SUMMARY OF STERN v. MARSHALL. The rigid core/noncore dichotomy of bankruptcy proceedings is now very blurry. In

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1 SUMMARY OF STERN v. MARSHALL The rigid core/noncore dichotomy of bankruptcy proceedings is now very blurry. In Stern v. Marshall, the Supreme Court held that the Bankruptcy Court lacked authority under Article III of the United States Constitution to enter a final judgment on a widow s counterclaim even though her counterclaim constituted a specifically identified core proceeding under the Bankruptcy Code. 1 The implications of this decision remain unclear. In 1991, J. Howard Marshall II (J. Howard), a wealthy oilman, met Vickie Lynn Marshall (Vickie), later known publically as Anna Nicole Smith, at a burlesque bar in Houston, Texas. 2 J. Howard courted Vickie for the next three years, showering her with lavish gifts. J. Howard and Vickie married on June 27, He was eighty-nine years old. She was twenty-six. Thirteen months later, J. Howard died. A decade-long legal battle over his wealth ensued between his wife Vickie and his son E. Pierce Marshall (Pierce). The litigation outlived both parties Pierce died in June 2006 and Vickie died in February The case was carried on by Howard Stern, Executor of Vicki s estate, and Elaine Marshall, Executrix of Pierce s estate. The battle began just prior to J. Howard s death when Vickie brought a claim against Pierce in Texas probate court alleging that Pierce tortuously interfered with her expectancy of an inter vivos gift from J. Howard. A few months later, Vickie filed for Chapter 11 bankruptcy in California. Soon after, Pierce filed an adversary proceeding in Vickie s bankruptcy case alleging defamation. In response, Vickie filed a counterclaim for tortious interference that was identical to the claim Vickie asserted against Pierce in the Texas probate court. Vickie prevailed on her tortious interference claim in the California bankruptcy court, but lost in Texas U.S.C. 157(b)(2). 2 Marshall v. Marshall, 547 U.S. 293, (2006).

2 At first glance, the question before the Supreme Court in Stern was straightforward: which court first entered final judgment on Vickie s tortious interference claim? On November 5, 1999, following a bench trial, the California bankruptcy court rendered a decision on the claim and awarded Vickie $475 million in compensatory and punitive damages. The California bankruptcy court asserted that its decision was a final judgment because Vickie s tortious interference counterclaim constituted a core proceeding under 28 U.S.C. 157(b)(2)(C) which states that [c]ore proceedings include counterclaims by the estate against persons filing claims against the estate. Pierce had filed a proof of claim in Vickie s bankruptcy case. After her victory in the California bankruptcy court, Vickie requested that the Texas probate court accord full faith and credit to the judgment of the California bankruptcy court. The Texas court refused, contending that there was no such obligation because the Texas proceeding had commenced before the bankruptcy case was filed. 3 After a five month trial, the Texas jury unanimously rejected Vickie s tortious interference claim. The Texas probate court then entered final judgment in favor of Pierce holding that J. Howard did not intend to give Vickie a gift either prior to or upon his death. Pierce also appealed the decision of the California bankruptcy court to the California District Court, which rejected the bankruptcy court s conclusion that it had core jurisdiction over Vickie s tortious interference claim. The District Court then vacated the bankruptcy court s judgment, reviewed the case de novo, ruled in favor of Vickie and awarded her $90 million in compensatory and punitive damages. Thus, in Stern the Supreme Court had to decide which judgment was the first final judgment entered on Vickie s claim and entitled to preclusive effect the bankruptcy court judgment, or the Texas probate judgment. 3 Id.

3 The Supreme Court analyzed the case by addressing two issues: (1) whether the bankruptcy court had the statutory authority under 28 U.S.C. 157(b) to issue a final judgment on Vickie s tortious interference claim; and (2) if so, whether conferring that authority on the bankruptcy court was constitutional. 4 In addressing the statutory issue, the Court found that the definition of a core proceeding in 28 U.S.C. 157(b)(3) was ambiguous. 5 Vickie s claim, however, fell under one of the examples of a core proceeding listed in 157(b)(2)(C), namely, counterclaims by the estate against persons filing claims against the estate as core proceedings. Thus, the Court concluded that 157(b)(2)(C) grants the bankruptcy court statutory authority to enter a final judgment on Vickie s tortious interference counterclaim. Next, the Court addressed the issue of whether 28 U.S.C. 157(b)(2)(C) is constitutional under Article III. On this question, the Court held that Congress could not grant authority to the bankruptcy court over Vickie s counterclaim because it was a private right entitled to adjudication in an Article III court. The Court acknowledged a category of claims, referred to as public rights, which Congress could assign to non-article III courts. The Court defined a public right as a case[ ] 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. 6 Vickie s claim, however, did not fall within any of the various formulations of the [public rights] concept that appear in this Court s opinions. 7 The Court reached this conclusion based on seven factors: (1)Vickie s claim fell under state common law; 8 (2) it was not completely dependent upon adjudication of a claim 4 Stern, 131 S.Ct at Id. at Id. at Id. at Id. at 2614.

4 created by federal law; 9 (3) Pierce did not truly consent to resolution of Vickie s claim in the bankruptcy court proceedings; 10 (4) the asserted authority to decide Vickie s claim is not limited to a particularized area of law ; 11 (5) there was never any reason to believe that the process of adjudicating Pierce s proof of claim would necessarily resolve Vickie s counterclaim; 12 bankruptcy law; 13 (6) the trustee was not asserting a right of recovery created by federal and (7) the Bankruptcy Judge ha[d] the power to enter appropriate orders and judgments including final judgments subject to review only if a party chooses to appeal. 14 Interestingly, the Court did not seem troubled by the fact that the allowance or disallowance of the counterclaim would have a material impact on the amount of assets in Vickie s bankruptcy estate. The Court insisted that its holding was a narrow one. 15 We conclude today that Congress, in one isolated respect, exceeded [the limitations of Article III] in the Bankruptcy Act of Although the Court acknowledged a fail[ure] to provide concrete guidance on the public rights exception to Article III, it held that the authority of a bankruptcy judge to enter a final judgment depends on whether that action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process. 17 The Court predicted that its decision would not meaningfully change[ ] the division of labor between bankruptcy and district courts. 18 So far, that prediction has proved to be wrong. 9 Id. 10 Id. 11 Id. at Id. at Id. at Id. at Id. at Id. 17 Id. at Id. at 2620.

5 Justice Scalia, the fifth vote for the majority, wrote a concurrence to simplify the doctrine of public rights. For Justice Scalia, the public rights exception to Article III must at minimum arise between the government and others. 19 He criticized the majority for analyzing the public rights exception under a surfeit of factors that had nothing to do with the text or tradition of Article III. 20 According to Justice Scalia, an Article III judge is required in all federal adjudications, unless there is a firmly established historical practice to the contrary. 21 He acknowledged the possibility that historical practice may permit non-article III judges to process claims against the bankruptcy estate, but did not resolve this issue because the subject had not been briefed. 22 Justice Scalia concluded that Vickie s claim did not fall under the public rights exception because the government wasn t a party to the claim and Vickie failed to point to a historical practice that authorized a non-article III judge to adjudicate a counterclaim such as hers. Thus, Justice Scalia concluded that the bankruptcy court did not have the constitutional authority to enter final judgment on Vickie s tortious interference claim Id. 20 Id. at Id. 22 Id. 23 Id.