Bankruptcy - Hon. James D. Walker, Jr. and Amber Nickell

• Jurisdiction: United States,Federal
• Publication year: 2012
• Citation: Vol. 63 No. 4

Bankruptcy

by James D. Walker, Jr.* and Amber Nickell**

I. Introduction

This Article offers a review of recent bankruptcy law developments¹ in the United States Court of Appeals for the Eleventh Circuit.² Two notable areas of activity in the past year included: (1) bankruptcy court jurisdiction, which was ruled on by the United States Supreme Court; and (2) mortgages in Chapter 13 cases, which were the subject of both case law and a new bankruptcy rule.

II. Jurisdiction: Stern v. Marshall

In its only bankruptcy decision of 2011, Stern v. Marshall,³ the United States Supreme Court partially defined the constitutional limits on bankruptcy court jurisdiction. The players in the case were as follows: (1) the decedent-an elderly and wealthy Texan; (2) the debtor-the decedent's widow; and (3) the creditor-the decedent's son from a prior marriage and the debtor's stepson.⁴

When the debtor found herself cut out of the decedent's estate plan, her lawyers publicly accused the creditor of fraud, forgery, and other

* U.S. Bankruptcy Judge, Middle District of Georgia. Augusta State University (B.A., 1970); University of South Carolina (J.D., 1974). Member, State Bar of Georgia.

** Law Clerk to the Honorable James D. Walker, Jr., Chapman University (B.A., 1993); Mercer University, Walter F. George School of Law (J.D., 2001). Member, State Bar of Georgia.

1. Unless specified otherwise, all statutory references in this Article are to the Bankruptcy Code, 11 U.S.C. §§ 101-1501 (2006 & Supp. IV 2010).

2. For analysis of Eleventh Circuit bankruptcy law during the prior survey period, see Hon. James D. Walker, Jr. & Amber Nickell, Bankruptcy, Eleventh Circuit Survey, 62 Mercer L. Rev. 1085 (2011).

3. 131 S. Ct. 2594 (2011).

4. See id. at 2600. The widow in this case was Vickie Lynn Marshall, better known as deceased celebrity Anna Nicole Smith. Id. at 2601.

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misdeeds. The debtor later filed for bankruptcy in California. The creditor filed a proof of claim in the bankruptcy case based on defamation, and he filed an adversary proceeding to determine the dischargeability of the debt. The debtor raised truth as a defense and filed a counterclaim for tortious interference with an expectancy. The bankruptcy court found in favor ofthe debtor and awarded her damages in excess of $449 million. The creditor appealed to the district court.⁵ Meanwhile, a probate court in Texas was considering whether the decedent's estate plan was valid.⁶ The debtor had filed claims challenging the validity of the plan and alleging tortious interference by the creditor. However, she withdrew her claims in the probate court after succeeding on her tortious interference counterclaim in the bankruptcy court. The probate court subsequently declared the estate plan to be valid, which created a conflict with the bankruptcy court's order. Sometime after the probate court entered its order, the district court, in reviewing the bankruptcy court order, entered a decision in favor of the debtor.⁷

At issue in the Supreme Court was whether the bankruptcy court decision or the probate court decision controlled. The bankruptcy court decision could only control ifthe bankruptcy court had authority to enter a final order on the debtor's tortious interference counterclaim.⁸ The Supreme Court held that it could not.⁹ Instead, the bankruptcy court order did not become final until affirmed by the district court.¹⁰ Because the probate court order preceded the district court order, the probate court order had preclusive effect.¹¹

To reach its decision, the Supreme Court first addressed the bankruptcy court's statutory authority to decide the debtor's counterclaim.¹² Pursuant to 28 U.S.C. § 157(b)(1),¹³ bankruptcy judges may enter final orders in "core proceedings arising under [T]itle 11, or arising in a case under [T]itle 11."¹⁴ By contrast, only the district court can enter final

5. Id. at 2601-02.

6. Marshall v. Marshall, 547 U.S. 293 (2006). Marshall involved the same case as Stern, but a different issue. The Court provided a more detailed explanation of the background facts in Marshall than in Stern.

7. Id. at 300-02.

8. See Stern, 131 S. Ct. at 2600.

9. Id. at 2601.

10. See id. at 2608.

11. See id. at 2602-03.

12. Id. at 2600.

13. 28 U.S.C. § 157(b)(1) (2006).

14. Id.

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orders in matters "related to" a bankruptcy case.¹⁵ Congress provided a nonexclusive list of core proceedings, including "counterclaims by the estate against persons filing claims against the estate."¹⁶ Thus, the bankruptcy court had statutory authority to enter a final judgment on the debtor's counterclaim.¹⁷ However, the bankruptcy court did not have "the constitutional authority to do so."¹⁸

Pursuant to the United States Constitution, and to effectuate the principle of separation of powers, only Article III judges¹⁹ may exercise the judicial power of the United States.²⁰ The judicial power, which may not be withdrawn by Congress, is exercised "[w]hen a suit is made of 'the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.'"²¹ However, the Supreme Court has previously recognized that cases involving "public rights" may fall outside the constitutional scope of judicial power and, thus, may be the subject of final orders by non-Article III tribunals.²²

While the Supreme Court has never provided a comprehensive definition of public rights, they may include: (1) those that "can be pursued only by grace of the other branches ... or one that 'historically could have been determined exclusively by' those branches";²³ (2) "those arising 'between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments'" rather than matters involving the "'liability of one individual to another'";²⁴ (3) those in which the claimed right to relief "flow[s] from a federal statutory scheme" and is " 'completely dependent upon' adjudication of a claim created by federal law";²⁵ and (4) those in which the claim is "limited to a 'particularized area of the law' . . . in which Congress devised an 'expert and inexpensive method for dealing with a class of questions of fact which are

15. Id. § 157(c)(1) (2006).

16. Id. § 157(b)(2)(C) (2006).

17. Stern, 131 S. Ct. at 2601.

18. Id.

19. Article III judges are those who are appointed for life and whose compensation may not be diminished. Id. at 2609; see also U.S. Const. art. III, § 1. Bankruptcy judges are

appointed to fourteen-year terms. 28 U.S.C. § 152(a)(1) (2006).

20. U.S. Const. art. III, § 1.

21. Stern, 131 S. Ct. at 2609 (quoting N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90 (1982) (Rehnquist, J., concurring)).

22. Id. at 2610 (internal quotation marks omitted).

23. Id. at 2614 (quoting N. Pipeline, 458 U.S. at 68).

24. Id. at 2612 (quoting Crowell v. Benson, 285 U.S. 22, 50-51 (1932)).

25. Id. at 2614 (quoting Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833,

856 (1986)).

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particularly suited to examination and determination by an administrative agency specially assigned to that task.'"²⁶

In summary, "what makes a right 'public' rather than private is that the right is integrally related to [a] particular federal government action."²⁷ In the bankruptcy context, the Supreme Court has previously said, "[i]f a statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court."²⁸

The debtor's counterclaim does not fit within the framework of a public right because it is not one that is within the domain of the executive or legislative branches.²⁹ In addition, it neither "flow[s] from a federal regulatory scheme," nor is it a "claim created by federal law."³⁰ Finally, it does not involve a particularized area of law.³¹ Instead, the debtor's counterclaim-an ordinary tort claim arising under state law-fits squarely within the scope of private rights that must be adjudicated by an Article III court.³² The fact that the creditor had filed a proof of claim does not change the result.³³ The creditor's defamation claim did not transform the nature ofthe debtor's counterclaim, nor did resolution of the creditor's claim fully resolve the debtor's counterclaim.³⁴ Although there was some overlap between the two claims-namely whether or not the creditor had engaged in acts rising to the level of tortious interference-the debtor's counterclaim required additional inquiries by the Court.³⁵ For example, a tortious interference claim typically requires proof that the plaintiff expected to receive a bequest and proof that the expectation was reasonable.³⁶ "There thus was never reason to believe that the process ofruling on [the creditor's] proof of claim would necessarily result in the resolution of [the debtor's] counterclaim."³⁷ Consequently, the Supreme Court held, in ruling on

26. Id. (quoting N. Pipeline, 458 U.S. at 85; Crowell, 285 U.S. at 46).

27. Id. at 2613.

28. Id. at 2614 (quoting Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 54-55 (1989)).

29. See id.

30. Id.

31. Id. at 2615.

32. Id.

33. See id. at 2615-16.

34. Id. at 2617.

35. Id.

36. Id.

37. Id. at 2617-18.

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the counterclaim, the bankruptcy court impermissibly exercised the judicial power.³⁸

The Supreme Court rejected the argument that its decision would give rise to practical problems, limiting efficiency.³⁹ It noted that with noncore "related to" matters, bankruptcy courts generally hear the case and submit proposed findings of fact and conclusions of law to the district court for de novo review.⁴⁰ Nothing in the opinion prevents similar procedures from being used for matters that are statutorily defined as core but actually require the exercise of Article III judicial power.⁴¹

Furthermore, the...