Stern v. Marshall: A Legal and Personal Overview By Kent L. Richland 5900 Wilshire Boulevard, 12th Floor Los Angeles, California 90036 (310) 859-7811 / Fax: (310) 276-5261
Stern v. Marshall: A Legal and Personal Overview A. Before The Supreme Court Proceedings. To appreciate the holding and impact of Stern v. Marshall, 564 U.S., 131 S.Ct. 2594 (2011), it s important to understand both the state of the law before the case got to the Supreme Court and the history of the case itself. In this section, I will start by describing the status of Article III law before the Court granted certiorari in Stern, and then give the background of what happened in the Stern case itself before it reached the Supreme Court. Stern was the Supreme Court s follow-on to Northern Pipeline Construction Co. Inc. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (Marathon), the 1982 case in which the Court invalidated the Bankruptcy Act of 1978 as violative of Article III of the Constitution. In Marathon, the Court had focused on the 1978 Act s creation of bankruptcy courts, which were broadly empowered to hear and decide all civil proceedings arising under the Bankruptcy Code or related to cases under the Bankruptcy Code. The problem was that bankruptcy court judges were not Article III judges: Rather than being appointed for life with fixed salaries as Article III required, bankruptcy judges were appointed for fixed terms and their salaries could be adjusted by Congress. Since only lifetimeappointed, fixed-salary judges could constitutionally wield the judicial Power of the United States under Article III, the Marathon court faced the question whether the 1979 Act unconstitutionally authorized bankruptcy judges to exercise the judicial power of the United States. A splintered Supreme Court held that, because the bankruptcy courts related to jurisdiction permitted bankruptcy judges to finally decide traditional 1
common-law actions lawsuits that were the bread and butter of federal judges dockets and hence the essence of the federal judicial power the 1979 Act violated Article III. Although six justices agreed with the result, no single opinion drew a five-justice majority. Three justices in dissent explained they would subject the 1979 Act to a balancing test to determine the extent to which the Act actually infringed Article III values. The dissenters would have held the Act constitutional because (1) all bankruptcy court judgments were subject to appellate review by Article III courts; (2) there was no indication the Act was an attempt by the political branches to seize power from the judiciary; and (3) the congressional goal motivating the creation of the bankruptcy courts was a worthy one to deal with the flood of bankruptcy cases that threatened to overwhelm the Article III courts. Two post-marathon cases seemed to suggest that the Court was moving away from strict, formal application of Article III and closer to the balancing test urged by the Marathon dissenters. Thomas v. Union Carbide Agricultural Products Co., 473 U.S.568 (1985) considered the constitutionality under Article III of a federal statute that required binding arbitration, with limited appellate review, of disputes among pesticide manufacturers regulated by a federal pesticide statute. The Court upheld the statute using a balancing test, noting that it presented little danger of congressional or executive encroachment on Article III judicial powers and provided for limited Article III review of the arbitration decision. Next came Commodity Futures Trading Commission v. Schor, 478 U.S. 833 (1986). At issue in Schor was the constitutionality of a statute that empowered the Commission to adjudicate claims of customers of commodity brokers that the brokers had violated securities laws. An important feature of the statute was 2
that it permitted the accused broker to counterclaim against the customer for any asserted wrongs related to the customer s claim. In Schor, the broker s counterclaim was for money he claimed was owed by the customer what would have been a traditional common-law claim analogous to the matter at issue in Marathon and the customer argued that adjudication of the counterclaim before the Commission violated Article III and Marathon. Since the customer had chosen to pursue the claims against the broker before the Commission rather than in court, the Supreme Court analyzed the Article III issue in the context of the issue of consent. The Court held that to the extent Article III rights were personal and belonged to the litigant, the customer had effectively consented to the Commission s jurisdiction over the counterclaim by bringing the case there in the first instance. But the Court noted that to the extent Article III constituted a structural, separation-of-powers guarantee that served as an essential part of the governmental system of checks and balances, it could not be waived by a party. As to that aspect of the Article III question, the Court again applied a balancing test. Concluding that the scheme posed minimal threat to Article III values, while at the same time evaluating the legislative goal of providing prompt and expeditious determination of specific kinds of disputes as an important one, the Court held there was no Article III violation. That was the state of Supreme Court Article III jurisprudence when, in 2001, I first became involved in the case that was then called Marshall v. Marshall. The history of that case is a bit convoluted, but important for a full understanding of the Court s eventual ruling. 3
Our firm, an appellate boutique, was brought into the Marshall case when it was in its last stages in a California federal district court and an appeal to the 9 th Circuit was anticipated. The case was notorious. It had arisen out of a dispute between model/actress Anna Nicole Smith (Anna) and Texas oil billionaire E. Pierce Marshall (Pierce) over millions in assets that had been owned by J. Howard Marshall II (Howard) Ms. Smith s late husband and father of Pierce. The case s trip to the district court had been circuitous. When Howard had died, Pierce opened up a probate in a Texas court, where Howard s will revealed that he had left his entire estate to Pierce and nothing to Anna. Anna claimed that Pierce had tortiously interfered with Howard s attempt to set up a substantial trust for her benefit during his lifetime. While the Texas probate action proceeded in fits and starts, Anna declared bankruptcy in California. Pierce filed a claim against Anna s estate in the California bankruptcy court, asserting that she had defamed him by falsely accusing him in the press of tampering with his father s assets to frustrate Howard s efforts to set up the trust for Anna. In addition to asserting truth as a defense to Pierce s defamation claim, Anna filed a compulsory counterclaim alleging, as she had in Texas, that Pierce had tortiously interfered with Howard s efforts to set up a trust for her benefit. The cases proceeded in parallel in both Texas and California. The California bankruptcy court ruled first. It granted summary judgment to Anna on Pierce s defamation claim, and then went on to try Anna s tortious interference counterclaim. It found that Howard had instructed his lawyers to create an inter vivos trust for Anna s benefit that was to consist of one-half the 4
increase in value of his assets during their marriage, but Pierce had tortiously interfered with the formation of that trust. It awarded Anna $449 million in compensatory damages and $25 million in punitive damages. Pierce appealed the bankruptcy court judgment to the district court and, at about the same time, Anna dismissed her Texas claims against Pierce; however, the Texas court continued to adjudicate the validity of Howard s will. The California federal district court conducted a trial de novo of Anna s tortious interference claim and found that the evidence was overwhelming that Pierce had interfered with the creation of Howard s intended trust for Anna. It also concluded that while compensatory damages should be reduced to $44.3 million, the evidence of Pierce s willfulness, maliciousness and fraud required that punitive damages be increased to $44.3 million. While post-trial matters were being completed in the Calfornia court, the Texas probate court concluded its trial and entered a judgment finding Howard s will valid as well as entering findings inconsistent with those that had been made by the California courts. About two weeks after the Texas probate court entered its judgment against Anna, the California district court entered its multimillion dollar judgment in favor of Anna. From the outset of my firm s involvement, it was clear that the case had an Article III issue. It stemmed from Pierce s claim that, because the Texas probate court judgment was inconsistent with the federal district court judgment and had preceded it in time, it was preclusive of the latter on collateral estoppel grounds. Our counterargument was that the judgment of the bankruptcy court, which was entered long before the probate court had ruled, was the first final judgment in time. But Pierce s answer to our counterargument was to point to the holding in 5
Marathon: Pierce argued Anna s counterclaim for tortious interference was just like the traditional common-law claim that the Supreme Court had held in Marathon could not, consistent with Article III, be adjudicated by a bankruptcy court. Therefore, he claimed, the first valid final judgment was that of the Texas probate court. B. In the Supreme Court. While we thought from the beginning that the Article III issue was a close one that might even have Supreme Court potential, we were surprised when the 9 th Circuit never reached the issue because it reversed Anna s judgment on an entirely different ground that the judgment violated the obscure, highly technical probate exception to federal jurisdiction. And we were more than doubly surprised when the Supreme Court granted our certiorari petition seeking review of that ruling. The day of that argument in the Supreme Court was memorable. The lines for a seat in the Court snaked around the block, and one court observer said the crowds were the biggest since the Roe v. Wade argument. The media had had a good time conjuring up the incongruous image of the reality TV star appearing before the Supreme Court, but when Anna Nicole Smith arrived at the Court she looked strikingly beautiful and dignified. The argument itself was relatively uneventful, as it became clear after the first few minutes that the Court was entirely on Anna s side of the issue. But those first few minutes yielded one personally indelible event. In preparing for the argument, I had consulted a number of lawyers who had argued many cases before the high court, and one particularly respected advocate advised me to lead off with one of our several arguments that he considered particularly strong. 6
I took his advice, but I was immediately peppered with questions from Justice Scalia indicating that he, at least, was not buying it. As I valiantly attempted to defend the position, Justice Scalia looked over his glasses at me and said, Do you want to stand on this position, Mr. Richland, or do you have a lesser position that... that might cause you to win? It was classic Scalia. I took the hint and moved on to other arguments, and it was smooth sailing from then on. The Supreme Court unanimously reversed, and we were sent back to the 9 th Circuit. The same 9 th Circuit panel predictably reversed again it was not favorably disposed to either our client or her recovery this time relying on the Article III/preclusion ground. And when the Supreme Court granted certiorari a second time, it was not quite so surprising. The oral argument was very different this time around. Pierce had died shortly after the first Supreme Court decision had issued, and Anna died a few months later. Now it was two estates battling each other. Although there was still a lot of money at stake, and the legal issue before the Court was far more important than the first time, the absence of celebrity made for a much lower-key event. The argument itself left few clues to the eventual outcome both sides got tough questions. On one of the last days of the term, the Court issued its opinion, a bankruptcy law blockbuster that resurrected the Marathon court s emphasis on the structural, separation-of-powers importance of Article III. In a 5-4 opinion that broke along familiar political lines (despite the absence of any overtly political aspect to the issue), the Court held that in general, Congress may not 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.... Thus, to the 7
extent the bankruptcy law authorized non-article III bankruptcy judges to decide ordinary, common-law civil claims even when brought as a compulsory counterclaims it violated Article III. Chief Justice Roberts majority opinion dismissed the post-marathon balancing test cases as simply involving the determination of issues by an expert government agency seeking a limited regulatory objective within the agency s authority. Justice Breyer s dissent, joined by Justices Ginsburg, Sotomayor and Kagan, urged the application of a balancing test akin to the one applied in Thomas and Schor. Weighing a number of factors, the dissent concluded that bankruptcy court determination of compulsory counterclaims intruded minimally on Article III concerns, while it was essential to an efficient bankruptcy system tasked with restructuring debtor-creditor relations. Finally, the dissent predicted that, despite the majority s insistence that its ruling does not change all that much, the decision would have a tremendously disruptive effect on the bankruptcy courts. The dissent s final warning would prove prophetic. C. After the Supreme Court. Stern v. Marshall hit the bankruptcy courts hard. Whatever else it might have meant, one unmistakable message of the majority opinion was that there could be no confidence that the functions assigned by Congress to the bankruptcy courts would necessarily pass constitutional muster. Stern issues proliferated, and significant confusion reigned. Three issues in particular begged for resolution: 8
First, under prevailing bankruptcy statutes, bankruptcy courts were authorized to adjudicate many common-law claims involving bankruptcy estates by virtue of the mutual consent of the parties. But as the Schor case had made clear, the structural aspect of Article III cannot be waived by consent. How did the Stern majority s rejection of the Schor balancing test affect the ability of parties to consent to bankruptcy court adjudication of common-law claims? Second, what were bankruptcy courts supposed to do with what came to be known as Stern claims claims the bankruptcy courts were authorized by statute to decide, but which they could not constitutionally adjudicate under Stern. The bankruptcy statutes did expressly provide that as to certain specific types of claims that could not be finally decided by bankruptcy courts, the bankruptcy judge was to make factual findings and recommended dispositions that were not binding on district courts; but Stern claims were not among those so provided for by statute. Could bankruptcy courts handle them that way anyway, even without such statutory authorization? Third, a substantial portion of bankruptcy courts dockets are devoted to determining fraudulent conveyance claims claims that the debtor improperly disposed of assets before declaring bankruptcy when those assets should have been included the bankruptcy estate, available to satisfy the claims of the creditors. In 1989, in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), the Supreme Court had held that the parties to a fraudulent conveyance action were constitutionally entitled to a jury trial, because such actions were quintessentially suits at common law. After Stern, and in light of Granfinanciera, could bankruptcy courts continue to finally adjudicate fraudulent conveyance actions? 9
These and related issues embroiled the bankruptcy courts in the years following Stern. As for the Stern v. Marshall case itself, the Supreme Court s ruling affirmed the judgment of the 9 th Circuit, which in turn had reversed the $89 million district court judgment in favor of Anna (now Anna s estate). The 9 th Circuit s holding that the Texas probate court judgment was preclusive seemed to bring an end to the litigation. But remarkably, in 2015, a Texas court of appeals handed down a startling decision: It modified the decade-old Texas probate court judgment ruling on Howard s will by striking some of the key findings that the 9 th Circuit had held were preclusive of the judgment in favor of Anna, concluding that any questions of Pierce s liability for tortious interference were not properly before the probate court and should not have been decided by it. Whether the Texas appellate court s decision ends up being simply an ironic footnote to this remarkable case or a route to its reopening remains to be seen. 10