State law claims and Article III in Stern v. Marshall, 131 S. Ct. 2594 (2011).

• Author: Kovvali, Aneil
• Position: Thirtieth Annual Federalist Society National Student Symposium

Article III, Section 1 of the Constitution vests "the judicial Power of the United States" in courts whose judges "shall hold their Offices during good Behavior." (1) Bankruptcy courts are presided over by judges who lack such life tenure (2) and so are unable to wield Article III judicial power. Almost three decades ago, in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., (3) a splintered Supreme Court held that this limitation prevented a bankruptcy court from deciding a state-law contract claim. (4) Over the course of subsequent cases, the Court struggled to define the limits of Article III's prohibition, deploying an expanding set of factors to explain its rulings. (5) Last Term, in Stern v. Marshall, (6) the Supreme Court applied these factors to conclude that a bankruptcy court could not decide a state-law claim for tortious interference. (7) Although the Court insisted that the state-law origin of a claim lacked "talismanic power" (8) in the years between Northern Pipeline and Stern, the Stern majority rightly emphasized that factor in its analysis.

As the Court observed, the length and complexity of the litigation at issue in Stern approached Dickensian proportions. (9) Vickie Lynn Marshall (Vickie), also known as Anna Nicole Smith, was the widow of J. Howard Marshall II (J. Howard). (10) E. Pierce Marshall (Pierce) was J. Howard Marshall's son by a previous marriage. (11) Vickie's lawyers alleged--in court and to the press--that J. Howard intended for her to receive the gift of a catchall trust and that Pierce fraudulently sought to defeat that intention. (12) Pierce contended that these statements amounted to tortious defamation. (13)

While litigation over the estate continued in Texas Probate Court, Vickie filed for bankruptcy. (14) To ensure that he would be able to collect damages on his claims of tortious defamation, Pierce joined the bankruptcy proceedings by filing a proof of claim against the bankruptcy estate. (15) Vickie asserted truth as a defense and filed a counterclaim against Pierce for tortious interference with J. Howard's gift to her. (16) The bankruptcy court granted Vickie summary judgment and awarded her damages. (17)

Pierce argued that the bankruptcy court lacked the authority to enter judgment on Vickie's counterclaim, (18) Bankruptcy courts have statutory authority to enter final judgments in "core proceedings arising under title 11, or arising in a case under title 11." (19) Core proceedings are not explicitly defined, but they include "counterclaims by [a debtor's] estate against persons filing claims against the estate...." (20) By contrast, in non-core proceedings, bankruptcy courts simply make proposals to district courts; the Article III judges on the district courts then review the proposals and enter final judgment. (21) Pierce argued that Vickie's counterclaim was a non-core proceeding. (22) The bankruptcy court concluded that Vickie's counterclaim was a core proceeding, and that it thus had the power to enter judgment. (23)

The district court disagreed, concluding that Vickie's counterclaim for tortious interference was not a core proceeding. (24) Although the counterclaim fell within the literal statutory language describing core proceedings, the district court was concerned that such an expansive reading would unconstitutionally give judicial power to non-Article III bankruptcy judges. (25) To avoid this conclusion, the district court took a narrow view of "core proceeding" and held that Vickie's counterclaim was a non-core proceeding. (26) It thus regarded the bankruptcy court's conclusions as mere proposals. (27)

By this time, the Texas state court already had conducted a jury trial and found for Pierce. (28) But the federal district court denied preclusive effect to the state court judgment, finding instead for Vickie, and awarding her compensatory and punitive damages. (29)

The Court of Appeals for the Ninth Circuit reversed, holding that the lower courts had lacked jurisdiction to hear the case because it fell within a "probate exception" to federal jurisdiction. (30) The Supreme Court rejected this conclusion and remanded. (31) On remand, the Ninth Circuit inferred an additional requirement for final judgment. Even when a counterclaim falls within the definition of a core proceeding, a bankruptcy judge can enter a final judgment on the counterclaim only if the counterclaim is "so closely related to [a creditor's] proof of claim that the resolution of the counterclaim is necessary to resolve the allowance or disallowance of the claim itself." (32) The Ninth Circuit held that Vickie's counterclaim did not satisfy this added requirement. (33) As a result, the Ninth Circuit concluded that the Texas probate court had been first to enter a final judgment and that the district court should have recognized the preclusive effect of that judgment. (34)

The Supreme Court affirmed on different grounds. (35) Writing for the Court, Chief Justice Roberts (36) held that Vickie's counterclaim against Pierce was a "core proceeding" within the meaning of the statute. (37) Moreover, the Court concluded that the statute authorized bankruptcy judges to enter final judgment in all core proceedings; it was not plausible that the otherwise detailed statute would demand additional threshold inquiries without providing any explanation of how those inquiries were to be conducted. (38)

But while the statute permitted the bankruptcy court to enter a final judgment on Vickie's state law counterclaim, the Constitution did not. Article III, Section 1 vests "[t]he judicial Power of the United States" in the Supreme Court "and in such inferior Courts as the Congress may ... establish." (39) It also provides for life tenure for the judges of these constitutional courts, declaring that they "shall hold their Offices during good Behavior...." (40)

Bankruptcy judges are appointed for a limited fourteen-year term (41) and thus stand outside Article III. To the Court, this presented a problem. Article III's life-tenure requirement enforces the separation of powers by protecting the judiciary from the other branches. (42) It also protects individual litigants by ensuring that judicial decisions will not be rendered "with an eye toward currying favor with Congress or the Executive...." (43) But neither purpose would be served if Congress and the Executive "could confer the Government's judicial Power on entities outside Article III." (44)

The Court noted that this principle was well-established. In 1856, the Court declared in Murray's Lessee that "Congress may not 'withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty." (45) More recently the Court applied the principle to invalidate portions of a statute that purported to allow non-Article III bankruptcy judges "'to decide [a] state-law contract claim' against an entity that was not otherwise part of the bankruptcy proceedings." (46)

Chief Justice Roberts acknowledged that the principle had limits. A category of cases involving "public rights" could be assigned to non-Article III "'legislative' courts." (47) Murray's Lessee provided the initial prototype. The case, involving a challenge to the Treasury Department's sale of a customs collector's land, "fell within the 'public rights' category of cases, because it could only be brought if the Federal Government chose to allow it by waiving sovereign immunity." (48) Because the suit in Murray's Lessee could proceed only with the government's consent, the Court concluded that the government could "set the terms" of its adjudication. (49)

The Court candidly admitted that its "discussion of the public rights exception since that time has not been entirely consistent ...." (50) At one point, the Court suggested that the public rights exception extended only to cases in which the government was a party. (51) Subsequent cases took a more expansive view. In Thomas v. Union Carbide Agricultural Products Co., the Court extended the exception to allow agency adjudication of a dispute between private parties over claims created entirely by a federal statute. (52) In Commodity Futures Trading Commission v. Schor, (53) the Court upheld an agency's jurisdiction over a state-law counterclaim whose resolution was "necessary" to effective resolution of claims under a federal statute. (54) Chief Justice Roberts, however, emphasized "[t]he most recent case" in which the Court had considered the public rights exception, Granfinanciera, S.A. v. Nordberg, (55) which limited the exception to claims that either were tightly bound to a federal regulatory scheme or were owned by or directed against the federal government. (56)

The Court briskly applied the factors from these cases to Vickie's counterclaim. Unlike claims held to fall within the public rights exception, "Vickie's claim [wa]s a state law action independent of the federal bankruptcy law...." (57) The claim also was not the result of a magnanimous Congressional waiver of sovereign immunity; indeed, "Congress ha[d] nothing to do with it." (58) It was simply a claim under "state common law between two private parties." (59)

Pierce's decision to file a proof of claim in bankruptcy court did not change this analysis. The decision could hardly be deemed voluntary consent to non-Article III adjudication of the counterclaim: Pierce had no alternative but to file in bankruptcy court "if he wished to...