. See Brief for Respondent at 49. Pierce explains that although counterclaims are generally allowed in the name of efficiency, with respect to bankruptcy proceedings, efficiency is not the most important concern. See id. at 54. Additionally, Pierce argues that preventing bankruptcy courts from hearing these types of counterclaims will not make the bankruptcy process overly confusing; rather, it will simply allow bankruptcy courts to avoid overseeing state law claims. See id. at 61.

The National Association of Bankruptcy Trustees (“NABT”) contends that because bankruptcy trustees handle so many complex cases, bankruptcy trustees must be able to render decisions upon all important issues affecting the bankruptcy estate, including compulsory counterclaims. See Brief of Amicus Curiae National Association of Bankruptcy Trustees in Support of Petitioner at 6. The NABT further argues, in opposition to Pierce, that efficiency concerns are indeed a primary goal of U.S. bankruptcy law. See id. Finally, NABT argues that forcing a bankruptcy court to determine whether a counterclaim is “core” or “non-core” as a prerequisite to hearing a counterclaim is an unnecessary procedure and goes against congressional aims of efficiency. See id. at 8.

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Analysis

In this case, the Supreme Court must determine whether Congress intended for compulsory counterclaims raised by an estate against a creditor to be considered a core proceeding, and therefore subject to the jurisdiction of bankruptcy courts. See Brief for Petitioner, Howard K. Stern at 1. If the Court rules that they are core proceedings, this would give bankruptcy courts the authority to render final judgments on these counterclaims when they arise during a bankruptcy proceeding. See id. The Supreme Court’s decision will rest on their interpretation of the language of 28 U.S.C. § 157(b)(2). This statute gives bankruptcy court judges authority to hear any and all non-federal issues that may arise in a bankruptcy case. See 28 U.S.C. § 157(b)(2). The authority of a bankruptcy court to hear these claims can only be granted by Congress. See U.S. Const. art. III.

Vickie argues that it is clear that Congress intended to give bankruptcy courts the authority to render final judgments on compulsory counterclaims by the estate. See Brief for Petitioner at 26. Vickie posits that the Court should look to the plain language of Section 157(b)(2) and to the legislative history in order to accurately determine Congress’ intent. See id. at 26–32. First, Vickie contends that the language of the statute includes a list of proceedings that Congress deemed to be core proceedings entitled to bankruptcy court jurisdiction. See id. at 26. Vickie claims that this list of proceedings, while non-exhaustive, includes compulsory counterclaims. See id. Vickie further argues that this designation allows bankruptcy courts to render final judgments on these counterclaims by estates. See id. Vickie points out that Congress’ inclusion of compulsory counterclaims on the list of core proceedings is especially fitting given the fact that these counterclaims are mandatory and subject to res judicata limitations. See id. at 28.

Secondly, Vickie posits that the legislative history of Section 157(b)(2) further proves that Congress intended compulsory counterclaims to be considered a core proceeding. See Brief for Petitioner at 28. Vickie argues that Congress recognized that almost all proceedings held before bankruptcy judges would be core proceedings because they are almost all part of the core bankruptcy function of “restructuring and adjusting debtor-creditor rights.” See id. at 31–32. Therefore, Vickie asserts, compulsory counterclaims would arise under federal law (and thus be subject to the jurisdiction of bankruptcy courts) even though they may involve issues of state law. See id. at 32.

In response, Pierce argues that petitioner’s alleged cause of action for tortious interference with an expectancy of a gift is at best a “related to” matter, and not a part of the core proceeding. See Brief for Respondent, Elaine T. Marshall at 35. Pierce contends that this is so because the bankruptcy court was not required to make a final ruling on petitioner’s claim in order to allow or disallow respondent’s claim. See id. Pierce acknowledges that although the list of core proceedings found in Section 157(b)(2) is non-exhaustive, there are inherent limitations contained in the statute itself. See id. at 51. Namely, Pierce contends, the overall structure of the statute is proof that Congress intended that only proceedings that “arise under” and “arise in” the bankruptcy court’s jurisdiction are those that should be heard by that court. See 28 U.S.C. § 157(b)(1); Brief for Respondent at 36. Pierce contends that the petitioner’s tort claim does not “arise under” the code, because it is a state law claim, and therefore “arises under” state law. See Brief for Respondent at 36. Pierce asserts that just because the tort claim has been raised as a counterclaim to a proof of claim does not alter this analysis, especially because it is not necessary to adjudicate the claim in order to allow or disallow the creditor’s proof of claim. See id.

Vickie argues that the Ninth Circuit’s opinion contravenes Congress’ intent as well as the plain language of Section 157(b)(2). See Brief for Petitioner at 32–33. Vickie posits that the Ninth Circuit erroneously read Section 157(b)(2) too narrowly to avoid dealing with the issue of whether or not the statute is constitutional. See id. at 32. Vickie acknowledges that while the practice of avoiding the constitutional question is acceptable, the Supreme Court has held that this practice should be avoided when it would force a court to ignore congressional intent. See id. Vickie asserts that by construing Section 157(b)(2) as narrowly as it did, the Ninth Circuit not only reformulated the statute to comport with its own view of constitutionality, it also ignored Congress’ explicit intent to include compulsory counterclaims in the category of core proceedings. See id. at 33. Specifically, Vickie argues that the Ninth Circuit’s interpretation of Section 157(b)(2) would contravene Congress’ goal to make bankruptcy proceedings efficient and expeditious. See id. at 34. Vickie points to the fact that if counterclaims are not considered core proceedings, and therefore not subject to the jurisdiction of bankruptcy courts, it would split a bankruptcy proceeding into separate actions that must be tried in different courts. See id. at 35–36. Vickie asserts that this would cause the absurd result of endless litigation, confusion of jurisdictional limits, and the mayhem of claim and issue preclusion. See id. at 36.

Pierce contends that the Ninth Circuit was justified in construing Section 157(b)(2) narrowly to avoid the serious constitutional questions that would otherwise be raised. See Brief for Respondent at 37. Pierce, pointing to the language found in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), argues that Congress is not allowed to assign to a specialized non-Article III court (such as a bankruptcy court) the authority to adjudicate private rights of actions. See id. at 39. Pierce contends the Supreme Court has held that suits arising under state common law (such as the tort action in this case) are prime examples of private rights of actions. See id. Furthermore, Pierce posits that in Northern Pipeline v. Marathon Pipeline, 458 U.S. 50 (1982), the Supreme Court held that Congress could not give non-Article III courts the power to hear and render final judgments in traditional contract lawsuits that arise under state law, unless the parties consent. See id. at 40. Pierce contends that since petitioner’s claim is a paradigmatic example of a private-right action arising under state law, and because both parties have not consented to jurisdiction, a bankruptcy court cannot decide this lawsuit. See id.

Finally, Vickie argues that Section 157(b)(2)(C)’s inclusion of compulsory counterclaims in the category of core proceedings is constitutional. Vickie states that by submitting a claim against an estate in bankruptcy court, a creditor is subjecting itself to the jurisdiction of that court to hear all claims that arise out of the proceeding. See Brief for Petitioner at 39. Vickie asserts that this principle has been upheld by the Supreme Court in Granfinanciera and in Langenkamp v. Culp, 498 U.S. 42 (1990). See id. at 41. In both of those cases, Vickie posits, the Supreme Court found constitutional Congress’ assignation of the right to hear state law claims to non-Article III courts. See id. at 43. Furthermore, Vickie argues that in Katchen v. Landy, 382 U.S. 323 (1966), the Supreme Court established the rule that a creditor cannot invoke the help of a bankruptcy judge by filing a claim against an estate and then try to deny that same court’s ability to render a final judgment in the entire dispute. See id. at 49. Vickie contends that along with gaining all of the benefits, a creditor must risk the disadvantages that flow as a consequence of invoking the aid of the bankruptcy court in its claim against an estate. See id.

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Conclusion

The Supreme Court’s decision in this case will determine whether Congress, by passing 28 U.S.C. §157(b)(2)(C), intended to authorize bankruptcy courts to consider all compulsory counterclaims, as opposed to only those counterclaims that are “core” to the bankruptcy proceeding. Vickie Lynn Marshall argues that the plain language and legislative history of Section 157 indicate that Congress intended to give bankruptcy courts the power to decide all compulsory counterclaims. Vickie further maintains that Congress may constitutionally give bankruptcy courts this power. E. Pierce Marshall rebuts Vickie’s arguments, claiming that Congress intended to only give bankruptcy courts the power to decide upon core compulsory counterclaims, and that any further grant of power would be unconstitutional.

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Authors

Prepared by: Priscilla Fasoro and Eli Kirschner

Edited by: Joanna Chen

Additional Sources

· The Volokh Conspiracy, Todd Zywicki: Ninth Circuit Decision in Marshall v. Stern (Formerly Marshall v. Marshall) (Mar. 22, 2010)

· USA Today, Joan Biskupic: Supreme Court to Hear Anna Nicole Smith Estate Case (Oct. 1, 2010)

· New York Times, David Stout: Anna Nicole Smith Wins Supreme Court Case (May 1, 2006)

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