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Anna Nicole Smith, Equity, and Article III

posted by Troy McKenzie

As John Pottow previewed in this post, the Supreme Court heard oral argument last week in Stern v. Marshall, better known as "The Anna Nicole Smith Case II." Justice Sotomayor put the first question to Kent Richland, lawyer for Vickie Lynn Marshall (aka Anna Nicole Smith), and it was a doozy:

JUSTICE SOTOMAYOR: What’s the authority at all for a bankruptcy court to adjudicate proof[s] of claims, without violating Article III? I don’t think we have ever had a case that’s actually said that.

MR. RICHLAND: This Court has never approached that issue directly. . . .

Despite that opening, by the end of the argument the Court seemed sufficiently receptive to Anna Nicole Smith's side (albeit with serious skepticism by the Chief Justice and Justice Scalia) that I wouldn't be surprised if they reverse the Ninth Circuit. What is very surprising, though, is that the questions presented in this case are still undecided in 2011. Northern Pipeline is a 1982 case, and Congress created the current system of bankruptcy courts in 1984. What's taken the Supreme Court so long?

The oral argument turned into an interesting discussion of topics that haven't gotten much attention at the Court recently. There was lively give-and-take about the equitable nature of bankruptcy and the "right" to a federal adjudicator protected by Article III of the Constitution. Justices Ginsburg and Sotomayor seemed persuaded by the argument that, as a matter of equity, a creditor who pursues a claim in bankruptcy could be subjected to a compulsory counterclaim by the debtor. Justices Breyer and Kagan pressed Roy Englert--counsel for the creditor--on the point that Article III is one area where the basic rule is that there is no hard-and-fast rule. So long as there's no suggestion that the integrity of the federal judiciary has been undermined by allowing bankruptcy judges to hear and decide a compulsory counterclaim, subject to appellate review in the Article III courts, then there's no Article III concern. Chief Justice Roberts and Justice Scalia, on the other hand, expressed serious discomfort with the idea that a creditor who seeks relief before a bankruptcy judge waives the right to an Article III adjudicator on the debtor's counterclaim.  

Thrilling stuff for the fed courts junkies out there. But shouldn't all of this be well settled by now? Are questions about Article III just too touchy and difficult for the Court to decide definitively? Maybe that's why the Court's Article III cases are "landmarks on a judicial 'darkling plain' where ignorant armies have clashed by night," as then-Justice Rehnquist, writing separately in Northern Pipeline, suggested. A little studied ambiguity keeps the system operating without letting matters get out of hand. 

The other possibility is that the Court doesn't really understand bankruptcy very well and knows it. Yes, the limits on a bankruptcy judge's power have been incompletely defined by the Court.  But maybe the Court has followed the hippocratic oath of judging--"First, do no harm"--rather than risk royally screwing up an important part of the business of the federal courts for which the Justices do not have a firm grasp. In fact, just two Terms ago the Court dodged a broad ruling on the reach of "related to" jurisdiction in Travelers Indemnity Co. v. Bailey.

I find the first explanation to be the stronger one, mostly because the Court seems completely oblivious to the criticism directed at its bankruptcy jurisprudence. But it does tend to stay away from definitive Article III decisions unless it absolutely has to. 



The continued insistence that bankruptcy is an equity proceeding mystifies me. It simply ain't. Just because something was administered by the Chancery in Merry Olde England doesn't make it a proceeding in equity, and bankruptcy law has only existed as a creature of statute in the US. There's no generic equitable bankruptcy power. Another case where the court reads its own past jurisprudence and not much else...

Great post. Just a little confused about your reply Adam. I have always heard that a Bankruptcy Judge sits in a court of equity. I understand the concept that points to constitutional questions on their authority, ie... are they a Masters or Magistrates because we know they are not Art.III. Currently appointed by the Cir. right?

Just a bit confused but hey.. I'm not an Attorney.

I think I am confusing this discussion with the inherent equitable powers delegated by 105 of BK code and I know equity arguments in BK are strong when litigating Stay actions etc..

So this is the second time this case as come to the Supreme Court...Right? Different Subjects..??

There is a lot of authority that would support giving the bankruptcy court jurisdiction over proofs of claim. The protections of Article III (independence through life tenure and undiminishable salaries) are waivable, because they are for the protection of the litigants. People who elect to participate in the bankruptcy distribution process by filing a claim have long been deemed to consent to the non-article III courts adjudication of their claim. Indeed, the Supreme court in Katchen v. Landy, 382 US 323 (1966), allowed consent jurisdiction over counterclaims against people who filed claims (which became known as jurisdiction by ambush). Let's hope they don't get misled by Marshall's lawyer's apparently bad answer to the question.

"Studied ambiguity" about the constitutionality of the bankruptcy system may be wonderful for law professors. But some of us have kids to put through college. How would Prof. Levitin feel about studied ambiguity when it comes to the tenure system at his university?


The Court doesn't view Article III as solely an individual right. The protections of Article III are also viewed as structural protections of the judiciary, in which case waiver-based arguments are less persuasive. That point--the structural nature of Article III--was one Chief Justice Roberts kept pressing in an extended colloquy with the Solicitor General's office (which participated in the argument as amicus supporting the debtor).

Technically Justice Sotomayor is right. The only Constitutional issue in Katchen was the right to a jury trial and in Gardner v NJ it was an 11th Amendment issue that the state raised cocnerning the proof of claim process. Pre-Northern Pipeline there were few cases posing Constitutional challenges to bankruptcy jurisdiction and the Court's consistently sweeping statements about jurisdiction have been in the context of construing the statutes or the inherent power of a court of equity. Still, to hold that an Article III adjudication is required for a proof of claim or a compulsory counterclaim would mean all those prior cases were unconsciously perpetuating an Article-III-defective regime, which seems an unlikely conclusion for the institution to reach.

Not Levitin. McKenzie. Sorry.

Bankruptcy Judge:

Please don't get me wrong--I don't think that the lack of definitive guidance from the Court on the constitutionality of the bankruptcy system is a good thing. But I do think that the Court walks on eggshells when dealing with cases touching on Article III. Just as in other areas involving separation of powers, the fear of unnecessary systemic disruption and inter-branch conflict wins out over the desire to clarify the law further.

And "studied ambiguity" is probably an apt description of the tenure process at most universities!

Troy: Great observation. We could say that SCOTUS has never explicitly upheld from an Art. III challenge the bankruptcy referee system going back to 1898. To be sure, we could say that's a long time for something fundamentally unconstitutional to have evaded judicial scrutiny, but I'm not sure of a doctrine of constitutional laches (although I think SB once said in a cross case that it was up for a very long time in Texas and so was probably constitutional!).

OK, some answers:
1) Northern Pipeline implicitly upheld. See WB's (A) discussion of "core" aspect of adjustment of debtor-creditor rights and (B)coy hint that they "may well" be public rights. See also BW's holding him to the wall on it ("I take it that the Court does not condemn as inconsistent with Art. III the assignment of these functions -- i.e., those within the summary jurisdiction of the old bankruptcy judges -- to a non-Art. III judge, since, as the plurality says, they lie at the core of the federal bankruptcy power."). I also take FN 40 as an oblique recognition that "core" bankruptcy rights adjudication by Art. I BJ OK because at least "some" bankruptcy claims could go before non-Art. III judge. The WB weasel in Granfinanciera ("we never decided that they were public rights!") may or may not "undo" this Northern Pipeline analysis.

2) Granfinanciera's delphic and revisionist attempt to equate Art. III analysis with 7th Amendment analysis might suggest that the lack of a 7th amendment right can be used to prove the permissibility of non-Art. III adjudication. (I have problems with what I see as this wildly sweeping obiter dictum; plus it also raises logical necessity issues -- if P then Q does not mean if not-P then not-Q.) Anyway, taking the "conflationary dictum" as binding positive law, we could say the lack of a jury trial right on the proof of claim shows it's OK to go before Art. I BJ.

3) Art. 1.5 argument: Katz has taken what I call the "Article 1.5" nature of bankruptcy seriously: that it's a special, super-duper grant of federal uniform lawmaking. As such, bankruptcy starts to wander into the domain of military courts -- at least as it regards its core elements of restructuring debtor-creditor rights. This builds on FN 17's recognition in NP that even military court jurisdiction gets carved into "core" and "non-core" (former OK outside Art. III, latter not). Accordingly, "core" bankruptcy non-Art. III jurisdiction probably OK -- that is the limiting principle that WB faux-searched for in NP. We can also buttress this with some hand-waving to in rem jurisdiction.

4) Raddatz Punt: All this goes away because the new bankruptcy courts are "adjuncty enough" post '84 amendments. Yes, BJ's can enter final judgment on some areas, but they are now subject to reference and withdrawal like MJ's, and surely the rights that MJ's oversee -- criminal process ones! -- are far more canonical exercises of "the judicial power" than the money fighting in bankruptcy. See NP FN 30.

Fun stuff...


Those are all plausible solutions for the Court to consider.

A point about Northern Pipeline that's bugged me. I sometimes wonder whether Justice Brennan's real concern in Northern Pipeline was the Seventh Amendment jury-trial right and not so much Article III. In other words, maybe the dictum in Granfinanciera ("delphic" is a charitable description, by the way) makes sense as a way of explaining what really drove the plurality opinion in Northern Pipeline.

According to Justice Elena Kagan that the problems were fixed because bankruptcy judges are no longer appointed by the - president and now are supervised by Article III district judges.

Two very low level points:

1) If the bankruptcy courts' core jurisdiction, as specifically set forth in 28 U.S.C. Section 157(b)(2), is not good enough for Article III jurisdiction using the 'reference' fiction, the entire bankruptcy court system is going down in flames.

2) The U.S. federal court system is to a large extent financed by the filing fees generated by the bankruptcy courts. The bankruptcy courts are the cash cows that fund the other federal courts.

Now, I'm not saying that real world considerations would every intrude on a Supreme Court decision on esoteric Constitutional issues - but in this budget climate, could you see the federal court system having to go to Congress for additional funding to run the judiciary? Or, perhaps, maybe the better course would be for every federal judge to give up one law clerk to balance their budget....

Surely, these factors would never intrude on the Supreme Court principled search for Constitutional truth - but if anyone knows where you can place legal wagers on, say, whether the Supreme Court will find bankruptcy courts ruling on proofs of claim Constitutional - could you please let me know?

A trip to Vegas - or even England - might be worth using up some of my accrued vacation time.

I believe the reason for the differences between the Supremes' willingness to play in the Code as if it were a sandbox and their unwillingness to address these Article III issues is the difference in lobbies. The messes they make with the Code are problems only for us practicing peons; Article III are problems for the entire judiciary system, and I suspect dire warnings from district court judges have been flooding the SCOTUS through back channels. Thus, Justice Sotomayor's question was actually, "Has counsel (for both sides) thought through what you're really asking us to do?"

Troy, I think that's a distinct possibility, but I had actually wondered whether it was the reverse. That is, I think WB cared a lot about Art. III (in part because he worried that individuals would get screwed out of DP rights, etc., and he lived through the 60s, Goldberg v. Kelly, etc.). I further think the fact that he couldn't get a majority in NP made him upset, despondent by his concurrence in Union Carbide, and pushing livid in his Schor dissent. GF gave him the chance to get his majority finally -- ostensibly a 7th A case -- but one with this bizarre link that lets him propound (albeit in dictum I'd argue) on behalf of a full majority opinion "the test" for Art. III. He played the long game.

If Article III concerns are structural as well as personal to the litigants, as they surely are, why has every circuit to have addressed the issue -- albeit with some vehement dissents -- allowed the litigants to consent to the entry of a final district court judgment by a magistrate judge?

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