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Opinion analysis: Bankruptcy courts’ powers pared down


With a stern lecture to Congress not to hand off the work of judges to others, even if those others might have the title “judge,” a divided Supreme Court on Thursday took out of the reach of specialized federal bankruptcy courts the authority to decide a small, but potentially significant, group of debtors’ claims.  Striking down a part of a 1984 law designed to satisfy an earlier Supreme Court decision limiting bankruptcy judges’ powers, the Court ruled by a 5-4 vote that specialized judges who do not have life tenure and other guarantees of independence cannot decide in a final way a debtors’ claim that is based upon state law with no link whatever to federal law or regulations.

For those members of the public who are fascinated by the case of Stern v. Marshall (10-179) only because it involved a former topless performer, Anna Nicole Smith, who had pursued millions of dollars from the estate of her tycoon husband of short duration, Ms Smith’s estate (her real name was Vickie Lynn Marshall; she died in 2007) lost the case entirely, her estate’s claim for some $89 million in damages is gone, and the estate of her adversary — the late E. Pierce Marshall, son of her late husband — wins all of his father’s $1.6 billion estate despite her claim that he used fraud to take control of all of the family wealth and shut her out.

But for bankruptcy lawyers, and for the specialized courts in which they ply their craft, the decision was as momentous a constitutional ruling on those courts’ authority as was the Justices’ decision in the 1982 case of Northern Pipeline Construction v. Marathon Pipe Line nullifying an earlier congressional law against those courts’ powers.  Congress, in 1984, passed a new law to salvage the bankruptcy courts’ authority by changing the way their judges were named, and the way those courts’ rulings were reviewed in higher federal courts.  But Thursday’s decision found that Congress had violated Article III — the part of the Constitution that controls judicial powers — in giving bankruptcy courts final authority to decide one kind of claim that debtors assert in those cases.  That claim, the new decision made clear, is one that is based solely on state law, and that characteristic puts it — because of Article III — beyond the reach of a bankruptcy judge.

The Court insisted that what it was taking away from those judges was of small dimension, but it said that grand constitutional principles, mandating the separation of powers and insuring judicial independence and individual liberty, were at stake.

The decision Thursday had two parts: the Court was unanimous in ruling that, under the 1984 law, Congress had given bankruptcy judges authority to issue a final and binding decision on the kind of debtor claim that Mrs. Marshall (“Ms Smith”) had made, but the Court split 5-4 in ruling that Congress could not validly do so under the Constitution.   (NOTE: In an earlier post on our LiveBlog today, we mistakenly reported that the Court had ruled that the bankruptcy court did not have jurisdiction over Mrs. Marshall’s claim.  Actually, she won on that point, but then she lost because her claim could not be decided by the bankruptcy court under Article III.  The blog apologizes for the earlier misreading of the decision’s headnotes.)

In the opening of the Court’s main opinion, written by Chief Justice John G. Roberts, Jr., the Court likened the prolonged legal fight over the estate of Texas oil tycoon J. Howard Marshall to the endless litigation (the fictional Jarndyce v. Jarndyce) in Charles Dickens’ novel Bleak House. Roberts noted that the case has been running for years in federal and state courts and has produced a “complicated” history, and continues even after the principal actors had died.  Actually, the dispute between Mrs. Marshall’s claims and those of Pierce Marshall has been unfolding since shortly after J. Howard died in 1995, after a 14-month marriage to Vickie Lynn, considerably junior in age.  At one point, Mrs. Marshall had won a federal court ruling for $474 million, but that was later cut to $88.5 million.  With Thursday’s ruling, even that lower amount has eluded her estate.

The late E. Pierce Marshall emerged as the final winner of the drawn-out courthouse battle, because — even while he and Mrs. Marshall jousted most vigorously in federal bankruptcy court — he had won a ruling by a Texas state probate court awarding him his father’s estate.  In their federal bankruptcy dispute, Mrs. Marshall had filed a claim of “tortious interference” with a gift that she claimed her late husband had promised her while he was still alive.  Technically, her claim was a counterclaim to one against her by Pierce Marshall, seeking damages in bankruptcy court because her complaints that he had used fraud to beat her out of her rightful gift allegedly had defamed him.

What was directly at issue in the Supreme Court this time (the Court had issued an earlier ruling in the case in May 2006) was whether Mrs. Marshall’s counterclaim for tortious interference was part of a “core proceeding” before the bankruptcy court.   In the 1984 changes in bankruptcy law that Congress made, it gave bankruptcy judges the authority to issue final rulings disposing of “core proceedings.” The Supreme Court’s 2006 ruling had ordered the Ninth Circuit Court to decide whether that is what the Vickie-Pierce claims battle constituted.   The Ninth Circuit Court in response ruled that the case was not a “core proceeding.”  That had the effect of putting into effect Pierce Marshall’s victory in Texas probate court.

Mrs. Marshall’s estate took the case back to the Supreme Court, seeking to revive her counterclaim based on Pierce’s alleged fraud.  The estate’s petition raised both the question of whether Congress had made bankruptcy cases with claims like hers a “core proceeding,” and the question of whether, if it was, Congress had the authority under Article III to assign the task of deciding such a case to a bankruptcy judge, not one appointed as is a regular Article III federal judge.

While Chief Justice Roberts spent considerable effort in the main opinion Thursday examining why the case did, in fact, qualify as a “core proceeding,” the flowing rhetoric in his 38-page opinion was reserved for the constitutional question of whether Congress in 1984 had given bankruptcy judges too much authority.

Under the 1984 law, Congress gave the regional federal appeals courts the authority to name bankruptcy judges and limited such judges to 14-year terms.  By contrast, regular federal judges named under Article III are appointed by the President, subject to Senate confirmation, and serve for life unless removed by impeachment.  The new ruling specifies that a  non-Article III judge of a bankruptcy court cannot constitutionally be given the authority to decide a debtor’s claim that is exclusively based upon some legal right assured by state law.

The decision apparently did not wipe out the authority of bankruptcy judges to decide, in a final way, claims and counterclaims in the same case by debtors and creditors, provided that all such claims are related to a federal law or some federal regulatory scheme.   Claims that are keyed only to state law rights or privileges, the decision indicated, are to be left to the state courts to decide.

In ruling against bankruptcy judges on what the Chief Justice called a narrow class of bankruptcy claims, the Court majority refused to expand a concept that earlier decisions had indicated would allow Congress to assign some authority to judge disputes to an entity other than an Article III judge — the concept that such an alternative mechanism was proper when “public rights” were at stake.

“What is plain here,” the Chief Justice wrote, “is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court with broad substantive jurisdiction, on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime.  If such an exercise of judicial power may nonetheless be taken from the Article III Judiciary simply by deeming it part of some amorphous ‘public right,’ then Article III would be transformed from the guardian of individual liberty and separation of powers we have long recognized into mere wishful thinking.”

Although Justice Antonin Scalia joined the Roberts opinion, giving it a majority of five votes on the constitutional question, he wrote separately to argue that the ruling did not go far enough.  The “public rights” rationale for handing off judging power to a government agency other than an Article III court, Scalia contended, should be limited to situations where the government itself is on one side of the dispute, not when both sides were private persons or entities.

The Chief Justice’s opinion was also joined by Justices Samuel A. Alito, Jr., Anthony M. Kennedy, and Clarence Thomas.

Justice Stephen G. Breyer wrote for the dissenters, including Justices Ruth Bader Ginsburg, Elena Kagan, and Sonia Sotomayor.  They agreed that Mrs. Marshall’s claim was within the authority of the bankruptcy court, but they argued that Congress’s assignment of that authority did not violate Article III, because the way Congress changed the bankruptcy court system in 1984 made those judges essentially a part of the regular Article III District Court.

Recommended Citation: Lyle Denniston, Opinion analysis: Bankruptcy courts’ powers pared down, SCOTUSblog (Jun. 23, 2011, 10:34 AM),