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Stern v. Marshall

Supreme Court of the United States
564 U. S. ____ (2011) (2011)
ELI5:

Rule of Law:

A bankruptcy court, as an Article I legislative court, lacks the constitutional authority under Article III to enter a final judgment on a state law counterclaim unless the counterclaim is resolved in the process of adjudicating a creditor's proof of claim against the estate.


Facts:

  • Vickie Lynn Marshall married J. Howard Marshall II approximately one year before his death.
  • During their marriage, J. Howard gave Vickie numerous gifts but did not include her in his will.
  • Vickie alleged that J. Howard intended to give her half of his property through a living trust, but his son, E. Pierce Marshall, fraudulently induced J. Howard to sign a trust that excluded her.
  • After J. Howard's death, Vickie filed for bankruptcy.
  • In Vickie's bankruptcy proceeding, Pierce filed a proof of claim against her estate, alleging she had defamed him by having her lawyers tell the press he committed fraud to control his father's assets.
  • In response, Vickie filed a counterclaim against Pierce in the bankruptcy proceeding for tortious interference with the gift she expected from J. Howard.

Procedural Posture:

  • Vickie Marshall sued E. Pierce Marshall in Texas state probate court for tortious interference with an expected inheritance.
  • Vickie Marshall filed a petition for bankruptcy in the U.S. Bankruptcy Court for the Central District of California (a court of first instance for bankruptcy).
  • In the bankruptcy case, Pierce Marshall filed a complaint and a proof of claim against Vickie for defamation.
  • Vickie Marshall filed a counterclaim against Pierce for tortious interference with an expected gift.
  • The Bankruptcy Court entered a final judgment in favor of Vickie on her counterclaim for over $400 million.
  • On review, the U.S. District Court for the Central District of California (a trial court) treated the Bankruptcy Court's judgment as proposed findings, conducted its own review, and entered judgment for Vickie for approximately $88 million.
  • Pierce Marshall, as appellant, appealed to the U.S. Court of Appeals for the Ninth Circuit (an intermediate appellate court), which reversed the District Court's judgment.
  • The Court of Appeals held that the Bankruptcy Court lacked the authority to enter a final judgment on Vickie's counterclaim, which meant the earlier Texas probate court judgment in Pierce's favor was controlling.
  • Vickie Marshall's estate petitioned the U.S. Supreme Court, which granted certiorari.

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Issue:

Does a bankruptcy court have the constitutional authority under Article III to enter a final judgment on a debtor's state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim?


Opinions:

Majority - Chief Justice Roberts

No. A bankruptcy court lacks the constitutional authority to enter a final judgment on such a counterclaim. Article III of the Constitution vests the 'judicial Power of the United States' exclusively in courts whose judges have life tenure and salary protection. Vickie's counterclaim is a state common law action between private parties, constituting a 'private right,' not a 'public right' that Congress may assign to a non-Article III tribunal. Unlike the preference claims in Katchen v. Landy, the resolution of Vickie's tortious interference counterclaim was not necessary to the process of adjudicating Pierce's defamation claim against the estate. The question is whether the action stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process; Vickie's counterclaim did neither, as it was a state law action that merely sought to augment the estate. Therefore, allowing an Article I bankruptcy court to enter a final judgment on this claim unconstitutionally infringes upon the judicial power reserved for Article III courts.


Dissenting - Justice Breyer

Yes. A bankruptcy court does have the constitutional authority to enter a final judgment on the counterclaim. The majority's approach is overly formalistic and ignores the pragmatic, functional analysis required by precedent like Commodity Futures Trading Comm’n v. Schor. Pierce voluntarily submitted to the bankruptcy court's jurisdiction by filing a proof of claim, making Vickie's compulsory counterclaim an integral part of restructuring the debtor-creditor relationship. Given the control Article III courts retain (through appeals and the power to withdraw cases), the judiciary's institutional integrity is not threatened. The majority's decision will lead to inefficiency, delay, and a 'game of jurisdictional ping-pong' between bankruptcy and district courts, undermining the effectiveness of the bankruptcy system.


Concurring - Justice Scalia

No. A bankruptcy court does not have the constitutional authority to enter final judgment. I agree with the majority's conclusion but reject its multifactor, balancing-test jurisprudence. The proper analysis is based on text and tradition: an Article III judge is required for all federal adjudications unless a firmly established historical practice allows for a non-Article III tribunal, such as in territorial courts, courts-martial, or true 'public rights' cases where the government is a party. Vickie's counterclaim does not fall within any of these historical exceptions, and therefore must be adjudicated by an Article III court.



Analysis:

This decision significantly restricts the authority of bankruptcy courts by reinforcing a formal separation of powers under Article III. It clarifies that a state common law claim between private parties, even if labeled a 'core' proceeding in bankruptcy, cannot be finally adjudicated by an Article I court if it is a 'private right.' The ruling necessitates a two-step process for such claims, where the bankruptcy court may hear the case and submit proposed findings, but an Article III district court must enter the final judgment. This holding limits Congress's power to structure bankruptcy proceedings and may increase the time and cost of litigation by requiring the involvement of two different federal courts to resolve what is often a single, intertwined dispute.

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