The 2011 United States Supreme Court ruling in the case of Stern v. Marshall has both a practical bankruptcy angle and Hollywood flair. That case concerned the longstanding litigation between Vickie Lynn Marshall, known to the public as Anna Nicole Smith, and Pierce Marshall, the son of Vickie Lynn Marshall’s former husband, J. Howard Marshall. Shortly before Pierce Marshall’s death, Vickie Lynn Marshall filed suit against Pierce in Texas state court, alleging that Pierce fraudulently induced J. Howard Marshall to sign a living trust that did not include Vickie Lynn Marshall, thereby tortiously interfering with the gift J. Howard Marshall intended to give her.
After J. Howard Marshall’s death, Vickie Lynn Marshall filed for bankruptcy in the Central District of California. Pierce Marshall then filed a complaint in the bankruptcy case, alleging that Vickie Lynn Marshall defamed him by directing her lawyers to tell the press that he engaged in fraud to gain control of his father’s assets. The complaint sought a declaration that Pierce Marshall’s defamation claim would survive the bankruptcy. Pierce responded by filing a proof of claim in Vickie Lynn Marshall’s bankruptcy proceedings. In response, Vickie Lynn Marshall asserted truth, which is a defense to a defamation charge, and filed a counterclaim for tortious interference with the property she expected from J. Howard Marshall.
The Bankruptcy Court’s Ruling
The United States Bankruptcy Court for the Central District of California granted Vickie Lynn Marshall’s motion for summary judgment on the defamation claim and, following a bench trial, awarded her $425 million in damages on the tortious interference counterclaim. At trial, Pierce Marshall argued that the bankruptcy court lacked jurisdiction over Vickie Lynn Marshall’s counterclaim for tortious interference because it was not related to her bankruptcy claim. The bankruptcy court disagreed, reasoning that Vickie Lynn Marshall’s counterclaim was a “core proceeding” under Bankruptcy Code, so the bankruptcy court had the “power to enter judgment.”
On appeal, the United States District Court for the Central District of California disagreed, concluding that it would be unconstitutional to find that all counterclaims are necessarily core proceedings and that the tortious interference counterclaim at issue could not be characterized as a core proceeding because it was only tangentially related to the underlying defamation claim. After review, however, the district court ultimately ruled in favor of Vickie Lynn Marshall, but reduced her damages award significantly. The case then proceeded to the Ninth Circuit Court of Appeals.
The Ninth Circuit reversed the district court’s ruling on different grounds and then, in deciding the appeal of a separate, unrelated issue in the case on remand from the Supreme Court, concluded that a bankruptcy court may enter a final judgment if the underlying matter is both a “core proceeding” and “arises under or arises in title 11” of the Bankruptcy Code. The Ninth Circuit also determined that permitting a bankruptcy court to enter final judgments on all counterclaims arising in bankruptcy proceedings “would certainly run afoul” of the Supreme Court’s decision in a case called Marathon. Accordingly, the Ninth Circuit held that Vickie Lynn Marshall’s counterclaim did not satisfy this test.
The case proceeded to the United States Supreme Court. At issue was whether the bankruptcy court had statutory authority to enter a final judgment regarding Vickie Lynn Marshall’s counterclaim of tortious interference, and if so, whether conferring such authority on the bankruptcy court violated Article III of the Constitution. The Supreme Court held unanimously that the bankruptcy court below had the statutory authority to rule on Vickie Lynn Marshall’s state law counterclaim because it was a “core proceeding” under but in a five-to-four split, ultimately determined that the bankruptcy court lacked the constitutional authority to do so.
Specifically, the Supreme Court found that:
Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.
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