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Super-Compulsory Counterclaims! Supreme Court Edition

posted by John Pottow

Greetings, Slipsters.  2011 will bring, alas, my retirement from the blog, although I may occasionally make intermittent guest posts in my emeritus capacity going forward.  So what better way to go out than commenting on the Anna Nicole Smith case up at SCOTUS (sub nom. Stern v. Marshall – or Marshall II, since this a return engagement by these parties)?  I will explain why CA9 will and should be reversed after the break, although the case is sufficiently complex it may require several postings.

Everyone remembers when Anna Nicole married octogenarian Howard Marshall.  Everyone probably also remembers their short-lived marriage ended upon his death, and everyone may even vaguely remember there was family litigation soon after.  The gist of it is Anna Nicole (Vickie, as she’s now called in the pleadings, as in Mrs. Vickie Lynn Marshall) alleged that Howard’s son, Pierce, was greedy and tortiously interfered with her expectation to get a sizable trust and/or gift from Howard before he died.  She advanced two claims, as far as I can tell: one against the estate in the late Howard’s probate proceedings (to recover from Howard’s estate), and one against Pierce individually for committing a tort (to recover against Pierce, who had loads of his own money).  Procedurally, each was odd: the probate claim was, I believe, launched by joining a will contest already afoot in Texas by another son, and the tort claim was launched in Anna Nicole’s own bankruptcy proceeding by way of an estate counterclaim.  Specifically, when Pierce filed a claim in Anna Nicole's bankruptcy for an unliquidated libel cause (“She’s saying bad things about me like I’m greedy!”), Anna Nicole responded with a compulsory counterclaim (“You bet I am – they’re true; you’re a scumbag and you owe me money, tortfeasor!”).  (Technically, Pierce first filed a nondischargeability complaint and then later filed his proof of claim; Anna Nicole’s counterclaim was to the nondischargeabilty complaint.  Nothing of relevance turns on it.)

Long story short, Anna Nicole wins in bankruptcy court – gajillions – and Pierce loses.  Pierce wins, however, in probate court in Texas, where Anna Nicole loses.  A wonderful wild goose chase ensues on whether the so-called “probate exception” to federal subject matter jurisdiction applies to Anna Nicole’s bankruptcy; it doesn’t, decrees SCOTUS in Marshall I.  Then come the doctrines of preclusion.  If the bankruptcy court is the first judgment, its findings should get preclusive effect in Texas (good for Anna Nicole).  Conversely, if the probate court is the first judgment, its findings should get preclusive effect (good for Pierce).  (I actually think the parties get some of this preclusion analysis wrong, but that’s not what’s interesting yet – maybe that will wait for Marshal III on remand?)

The bankruptcy court says its judgment came first, chronologically, so Anna Nicole wins.  Seems simple enough; it did, as a matter of timing.  But – a big but – CA9 said on appeal (technically on remand from Marshall I), that because Anna Nicole’s tort claim was not within the class of actions a bankruptcy judge can enter a final judgment on, its putative judgment was merely a proposed finding to the district court, which did not “affirm” -- and hence enter the actual judgment that would trigger the preclusion doctrines -- until after the Texas probate judgment came down.  (How's that for timing is everything in the law?)  Thus, under Preclusion Law 101, Pierce wins.

Leaving aside this over-simplified and likely erroneous application of preclusion law (for example, preclusion as an equitable doctrine requires the second court to decide whether it would be fair to allow preclusive effect to the first judgment, and there are allegations as I read the pleadings that Pierce lied to get the bankruptcy court to lift its stay so the Texas probate proceedings could continue and hence generate the first judgment), let’s examine the bigger holding: that the bankruptcy court could enter only a proposed judgment, not a final one, on Anna Nicole's tort counterclaim.  Quick, page the bankruptcy jurisdiction nerds!

As we all know – I am one of those nerds – this sounds like CA9 was saying Anna Nicole’s tort was not a “core” proceeding under 28 USC 157(b)(1), but an “otherwise related to” proceeding under 157(c)(1).  But that of course would be crazy, because a counterclaim by the estate – especially a compulsory counterclaim, as was this one – filed in response to a claim against the estate is expressly defined as a core proceeding in 157(b)(2)(C).  (I love the ambiguity game as much as the next lawyer, but there is not a shred of textual ambiguity.)

CA9, bless them, were unphased by textual clarity.  They said 157(b)(2)(C) as written would be, yes, unconstitutional.  It would violate Article III, at least as CA9 read (misread, in my view) the dictum of Marathon Pipeline’s plurality.  So to avoid the constitutional difficulty, instead of the textual reading, 157(b)(2)(C) should be read as saying core proceedings include “not all counterclaims or even all compulsory counterclaims to claims against the estate, but only the subset of compulsory counterclaims that are inextricably intertwined with the claims allowance process.”  Hence, we saw the birth of the judicially unprecedented – yet apparently constitutionally compelled – “super-compulsory counterclaim.”  Bravo, CA9.  (And you wonder why people make fun of you?)

SCOTUS jumped at the cert petition, of course, and I am confident the lifespan of this judicial freak-child will be short-lived.

Now, I have my doubts whether the framers of our Constitution envisioned the permissibility of an Article III adjunct (like a bankruptcy judge) trying a bankruptcy estate’s counterclaim to turn on whether that counterclaim is based on “merely” the same transaction and occurrence as the creditor’s filed claim (compulsory counterclaim) or whether in addition it is based on “the same transaction and occurrence that is also inextricably intertwined with the creditor’s claims resolution” (super-compulsory counterclaim).  Indeed, I find it preposterous.  (In fact, quite to the contrary, I actually think the powers of equity courts, especially as construed by SCOTUS over the years, would probably find the bankruptcy judge has the power to try even permissive counterclaims to render full justice between the parties after the creditor files a proof of claim, but that’s beyond the scope of this case.)  Nor am I worried about the aggrandizement of judicial power by these non-Article III judges – who are appointed by and overseen by Article III judges, not the political branches!  But that can await another post.  For now, I just wanted to let the readers know out there that the second shoe of Northern Pipeline might be ready to drop (Granfinanciera’s sideshow is not technically an Article III shoe, Justice Brennan’s revisionism notwithstanding).  Stay tuned!

PS: Anna Nicole and Pierce are both now dead.  But that's never stopped litigation about money, has it?  "Stern" is Anna Nicole's executor, and Eliane "Marshall" is Pierce's executrix.


I'm missing something. How is the Ninth Circuit's analysis of § 157 any different than the Third Circuit's in Halper v. Halper, 164 F.3d 830, 836 (3d Cir. 1999) and the 6th, 8th, 9th, and 10th Circuit cases cited therein. That is hardly that first opinion to conclude that core jurisdiction requires more than just being listed in § 157. What am I missing?

PSP -- Welcome, fellow nerd! Halper, as I recall, is an example of a strand of cases that simply underscore that 157(b)(2) is a NON-EXHAUSTIVE list of core proceedings. As such, there exists further core proceedings beyond those listed therein. Most courts do something like "can only arise in a bankruptcy case" or something like that to predicate such an extra-157(b)(2) core proceeding. In fact, I think I'm remembering Halper now -- there are a whole bunch of claims, and the court holds half of them core (finding them squarely under 157(b)(2)) and half of them non-core (finding them neither under 157(b)(2)'s non-exclusive list NOR under the "can only arise in bankruptcy" expansion to that list). But the converse is equally true: the court never held any of the claims that DID arise specifically under 157(b)(2) might somehow not be core proceedings.

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