What U.S. Supreme Court Has to Say About Bankruptcy Court Jurisdiction

On June 23, 2011, the U.S. Supreme Court handed down what may prove to be the most significant case on bankruptcy court jurisdiction in almost 30 years. In Stern v. Marshall,¹ the Court held that bankruptcy court judges, as non-Article III judges, lack constitutional authority to enter final judgments on counterclaims asserted by a debtor where the counterclaims involve issues not essential to the allowance or disallowance of the underlying claims or are otherwise not subject to the “public rights” exception. While the opinion addresses the narrow legal question of bankruptcy court authority to enter final judgments on counterclaims, in the wake of Stern, bankruptcy courts are acting quite carefully and conservatively in asserting authority and jurisdiction; and debtors and creditors are spending time and resources litigating these issues.

‘Stern v. Marshall’

The Stern case involves notorious litigation between the estate of Vickie Lynn Marshall (a/k/a Anna Nicole Smith) (the debtor) and the estate of Ms. Smith’s step-son, Pierce Marshall (the claimant). Shortly before the claimant’s father (Ms. Smith’s husband) died, Ms. Smith filed suit against her step-son in Texas state court, asserting that her husband meant to provide for her through a trust, and that her step-son tortiously interfered with that gift. After Ms. Smith’s step-son died, Ms. Smith filed for bankruptcy. The estate for Pierce Marshall filed a proof of claim in the bankruptcy case, asserting a claim for defamation. Ms. Smith responded by filing a counterclaim for tortious interference with the gift she expected from her husband.