Stern v. Marshall Tests Authority of Bankruptcy Courts – Yahoo! News

Stern v. Marshall achieved notoriety due to the identity of parties now long dead. When former Playboy Bunny Anna Nicole Smith, a.k.a. Vickie Lynn Marshall, married multimillionaire J. Howard Marshall II, a man 63 years her senior, in 1994, suspicion that Smith was using her sex appeal to gain access to Howard’s bank account ran rampant. The wedding story published by People disparagingly began “The bride wore cleavage.” And when Marshall died a little more than a year later, tongues wagged anew.

Animosity between Vickie Lynn and Marshall’s youngest son, Pierce, ensured that Marshall’s will would be contested. The will contest began in a Texas probate court. However, Vickie Lynn’s California bankruptcy petition brought that state’s courts into the dispute, with dueling court decisions the result.

While the dispute before the Supreme Court concerns technical bankruptcy rules, the practical effect will be to determine whether the Texas probate court’s decision or that of the California district court is given effect.

How did this case arise?

The history of this case is long and complicated and involves concurrent litigation in two different states.

Vickie Lynn Marshall sued her stepson Pierce Marshall in guardianship proceedings concerning her ill husband in a Texas probate court, charging that he was interfering in her statutory right to support from her husband. She claimed Pierce had used fraud and undue influence to persuade Howard to make his Living Trust irrevocable. When her husband died, Vickie Lynn asked the court to reject the will and Pierce asked the court to uphold it.

While these claims were pending in the Texas probate court, Vickie Lynn filed a personal bankruptcy case in California, where she resided. In the bankruptcy action, Vickie Lynn was required to list all potential assets including ones she might be entitled to depending on the outcome of the Texas probate proceeding.

Pierce voluntarily came to the bankruptcy court, filing a claim for an undetermined amount to cover any judgment he might receive with respect to claims that Vickie Lynn defamed him by alleging wrongdoing with respect to Howard’s Living Trust and will. Once he made this claim, Vickie Lynn was required to file any counterclaims she had resulting from the same underlying events. Her counterclaims included her allegation that Pierce tortiously interfered with her expectation of a gift or inheritance from Howard Marshall in excess of $300 million.

While these claims were pending, Vickie Lynn filed the same tortious interference claim in the Texas probate court after Pierce alleged in that court that the bankruptcy court lacked jurisdiction over it.

Ultimately, inconsistent decisions emanated from these courts.

Under principles of full faith and credit, the courts in one state will give effect to another state court’s decisions. Which of these courts first decided Vickie Lynn’s claim is therefore critical in determining which decision should be upheld.

The California bankruptcy court was nominally the first to rule, with its decision favoring Vickie Lynn on Pierce’s defamation complaint and on her tortious interference claim. At this point, Vickie Lynn withdrew her claim from the Texas probate court. However, the California district court later found that the bankruptcy court exceeded its authority in issuing a ruling on the merits.

The federal district court in California said that while a bankruptcy court can issue final judgments on core matters (matters intrinsically related to bankruptcy proceedings), Vickie Lynn’s claim was not a core matter. Although they arose from the same transactions, their vastly different magnitude, legal theories and necessary proof resulted in their classification as non-core matters. Because they were non-core, the bankruptcy court was not authorized to issue findings of fact and conclusions of law, but was instead required to issue proposed findings and conclusions which would then be decided by the district court. The federal district court issued a ruling itself in favor of Vickie Lynn but by that time the Texas probate court had already ruled that Vickie Lynn had no interest in Howard’s estate and that he did not intend to make her a gift from his Living Trust.

How did this case come before the U.S. Supreme Court?

The case is up before the high court for the second time. The Ninth Circuit originally ruled that it could not hear the case because of a probate exception to its jurisdiction. But the Supreme Court found the probate exception did not apply and remanded the case to the Ninth Circuit for a decision on the merits.

In its ruling on the merits, the Ninth Circuit ruled that Vickie Lynn’s claim was compulsory but was a non-core bankruptcy claim. The court reasoned that the claim was non-core because it was not so closely entertwined with Pierce’s claim against her that it had to be resolved in order to determined whether his claim should be allowed.

Because it was non-core, the Ninth Circuit said the bankruptcy court’s jurisdiction was limited to issuing proposed findings of fact and conclusions of law to the district court. By the time the case reached the district court, the doctrine of issue preclusion should have kept the court from ruling on the merits, instead giving full faith and credit to the Texas probate court’s decision.

What is the issue before the Supreme Court?

The Supreme Court will decide whether to uphold the Ninth Circuit’s interpretations of bankruptcy law with respect to core proceedings and compulsory counterclaims. In particular, it will consider whether the Ninth Circuit’s analysis is consistent with Congressional intent, whether Congress has the authority to authorize core jurisdiction over compulsory counterclaims and whether the Ninth Circuit’s decision violates existing precedent by holding that Congress cannot constitutionally authorize non-bankruptcy judges to enter final judgments on all compulsory counterclaims.

via Stern v. Marshall Tests Authority of Bankruptcy Courts – Yahoo! News.

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