On June 22, 2011, the Supreme Court decided Stern v. Marshall, No. 10-179, holding that the Bankruptcy Court had the statutory authority under 28 U.S.C. § 157(b)(2)(C) to enter judgment on a counterclaim that the bankruptcy estate of Vickie Lynn Marshall (a/k/a Anna Nicole Smith) asserted against E. Pierce Marshall's claim for defamation because the statute defined counterclaims as "core proceedings." The Bankruptcy Court did not, however, have constitutional authority to enter judgment on that counterclaim because Article III reserves to Article III judges the jurisdiction to decide state-law contract claims against entities that are not otherwise part of the bankruptcy proceedings. Thus, a Texas state court decision in favor of Pierce Marshall controls the outcome of this long-running battle.
Vickie Lynn Marshall—popularly known as "Anna Nicole Smith"—married J. Howard Marshall, reportedly one of the richest men in Texas at the time. Less than a year later, J. Howard died. He did not include Vickie in his will. Before he died, Vickie had filed suit in Texas state probate court, alleging that E. Pierce Marshall (J. Howard's younger son) fraudulently induced J. Howard to sign a living trust that did not include her, even though J. Howard meant to give her half of his property. Pierce denied wrongdoing, and defended the validity of J. Howard's trust and will in the probate proceeding.
After J. Howard died, Vickie filed a bankruptcy petition in California. Pierce filed a complaint in the bankruptcy proceeding, alleging that Vickie had defamed him by having her lawyers tell the press that he had engaged in fraud to get control of J. Howard's assets. Pierce also filed a proof of claim against the bankruptcy estate based on the same allegations. Vickie responded to the complaint by asserting a counterclaim for tortious interference with the gift that she expected from J. Howard—essentially the same claim that she raised in the Texas probate proceeding.
Pierce argued that the Bankruptcy Court lacked jurisdiction to enter judgment on Vickie's counterclaim because the counterclaim was not a "core proceeding" under 28 U.S.C. § 157(b)(2)(C), as to which a Bankruptcy Court could enter a final judgment. The Bankruptcy Court disagreed, granted Vickie summary judgment on Pierce's defamation claim, and later entered judgment for more than $425 million in her favor on the counterclaim.
The District Court held that while Vickie's counterclaim for tortious interference fell within the literal language of Section 157(b)(2)(C), it would be unconstitutional to hold that all counterclaims in bankruptcy proceedings are core proceedings under Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 79 n.31. The District Court held that Vickie's counterclaim was not a core proceeding because it was only somewhat related to the defamation claim against which it was asserted and was unlike the normal type of setoff and other counterclaims that bankruptcy courts customarily handle. Thus, the District Court held, the Bankruptcy Court's judgment was only a proposed judgment that the District Court had to review independently under 28 U.S.C. § 157(c)(1). Despite the fact that the Texas state court had in the meantime entered judgment in Pierce's favor on Vickie's tortious-interference claim, the District Court declined to give that judgment preclusive effect and went on to decide the matter itself. The court found that Pierce had tortuously interfered with Vickie's expectancy gift from J. Howard, and entered judgment for approximately $88 million in her favor.
The Ninth Circuit reversed on a different ground. That decision was the subject of an earlier appeal to the Supreme Court, which reversed and remanded the case to the Ninth Circuit for further proceedings. The Ninth Circuit held that allowing bankruptcy courts to enter final judgments on all counterclaims would run afoul of Northern Pipeline and violate Article III of the Constitution. The Ninth Circuit concluded that a counterclaim is properly a "core proceeding" under 28 U.S.C. § 157(b)(2)(C) only if it 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 proof of claim itself. The court held that Vickie's counterclaim did not meet that test, so the Bankruptcy Court lacked jurisdiction to decide the claim. And because the Texas probate court's judgment predated the District Court's de novo decision on Vickie's counterclaim, it was preclusive and the District Court should have ruled in Pierce's favor based on the Texas judgment.
The Supreme Court affirmed. The Court began by holding that Vickie's counterclaim against Pierce was a "core proceeding" under the plain language of 28 U.S.C. § 157(b)(2)(C), which expressly provides that core proceedings include "counterclaims by the estate against persons filing claims against the estate." Thus, as a statutory matter, the Bankruptcy Court would have authority to enter a final judgment on Vickie's counterclaim. The Court rejected Pierce's argument that Section 157(b)(1) authorizes bankruptcy courts to issue final judgments in only a subset of core proceedings, and excludes core proceedings that neither arise under title 11 nor arise in a Title 11 case. The Court held that no such category of cases exists under the statute. The Court held that core proceedings are those that "arise in a bankruptcy case or under Title 11," and that the list of core proceedings in Section1 57(b)(2) are examples of such matters. The Court also rejected Pierce's argument that the Bankruptcy Court lacked jurisdiction under Section 157(b)(5), which provides that personal-injury-tort and wrongful-death claims must be tried in district court, rather than bankruptcy court. The Court held that Section 157(b)(5) is not jurisdictional, and that Pierce consented to the Bankruptcy Court's resolution of his defamation claim.
The Supreme Court went on to hold, however, that while the Bankruptcy Court had the statutory authority to enter final judgment on Vickie's counterclaim, it did not have the constitutional authority to do so. Article III vests the judicial power of the United State solely in judges who are appointed in accordance with Article III. Bankruptcy court judges are appointed under Article I, and therefore cannot exercise the judicial power of the United States. A plurality of the Court in Northern Pipeline recognized that there was a category of cases involving "public rights" that Congress could constitutionally assign to "legislative courts" for resolution, but that category extends only to matters arising between individuals and the Government in connection with the performance of the constitutional functions of the executive or legislative departments. State-law claims in bankruptcy court are not "public rights" cases that can be decided by Article I judges. Thus, the Bankruptcy Court in this case exercised the "judicial power of the United States' when it resolved Vickie's state-law counterclaim. The fact that Pierce filed a proof of claim in the bankruptcy proceeding, the Court held, did not make Vickie's counterclaim any less a common-law claim that required the "judicial power of the United States" to resolve. That required the counterclaim to be resolved by an Article III judge, not an Article I bankruptcy judge.
Chief Justice Roberts delivered the opinion of the Court in which Justices Scalia, Kennedy, Thomas, and Alito joined. Justice Scalia filed a concurring opinion. Justice Breyer filed a dissenting opinion in which Justices Ginsburg, Sotomayor, and Kagan joined.