Stephanie Bentley, responding To stern v. Marshall

• Publication year: 2011

RESPONDING TO STERN V. MARSHALL

ABSTRACT

Stern v. Marshall is the most recent decision in a series of cases decided by the Supreme Court that involves the doctrine of public rights. The Court found that although 28 U.S.C. § 157(b)(2)(C) permits a bankruptcy court to enter final judgments on all counterclaims, Article III of the Constitution does not. The Court reiterated that Article III, Section 1 of the Constitution mandates the judicial power of the United States “be vested in one Supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.” The judges for these courts must have constitutionally protected salaries and tenure. Bankruptcy judges do not enjoy these protections, and so, may not hear matters that must come before Article III courts.

The Supreme Court applied the relevant case law to its analysis in Stern, including American Insurance Co., Murray’s Lessee, Ex parte Bakelite Corp., Crowell, Thomas, Northern Pipeline Construction Co., Commodity Futures Trading Commission, and Granfinanciera. Chief Justice Roberts, writing for the majority, relied heavily on Murray’s Lessee and Northern Pipeline despite more recent precedent. The Court glossed over the most important issue for bankruptcy courts in a footnote of its decision: “Because neither party asks us to reconsider the public rights framework for bankruptcy, we follow the same approach here . . . .” By declining to discuss further the public rights framework for bankruptcy, the Court left bankruptcy judges and practitioners to rely on precedent that is not dispositive—some of it very shaky. This Comment proposes a seven-factor analysis to help guide bankruptcy judges and practitioners, and to help shed some light on how to determine whether a matter is a public right and so may be heard and decided by a bankruptcy court.

INTRODUCTION

In the Supreme Court’s recent decision, Stern v. Marshall,1 the Court held that 28 U.S.C. § 157(b)(2)(C), with respect to a state law counterclaim, violated the Constitution. Chief Justice Roberts wrote: “Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded

that limitation in the Bankruptcy Act of 1984.”2 While the Court attempted to

limit the scope of Stern, the Court confirmed that judges can no longer rely on Congress’s interpretation of a “core” proceeding.3 To circumvent this problem, this Comment proposes, that when there is doubt over whether a bankruptcy judge may constitutionally treat a proceeding as “core,” the court make the

inquiries prescribed, albeit breezily, by Chief Justice Roberts, in a part of the majority opinion that is essentially dicta.4 These inquiries, which this Comment refers to as the “Stern factors,”5 are whether the matter:

1. can be pursued only by the grace of the other branches;

2. historically could have been determined exclusively by the other branches;

3. depends on the will of Congress;

4. flows from a regulatory scheme;

5. is completely dependent upon adjudication of a claim created by federal law;

6. is limited to a particularized area of the law; and

7. is a situation in which Congress created an expert an inexpensive way to deal with a class of questions of fact particularly suited for examination and determination by an administrative agency.

Despite more recent precedent, the Court in Stern followed the plurality decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,6 in which the Court held that whether a matter may be heard by an Article I court without violating the Constitution ultimately depends on if it falls within the

1 131 S. Ct. 2594 (2011).

2 Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011).

3 Meoli v. Huntington Nat’l Bank (In re Teleservices Grp.), 456 B.R. 318, 323 (Bankr. W.D. Mich. 2011).

4 Stern, 131 S. Ct. at 2613–15.

5 See id. at 2613–15.

6 458 U.S. 50 (1982).

“public rights doctrine.”7 For the Court in Stern, this meant that whether a proceeding is a “core proceeding” also depends on whether it falls within the “public rights doctrine.”8 However, the Court declined to define or even further discuss the “public rights framework” of bankruptcy.9 Consequently, judges and other practitioners have been left to determine whether a proceeding fits within the public rights doctrine and how those public rights relate to bankruptcy. The difficulty with leaving this responsibility to bankruptcy judges

is that Supreme Court precedent on public rights is unclear.

The benefit of the process proposed in this Comment is that these inquiries relate to each previous public rights case. If properly followed, these inquiries ensure the identification of a “core” proceeding within the public rights framework for bankruptcy, regardless of what the Supreme Court chooses to do next with this doctrine.

1. BACKGROUND AND THE EFFECT OF STERN V. MARSHALL

   
   

   Stern has a long and twisted history in the American judicial system.10 Vickie Lynn Marshall, known to most as Anna Nicole Smith, married J. Howard Marshall in 1994.11 J. Howard died only a year after their marriage at the age of 90.12 Before J. Howard passed away, Vickie sued his son Pierce in Texas probate court, alleging that Pierce tortiously interfered with her expectation of an inheritance from her husband through fraud and undue influence over J. Howard.13 Pierce counterclaimed, alleging that Vickie and her lawyers had defamed him.14

   
   

   7 See Stern, 131 S. Ct. at 2609–11.

   1. See id.

   2. Id. at 2614 n.7 (citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 54–56 (1989) (citations omitted).

   3. Marshall v. Marshall, 547 U.S. 293 (2006). Its recent trip to the Supreme Court was its second. A previous issue in the case, regarding the probate exception to federal jurisdiction as it related to bankruptcy courts, was decided in May 2006. Id.

   4. Marshall v. Marshall (In re Marshall), 253 B.R. 550, 554 (Bankr. C.D. Cal. 2000), adopted as modified, 275 B.R. 5 (C.D. Cal. 2002), vacated and remanded, 392 F.3d 1118 (9th Cir. 2004), rev’d and

      remanded sub nom. Marshall v. Marshall, 547 U.S. 293 (2006), rev’d, 600 F.3d 1037 (9th Cir. 2010), aff’d sub

      nom. Stern, 131 S. Ct. 2594.

   5. See id. at 553–54.

   6. Kenneth N. Klee, Klee on Stern v. Marshall, 2011 LEXIS EMERGING ISSUES ANALYSIS 5743, at 1–2 (June 2011).

   7. Marshall v. Marshall (In re Marshall), 600 F.3d 1037, 1043 (9th Cir. 2010), aff’d sub. nom. Stern, 131

      S. Ct. 2594.

      After J. Howard’s death, but before the case in Texas was fully litigated, Vickie filed for bankruptcy in California.15 Pierce then dismissed his case in the Texas court against Vickie and filed (1) an adversary hearing in the bankruptcy case to obtain a declaration that defamation liability was non-

      dischargeable and (2) a proof of claim for damages resulting from the alleged defamation.16 Vickie predictably filed a counterclaim in the bankruptcy case against Pierce, again alleging tortious interference with her expectation of an inheritance.17 Ultimately, the bankruptcy court awarded Vickie $449,754,134, less any amount that she would recover in the case pending in probate court.18 Pierce’s claim of defamation was settled in favor of Vickie on summary judgment.19 Originally, the bankruptcy court ordered that entry of judgment on her counterclaim should wait because the damages could not be calculated until a decision was made on how much inheritance Vickie was entitled to receive.20 However, the bankruptcy court was later persuaded that it could enter judgment before the probate court’s decision, “in a form to take account of any recovery . . . in the Texas probate action.”21 The award included damages to Vickie for her counterclaim against Pierce and, as the court emphasized, was also the result of Pierce’s egregious discovery violations.22

      
      

      To determine the outcome of Vickie’s counterclaim, the California bankruptcy court looked to Texas case law to determine whether it recognized a cause of action for tortious interference in the expectation of a gift.23 While determining that Texas did recognize this cause of action, the bankruptcy court could not identify the elements used for tortious interference.24 Consequently, the court applied the law of “other jurisdictions,” citing a New Mexico case as well as secondary sources, and concluded that tortious interference involved five elements, which it then applied to the case.25

      
      

   8. Id.

   9. In re Marshall, 600 F.3d at 1043–44.

   17 Id. at 1044–45.

   18 In re Marshall, 253 B.R. at 561–62.

   19 Id. at 556 n.16.

   1. Marshall v. Marshall (In re Marshall), 257 B.R. 35, 40 (C.D. Cal. 2000) aff’d in part, vacated in part, rev’d in part, 264 B.R. 609 (C.D. Cal. 2001).

   2. Id.

   3. In re Marshall, 253 B.R. at 553.

   4. Id. at 559.

   5. See id.

   25 Id. at 559–60.

   Pierce appealed to the district court, claiming the bankruptcy court lacked jurisdiction over the counterclaim because it was not a “core proceeding.”26 The district court agreed and reversed the bankruptcy court’s decision on this basis, and then went on to decide the matter for itself (finding in Vickie’s

   favor) even though the Texas Probate Court had finally reached its own decision (in favor of Pierce).27 The case then went before the Ninth Circuit Court of Appeals.28 The court of appeals reversed, but only to the extent that it held the Texas court’s decision should have been given preclusive effect.29 Vickie appealed to the Supreme Court.30

   
   

   The Supreme Court considered the constitutionality of Congress’s grant of jurisdiction to bankruptcy courts in the Bankruptcy Amendments and Federal Judgeship Act of 1984 for the first time in Stern, decided in June 2011.31 The Court specifically addressed whether a bankruptcy court could, without

   violating the Constitution, enter a final judgment on a counterclaim seeking damages for the tortious interference of the expectation of an inheritance brought in a bankruptcy proceeding.32 The majority opinion, written by Chief Justice Roberts, stated: “Although we conclude that...