Legal View: Supreme Court plays taps for Anna Nicole

By Robert Somma The Daily Record Newswire In June, the U.S. Supreme Court brought the curtain down on the long-running and often entertaining quest by the deceased phenomenon known as Anna Nicole Smith to obtain a share of her also deceased husband's assets. In doing so, the court held that bankruptcy courts cannot constitutionally enter final judgment in certain barroom brawls occurring in strictly state law grudge matches even though Congress gave them that power. Stern v. Marshall, 564 U.S. __, Case No. 10-179 (2011). The decision will likely alter the bankruptcy process as we've known it for almost three decades. Here's why. Meet the judges Almost 30 years ago, a different lineup of Supreme Court justices said that, absent the consent of the litigants, the Bankruptcy Court as then constituted could not finally decide a pre-bankruptcy state law contract dispute involving a party not otherwise part of the bankruptcy proceedings. Northern Pipeline Constr. Co. v. Marathon Pipeline Co., 458 U.S. 50 (1982). The court reasoned that the judicial powers of the United States can be exercised only by judges protected by the federal Constitution's Article III guarantees of life tenure without salary diminution. The judges of the Bankruptcy Court had then (and have now) no such protections, hence seemingly may not exercise such powers. Marathon effectively invalidated a key provision of the Bankruptcy Reform Act of 1978, a comprehensive revamping of federal bankruptcy laws more than 10 years in the making. Stern can be read as a variation on the Marathon theme. Both require an understanding of the considerable differences between bankruptcy judges and other federal judges. Federal District Court and circuit court judges and the Supreme Court justices are commonly called Article III judges because, in accordance with that article of the Constitution, they have life tenure during "good Behavior" (not defined, of course) and can't have their salaries reduced (to hear Chief Justice John G. Roberts Jr. tell it, they can't get them increased either!). They are appointed by the president, customarily informed by political considerations, with the advice and consent of the Senate. By contrast, federal bankruptcy judges are commonly called Article I judges because they serve on an "inferior" court established by Congress under Article I of the Constitution, have neither life tenure nor salary guarantees, and are appointed neither by the president nor by Congress but by the federal circuit courts of appeal (after considering the recommendation of the Judicial Conference, a sort of board of directors of the federal court system). They serve not for life but for a term of 14 years and are paid at the rate of 92 percent of the salary of federal District Court judges (a differential unpopular with both groups). Moreover, they serve not during "good Behavior" but subject to removal for incompetence, misconduct, neglect of duty, or physical or mental disability and are removed only by the judicial council of the pertinent federal circuit (in effect, the disciplinary panels of the federal courts). They are denominated judicial officers of the federal District Court, and the Bankruptcy Court is identified as a unit of that court. They do what, exactly? To navigate around Marathon, Congress had two choices: (a) provide for appointment of bankruptcy judges under Article III or (b) do something else. In 1984, Congress chose the latter, conjuring the legal fiction that bankruptcy judges are like deputies of the federal District Court sheriffs, firing that court's Article III bullets but with the Bankruptcy Court's Article I guns. Nobody seemed to mind. So what do these judges do? They exercise the powers of the federal District courts over bankruptcy matters by the sleight of hand known as a "referral"; those District courts may, and all do, refer all bankruptcy matters to the judges of the Bankruptcy Court. On referral, the judges of the Bankruptcy Court have authority over bankruptcy cases, the debtors who file them and their property. Importantly, they can make final judgments and orders in those cases subject to appeal. The federal District Court can withdraw the reference, and sometimes it does. Congress also gave bankruptcy judges authority to make final judgments and orders regarding "core proceedings, an undefined category of civil matters, illustrated by a list of 16 such items, covering the spectrum of bankruptcy case activity: the dischargeability of a debt, the allowance of a claim, the recovery of a preference, the avoidance of a fraudulent transfer, the confirmation of a Chapter 11 reorganization plan or a Chapter 13 debt adjustment plan, turnover of the debtor's property, objections to discharge, the status of liens, the duration of the automatic stay, counterclaims against proof-of-claim filers and so on. Those proceedings are also subject to withdrawal of the reference. Lastly, bankruptcy judges can make proposed findings of fact and conclusions of law in non-core proceedings for consideration and final determination by the District Court if the matter at hand is related to a bankruptcy case (though the parties may consent to final judgment by the bankruptcy judge, and often do). Stern deals with a challenge to the Bankruptcy Court's power to make a final judgment in one of the designated "core proceedings" consisting of a counterclaim rooted in state common law to a proof of claim filed in the bankruptcy case. The Anna Nicole Smith saga You may recall the high jinks: Vickie Lynn Hogan, a.k.a. Anna Nicole Smith, married a rich Texan named J. Howard Marshall II, about a year before his death. She was wife No. 3, a 1993 Playmate of the Year and 62 years younger than Howard. Contrary to her expectations, Howard left her out of his estate plan in his final days, influenced (according to Anna Nicole) by his son, E. Pierce Marshall. She was understandably miffed, and she and Pierce, tireless and unrelenting adversaries, pursued numbingly complicated, mildly tabloid and painfully protracted legal proceedings for more than 15 years in the Texas Probate Court, the federal Bankruptcy Court in California, and various appellate courts including a prior round before the Supreme Court. Both Pierce (in 2006) and Anna Nicole (in 2007) died during the seemingly endless melee, their hostilities continuing post-mortem and only now ceasing. The short version: Anna Nicole started the fight in 1995 in the Texas Probate Court, challenging the validity of Howard's estate plan and claiming Pierce induced Howard to exclude her from a promised estate share. Pierce countered with a defamation lawsuit. In January 1996, she filed a Chapter 11 case in federal Bankruptcy Court in California. Pierce countered with a defamation claim in her bankruptcy case, and Anna Nicole filed a counterclaim, again disputing the efficacy of the estate plan. Those quintessential state law causes of action became the nexus of their dispute, considered by multiple courts. The wrangling continued up and down the federal appellate system and through a Bankruptcy Court ruling in her favor, a Texas Probate Court judgment for him, and a federal District Court ruling for her. The Supreme Court ultimately determined that the Bankruptcy Court could not finally rule on her counterclaim, the Texas Probate Court had done so on the merits, and the federal District Court should have given preclusive effect to the prior Probate Court ruling. He wins; she loses. In deciding the dispute, the Supreme Court addressed the question whether the federal Bankruptcy Court had the authority to enter final judgment on Anna Nicole's counterclaim. The court said yes and no: Yes, the counterclaim is indeed a core proceeding under the Bankruptcy Code and, as such, the Bankruptcy Court had statutory authority to hear and determine it; but no, notwithstanding that statutory authority, the Bankruptcy Court as an Article I court did not have the constitutional authority to hear and determine the counterclaim, even if the matter comprised a core proceeding under federal bankruptcy law. The outcome: the California Bankruptcy Court judgment falls, the Texas state court judgment stands, and Pierce wins. Shades of Marathon? What's it all about? The decision in Stern is narrow but nonetheless baleful: It holds that the federal Bankruptcy Court, comprised of Article I judges, "... lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Said differently, the post-Marathon statutory contraption that grants federal bankruptcy judges the power to make final judgments over counterclaims is unconstitutional to the extent it purports to give Article III powers to an Article I judge to enter final judgments on state law counterclaims to proofs of claim. The specter of Marathon materializes: If Article I judges cannot finally determine counterclaim core proceedings, an exercise seemingly fundamental to the bankruptcy process, what else can they not do? Allow a claim, avoid a preference, deny a discharge? Improbable, yes; impossible, no. Stern then may be understood, and employed, to effectuate a broad reconfiguration of who handles what in the federal bankruptcy system. Since Marathon, the Bankruptcy Court has functioned, constitutionally or not, as a primarily single-tribunal case-and-proceeding adjudicator, limited to be sure by reference withdrawal, arbitration enforcement and the court's own abstention powers but nonetheless command central for the bankruptcy process. Stern may well occasion a spate of jurisdictional challenges to the authority and role of bankruptcy courts in other categories of core proceedings. In turn, that may cause the fragmentation of bankruptcy cases, with the Bankruptcy Court deciding, sometimes finally and sometimes not, a reduced grocery list of disputes while other courts (state and federal) shoulder an added and unfamiliar bankruptcy-driven caseload. That fragmentation, should it occur, does not seem a good thing. In planning for the economic convulsions of bankruptcy, debtors and creditors alike are better off when they know, within some reasonable expectation framework, where a dispute will be heard, by whom, with what available precedent, at what cost and within what timeline. That is to say, they are better off when an established and reliable process is a component of their planning for life during and after bankruptcy. Predictability will be diminished and process destabilized if every bankruptcy case starts off with the questions: Where will a disputed matter be heard and with what finality? In the end, Anna Nicole didn't get the pot of gold she may have been promised by a tired, sick and rich old man. Still, she has a legacy, though not the one she expected: Bankruptcy litigants will henceforth invoke her name to persuade bankruptcy judges to pause in mid-pitch and make sure they can properly and with finality call balls and strikes in every inning and on every batter in the bankruptcy ball game. Robert Somma is senior counsel at the Boston law firm Posternak, Blankstein & Lund. He served as a federal bankruptcy judge in Massachusetts from 2005 to 2008. Published: Tue, Aug 23, 2011