'Stern v. Marshall' - Shaking Bankruptcy Jurisdiction To Its Core?

To read Business Restructuring Review in full, please click here.

In Stern v. Marshall, 131 S. Ct. 2594 (2011), the estate of Vickie Lynn Marshall, a.k.a. Anna Nicole Smith, lost by a 5-4 margin Round 2 of its Supreme Court bout with the estate of E. Pierce Marshall in a contest over Vickie's rights to a portion of the fortune of her late husband, billionaire J. Howard Marshall II. The dollar figures in dispute, amounting to more than $400 million, and the celebrity status of the original (and now deceased) litigants may grab headlines. But the real story here is the Supreme Court's declaration that a portion of the Federal Judicial Code addressing the bankruptcy court's "core" jurisdiction is unconstitutional.

THE DISPUTE

In 1994, Vickie married 89-year-old oil tycoon J. Howard Marshall II. About one year after they were married, J. Howard passed away. Shortly before he passed, Vickie filed suit in a Texas probate court alleging that J. Howard's younger son, E. Pierce Marshall, fraudulently induced J. Howard to sign a living trust that did not include Vickie as a beneficiary, even though J. Howard meant to provide Vickie with half his fortune. Pierce denied wrongdoing and defended the trust and, eventually, J. Howard's "pour-over" will, which provided that all of J. Howard's assets not already included in the living trust were to be transferred to the trust upon his death.

After J. Howard's death, Vickie filed for chapter 11 relief in a California bankruptcy court. Pierce filed a defamation complaint in the bankruptcy case against Vickie, alleging she induced her lawyers to tell the media that Pierce had fraudulently controlled J. Howard's estate planning. The complaint, which was followed by Pierce's filing a proof of claim, sought a declaration that the defamation claim was nondischargeable in Vickie's bankruptcy. Vickie defended on the merits and, at the same time, asserted a counterclaim against Pierce for tortious interference with the gift she expected from J. Howard.

The California bankruptcy court granted Vickie's motion for summary judgment on Pierce's defamation complaint and later, after a bench trial, found in favor of Vickie on her counterclaim. After the bankruptcy court's ruling on these matters, the Texas probate court reached the opposite result—that is, after the completion of a jury trial on the merits, the Texas court entered a judgment for Pierce. On Pierce's appeal to the federal district court in California, the district court came to three notable conclusions. First, the bankruptcy court could not have appropriately exercised core jurisdiction and, as a result, the district court would treat the bankruptcy court's ruling on the counterclaim as a proposed, rather than final, judgment. Second, the Texas probate court's judgment was not entitled to preclusive effect. And third, applying its own independent review of the record, the district court found that Pierce had tortiously interfered with J. Howard's gift to Vickie.

On appeal, the Ninth...