Until the U.S. Supreme Court’s recent 5-4 decision in Stern v. Marshall,[1] it was safe to assume that conversations about Charles Dickens, a Playmate of the Year and an octogenarian billionaire rarely focused on the Constitution’s separation of powers. Now, it is equally safe to assume that most, if not all, will.
Writing for the majority, Justice John Roberts began Stern by quoting the Dickens novel, Bleak House, to describe the legal saga that erupted when Vickie Lynn Hogan, better known as “Anna Nicole Smith,” married J. Howard Marshall, an 89-year-old Texas oil tycoon. Justice Roberts concluded by holding that, despite Congress’s blessing, the Constitution prohibits bankruptcy courts from fully adjudicating a debtor’s state-law counterclaim in certain situations. Not since Northern Pipeline Construction Co. v. Marathon Pipeline Co.[2] almost 30 years ago has a decision carried such importance for bankruptcy litigation.
Background
Vickie married J. Howard in 1994 and shortly thereafter, the living trust containing J. Howard’s assets was revised to be irrevocable. Vickie was not a named beneficiary, and she believed that J. Howard’s son, E. Pierce Marshall, had revised the trust to cut her out. This revision contradicted J. Howard’s alleged promise to give her half of everything he owned.
In April 1995, Vickie sued Pierce in the Texas probate court overseeing J. Howard’s guardianship, alleging that Pierce had tortiously interfered with her right to spousal support. She also sought to invalidate the irrevocable trust. J. Howard died in August 1995, and Vickie filed for bankruptcy in California five months later. Pierce filed a nondischargeability complaint in Vickie’s bankruptcy alleging defamation. Pierce later filed a proof of claim on the same grounds. Vickie objected to his proof of claim and asserted a counterclaim for tortious interference with her alleged inter vivos gift from J. Howard.
In November 1999, the bankruptcy court dismissed Pierce’s defamation claim, and later awarded $400 million to Vickie on her tortious interference counterclaim. Vickie then withdrew her claims in the Texas probate matter, which continued unabated. However, Pierce appealed the bankruptcy court’s judgment. The course of those parallel proceedings would ultimately dictate the outcome of Vickie’s case.
First, in March 2001, the jury in the Texas proceeding found—contrary to the bankruptcy court’s determination—that there was no inter vivos gift from J. Howard to Vickie. Then, in June 2001, the Central District of California court hearing the bankruptcy appeal decided that Vickie’s counterclaim was not a “core” proceeding under 28 U.S.C. § 157(b) and therefore, the bankruptcy court’s ruling was not a final judgment but proposed findings subject to de novo review. Consistent with that review, the district court ordered what became a re-trial of Vickie’s counterclaim.
Before that retrial, the Texas probate court rendered judgment on the jury’s verdict against Vickie in December 2001. Consistent with that verdict, the Texas court determined that J. Howard’s will and trust excluding Vickie were not the product of any undue influence. When Pierce moved the California district court for summary judgment based on the preclusive effect of this judgment, the district court denied his motion, reasoning that, inter alia, the judgment did not share the identity of issues necessary for claim or issue preclusion.
The California district court subsequently awarded Vickie nearly $89 million on her tortious interference counterclaim. Further appeals ensued, including one to the Supreme Court, before the Ninth Circuit ultimately determined that (1) Vickie’s counterclaim was not a “core” proceeding and, therefore, the bankruptcy court lacked jurisdiction to enter a final judgment; (2) the Texas probate court’s judgment was the earliest final judgment on the issues raised in Vickie’s counterclaim; and (3) collateral estoppel barred Vickie’s counterclaim. The executor of Vickie’s estate, Howard K. Stern, appealed.
Supreme Court’s Decision
The Supreme Court affirmed the Ninth Circuit’s decision that the bankruptcy court lacked jurisdiction to enter a final judgment on Vickie’s counterclaim. The Court first considered whether Vickie’s counterclaim was, in fact, a “core” proceeding. The Ninth Circuit had determined that it was not core because, despite the straightforward reference to such counterclaims in § 157(b)(2)(C), it did not arise in or under title 11, and the Court rejected this conclusion. The Court reasoned that Congress had designated those matters listed in § 157(b)(2), like Vickie’s counterclaim, as core proceedings and authorized bankruptcy courts to fully adjudicate them.[3] The plain text of the statute did not allow for other interpretations.
Although the Court found that the bankruptcy court had statutory authority to adjudicate Vickie’s counterclaim, it then went on to find that the bankruptcy court lacked constitutional authority to do so. According to the Court, permitting a bankruptcy court to render final judgment on Vickie’s counterclaim violates the separation of powers. Vickie’s state-law counterclaim was not “necessarily resolvable by ruling on [Pierce’s] proof of claim,” and it did not otherwise impact the restructuring of debtor-creditor relations.[4] The Court reasoned that Article III of the Constitution grants district courts the exclusive power to adjudicate such a dispute. Congress cannot—by statute, fiat or otherwise—bestow that power on an Article I bankruptcy court. Doing so robs litigants of Article III’s protections.
The Court grounded its analysis on the difference between public and private rights. Lawsuits involving traditional, common-law disputes concern “private” rights, which only an Article III district court can resolve (assuming that subject-matter jurisdiction exists).[5] Congress cannot refer those matters to a non-Article III body for final adjudication any more than it can reassign presidential veto power.[6] The Court also observed that proceedings involving “public” rights, which derive from a federal regulatory scheme or are integral to federal government action, may be treated differently.[7] Because Congress creates these rights, it may refer them to an Article I tribunal for resolution.
The Court assumed without deciding that the restructuring of debtor-creditor relations is a public right.[8] However, this public right is not so broad as to encompass all actions that might augment the estate but have no other connection to or impact on a bankruptcy. Because Vickie’s counterclaim asserted only private rights, the Court concluded that only an Article III court could resolve it.[9] The bankruptcy court’s purported judgment was therefore void, and because the Texas probate court’s judgment was the first final judgment on the issues raised in Vickie’s counterclaim, collateral estoppel barred Vickie’s claims.
Future Implications
Justice Roberts characterized the Court’s holding as “isolated” to a “narrow question.”[10] Justice Stephen Breyer, in his dissent, disagreed,[11] perhaps because Justice Roberts painted his “isolated” and “narrow” holding with a broad brush. Now, just because a matter is a “core” proceeding by statute no longer qualifies a bankruptcy court to adjudicate it. The matter must also involve at least some degree of public rights, but the dividing line between public vs. private rights is not black-and-white. Indeed, Justice Antonin Scalia, in his concurrence, observed that there are no fewer than seven factors that the Court considered in determining whether Vickie’s counterclaim involved public rights.[12] The clarity that Congress had hoped to achieve with § 157(b)(2) has therefore been tossed out with Vickie’s counterclaim. How Congress or the courts intend to regain this clarity remains to be seen.
In the meantime, there will be much hand-wringing by litigants, commentators and scholars as to Stern’s implications. Understandably, many will take Justice Roberts at his word that the issues were narrow ones resulting in an isolated constitutional foul. Yet it does not take much foresight to predict that until district courts revise their standing referral orders or Congress addresses the overbreadth of § 157(b)(2), or the Court offers further guidance on Stern and its implications, parties will try to characterize Stern in the manner most consistent with their self-interest, always wrapping these characterizations in lofty constitutional dialogue about whether particular claims involve public rights, private rights or both.[13]
Editor’s Note: This is part one of a two-part series.
1. 564 U.S. __, 131 S.Ct. 2594 (2011).
2. 458 U.S. 50 (1982).
3. 131 S.Ct. at 2604-5.
4. Id. at 2611. Because adjudicating his proof of claim would not necessarily resolve the counterclaim, the Court found that Pierce had not consented to jurisdiction over the counterclaim simply by filing a proof of claim. Id. at 2598-99, 2614.
5. Id. at 2609.
6. Id. at 2608.
7. Id. at 2612-13.
8. Id. at 2614 n. 7. By leaving this question open, the Court raised a broader conundrum: Does the public rights exception apply at all to bankruptcy?
9. Id. at 2614-15.
10. Id. at 2620 (“[O]ur decision today does not change all that much.”).
11. Id. at 2629-30 (Breyer, J., dissenting) (stating that Court’s decision will trigger “game of jurisdictional ping-pong between courts”).
12. Id. at 2621 (Scalia, J., concurring).
13. In Part II of this article, the authors will examine how courts are addressing Stern’s ramifications and what litigants should expect as a result.