The Bottom Line:

The U.S. Supreme Court, in the case of Stern v. Marshall, ruled (in a 5-4 vote) on June 23, 2011 that a bankruptcy court judge did not have the constitutional authority to enter a final judgment on a counterclaim that was insufficiently related to the underlying proof of claim in the debtor’s bankruptcy proceedings.  Stern v. Marshall, No. 10-179, 564 U.S. __ (June 23, 2011).  The Court looked first to whether the bankruptcy court had proper statutory authority to enter a final judgment on such a counterclaim, under 28 U.S.C. § 157, and found that Congress did, indeed, grant to bankruptcy court judges the authority to enter final judgments on counterclaims.  However, in this case, the Supreme Court held that Congress lacked the ability to actually grant that authority to bankruptcy court judges pursuant to Article III of the Constitution.  The Supreme Court’s ruling centered around the fact that bankruptcy court judges, who are not Article III judges and are only appointed to 14-year terms, only have the authority to enter final judgments on “core” counterclaims, and not to non-core counterclaims based purely on state-law grounds. 

What Happened:

Stern v. Marshall and its predecessor cases have been garnering popular attention for years due to the involvement of Anna Nicole Smith (legal name Vicky Lynn Marshall), a former playboy model and her marriage to a billionaire – J. Howard Marshall II – almost 70 years her senior.  The fight, of course, began upon the death of J. Howard Marshall, who was approximately ninety years old at the time of his marriage to Anna Nicole.  A fight over the decedent’s estate began between Anna Nicole and Pierce Marshall, the son of J. Howard.  Stern v. Marshall is the culmination of that legal battle. 

The factual background and the course of legal proceedings are as follows: In short, this case originated in the bankruptcy court, which held that Anna Nicole had a viable counterclaim; that the bankruptcy court could enter a final judgment; and that Anna Nicole was entitled to damages (including punitive damages) of over $400 million.  Concurrently, a Texas State Probate Court trial, started by Anna Nicole, was conducted and entered a final judgment against Anna Nicole (and for Pierce).  After the bankruptcy court ruling, the U.S. District Court for the Central District of California held that the counterclaim was non-core and that the bankruptcy court could not enter a final judgment on it.  The case then went (i) up to the Court of Appeals, (ii) up to the Supreme Court, and (iii) back down to the Court of Appeals, where the Court held that the Texas State Probate Court was the first court to enter a final judgment because the bankruptcy court lacked authority to do so because the counterclaim was non-core.  This brings us to the current Supreme Court case, which was presented with the question of “whether a bankruptcy court judge who did not enjoy such tenure and salary protections had the authority under 28 U.S.C. § 157 and Article III to enter final judgment on a counterclaim...”

As stated above, the Supreme Court focused its analysis, first, on 28 U.S.C. § 157(b).  The Court looked to the Bankruptcy Amendments and Federal Judgment Act of 1984, specifically focusing on the fact that bankruptcy court judges are appointed (i) to 14-year terms (ii) by judges in their respective court of appeals.  In addition, pursuant to 28 U.S.C. § 157(b), bankruptcy judges can enter final judgments on “core” proceedings, which includes “counterclaims by a [debtor’s estate against persons filing claims against the estate.”  28 U.S.C. § 157(b)(2)(C).  The Supreme Court held that Nicole Smith’s counterclaim, which was based in tortuous interference, actually falls under the jurisdictional language of that provision. 

However, the Supreme Court held that the bankruptcy court lacked jurisdiction to enter final judgments because it lacked constitutional authority.  The Court looks to Article III for this ruling, and focuses on the previous Supreme Court case of Northern Pipeline for guidance.  “In Northern Pipeline [the Supreme Court] considered whether bankruptcy judges...could constitutionally be vested with jurisdiction to decide [a] state law contract claim against an entity that was not otherwise part of the bankruptcy proceedings.”  The Supreme Court in Northern Pipeline held that bankruptcy judges lacked that authority.  The Northern Pipeline case revolved around the concept of “public rights.”  The Supreme Court, there, held that the public rights exception “did not encompass adjudication of the state law claim at issue in that case.” However, at the time of Northern Pipeline the issue of “core” bankruptcy proceedings did not exist; that was only created in the Bankruptcy Amendments and Federal Judgment Act of 1984.  Subsequently, in the case of Gianfinanciera S. A. v. Nordberg, the Supreme Court made a similar ruling holding that the public rights exception did not apply to fraudulent conveyance claims, which “more nearly resemble state law contract claims.”  492 U.S. 33 (1989). 

Here, the Supreme Court, emphasizing the similarities between the 1978 Act and the 1984 Act and the rulings in Northern Pipeline and Gianfinanciera held that the “public rights” exception does not apply to state law claims that are completely independent of federal bankruptcy law.  As such, the Supreme Court held that Anna Nicole Smith’s counterclaim, which bears no relation to the underlying claim filed by Pierce Marshall and is completely based in state law, cannot be ruled on by bankruptcy court judges via final judgment. 

Why the Case is Interesting:

This case directly impacts that jurisdictional authority of bankruptcy court judges, by limiting their authority to enter final judgments on only “core” matters.  This case serves as a reminder both to the limitations of statutory authority and of bankruptcy court judges.  This case serves the dual purpose of allowing parties to file claims in bankruptcy proceedings without worrying that unrelated, state law counterclaims could be asserted and enforced by bankruptcy court judges; however, the case does not completely shut the door on counterclaims being able to negatively impact the original claimant significantly.