The Lawletter Vol 36 No 4
The Supreme Court recently rendered a decision that may rival the impact of Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), which had declared aspects of the then newly enacted Bankruptcy Code unconstitutional. In Stern v. Marshall, 131 S. Ct. 2594 (2011), the notorious Anna Nicole Smith ("Vickie") had married tycoon J. Howard Marshall II, Pierce Marshall's father, approximately one year before the former's death. Shortly before J. Howard died, Vickie had filed a suit against Pierce in Texas state court, asserting that J. Howard had meant to provide for Vickie through a trust and that Pierce had tortiously interfered with that gift. After J. Howard died, Vickie filed for bankruptcy in federal court. Pierce filed a proof of claim in that proceeding, asserting that he should be able to recover damages from Vickie's bankruptcy estate because Vickie had defamed him by inducing her lawyers to tell the press that he had engaged in fraud in controlling his father's assets. Vickie responded by filing a counterclaim for tortious interference with the gift she had expected from J. Howard.
The bankruptcy court granted Vickie's motion for summary judgment on the defamation claim and eventually awarded her hundreds of millions of dollars in damages on her counterclaim. Pierce objected that the bankruptcy court lacked jurisdiction to enter a final judgment on that counterclaim because it was not a "core proceeding" as defined by 28 U.S.C. § 157(b)(2)(C). As set forth in § 157(a), Congress has divided bankruptcy proceedings into three categories: those that "aris[e] under title 11"; those that "aris[e] in" a Title 11 case; and those that are "related to a case under title 11." District courts may refer all such proceedings to the bankruptcy judges of their district, 28 U.S.C. § 157(a), and bankruptcy courts may enter final judgments in "all core proceedings arising under title 11, or arising in a case under title 11," id. § 157(b)(1). In noncore proceedings, by contrast, a bankruptcy judge may only "submit proposed findings of fact and conclusions of law to the district court." Id. § 157(c)(1). Section 157(b)(2) lists 16 categories of core proceedings, including "counterclaims by the estate against persons filing claims against the estate." Id. § 157(b)(2)(C).
The bankruptcy court held that the counterclaim was a core proceeding, but the district court reversed, concluding that to hold all counterclaims to be core proceedings would be unconstitutional under Northern Pipeline. The court of appeals vacated the district court's judgment, concluding that because the subject matter of the counterclaim was not so closely related to the underlying core proceeding, the bankruptcy court should not have entertained it but instead should have given the Texas state court judgment preclusive effect. The Supreme Court affirmed, but on different grounds. The Chief Justice, writing for a 5-4 majority, concluded that while § 157(b)(2)(C) permitted the bankruptcy court to entertain the counterclaim, Article III of the Constitution does not.
Bankruptcy courts are creatures of Congress, while Article III courts have powers conferred by the Constitution. After Northern Pipeline, some thought Congress might resolve doubts about the jurisdictional limits of the bankruptcy courts by conferring Article III status on those courts. Congress was disinclined to do so, in part because it dreaded the partisan political battle that reconfirming hundreds of bankruptcy judges would have provoked. Instead, it created the jurisdictional muddle that is 28 U.S.C. § 157, which enables bankruptcy courts to hear some, but not all, of the categories of cases that may be decided by the district courts. The majority in Stern reasoned that while Article III forbids Congress to withhold or withdraw from Article III courts the authority to decide matters historically within the scope of their jurisdiction, neither can Congress confer on non-Article III courts jurisdiction that can be exercised only by an Article III court.
The majority's reasoning is hard to follow, since the district courts (which are, of course, Article III courts) can confer or withhold jurisdiction from the bankruptcy courts over which they have supervisory authority. Because the bankruptcy courts frequently decide substantive questions of state law, Stern places in doubt the scope and extent of the jurisdiction of the bankruptcy courts to decide the many issues that they have historically heard and resolved and that arise under state law, a matter that Congress presumably had resolved. See Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 132 n.2 (1995) ("After the Court held inconsonant with Article III the Bankruptcy Act's broad grant of jurisdiction to bankruptcy judges, see Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 87, 102 S.Ct. 2858, 2880, 73 L.Ed.2d 598 (1982), Congress transferred supervisory jurisdiction over bankruptcy cases to Article III courts and retained for the district courts the broad removal/remand authority the Act initially gave to bankruptcy courts. See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, 98 Stat. 333.").
Stern has managed to muddy even further the already murky issues surrounding the jurisdictional scope of the bankruptcy courts' authority to decide nonbankruptcy issues.