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Anna Nicole Smith May Be More Than Just the Only Loser on This One

posted by Bob Lawless

Vickie Lynn Marshall, as she is known to bankruptcy mavens, or Anna Nicole Smith, as she is known to normal people, lost today in her second round before the Supreme Court. In his last post with us, John Pottow provided a good summary of the issues, and guest blogger Troy McKenzie also had offered some thoughts about what the case might mean for some other areas of bankruptcy law (here and here). Now that the opinion is out, I would describe it as scary for the daily workings of the bankruptcy system.

Given the case summaries available just on this blog, I will not belabor the facts, but a little context is necessary. Anna married a much older and much wealthier man (J. Howard Marshall) who died a year after the marriage. He left all of his money to his son, Pierce. In the Texas probate court, Anna claimed Pierce had tortiously interfered with her inheritance. Anna then filed bankruptcy in Los Angeles. When Pierce filed a claim in Anna's bankruptcy, Anna defended with a counterclaim alleging the tortious interference. Pierce won in the Texas state probate court, but Anna won in the bankruptcy court. The case went up to the Supreme Court once, and Anna won. On remand to the lower courts, however, she ended up on the losing side, and appealed again to the Supreme Court. By the second trip to the Supreme Court, the case had been proceeding for sixteen years, and everyone just mentioned had long since passed away. Most tragically, given the long history of the litigation, the Supreme Court was compelled to make the obligatory, clichéd reference to Dickens's Bleak House.

The legal issue turned on whether the bankruptcy court had the constitutional authority to rule on Anna's counterclaim. Bankruptcy judges are not "regular" federal judges in the sense that they do not, among other things, have life tenure. This means that bankruptcy judges cannot do things "regular" federal judges can do such as ride the judges' elevator in the federal courthouse--or at least such was the case in the federal courthouse where I was a judicial law clerk twenty-two years ago. Bankruptcy judges also cannot exercise the "judicial power" of the federal government because Article III of the U.S. Constitution reserves the judicial power only to "regular" federal judges. For this reason and because it is more politic (albeit less fun) than reminding your friend that he is just not a "regular" federal judge, lawyers talk about Article III and non-Article III judges.

Today, the Supreme Court ruled that deciding Anna's counterclaim was an exercise of "judicial power" and was something bankruptcy courts could not do. Because the bankruptcy court order cannot stand, the order of the Texas probate court will. Anna loses, which means as a practical manner that her heirs lose.

The Court's reasoning revolves around what constiutes a "public right," how to count former Chief Justice Burger's Justice Rehnquist's vote based on two sentences in his concurring opinion in the 1984 Northern Pipeline case, and an 1856 Supreme Court case involving someone who has suffered the ignominious fate of going down in posterity simply as "Murray's Lessee." Frankly, I don't care. There was plenty of support for the case to come out either way as evidenced by the 5-4 vote.

The majority builds an elaborate federal courts castle in the sky, treating grand theories of federal court jurisdiction almost as if they were preordained by some universal moral theory. The majority's invocation of Article III safeguards as protections against encroachments to liberty come across as having doth protested too much given the context of the dispute. None of these grand theories of federal jurisdiction will matter much to the 2,000,000 persons who will file bankruptcy cases this year and who could be affected by the Court's decision. The majority recognizes its opinion could have practical consequences for the bankruptcy court system. The dissenting also does so even more pointedly. It is these implications of these effects that I suspect for the reason why the Court split along ideological lines on an issue that must strike nonlawyers as incredibly technical and arcane.

After this case, bankruptcy courts will still be able to receive bankruptcy petitions and do most all of the work bankruptcy courts do. Among these powers, they will be able to decide creditor's claims and adjudicate any defenses the debtor might have arising out of federal bankruptcy law that necessarily gets completely resolved in the context of resolving the claim. An example might be that the creditor's claim asks for more than one year of rent on a lease, a claim generally barred by the Bankruptcy Code. The majority's opinion, however, seems to suggest that many defenses to a a creditor's claim cannot be adjudicated by the bankruptcy court. In dissent, Justice Breyer offers the example of a bankruptcy debtor's defense that a residential lessor failed to satisfy obligations under a lease and made misrepresentations to a landlord-tenant court, an example drawn from a real-life case. According to Justice Breyer, it is not clear the bankruptcy court could now hear that defense. The majority does not appear to dispute the point.

That brings me to a bigger concern in today's enviroment. In light of all the housing problems and with misconduct by many in the mortgage lending industry, many debtors have been asserting defenses based on federal consumer protection statutes such as the Real Estate Settlement Procedures Act (RESPA) or the Truth-in-Lending Act (TILA). At a few points in the opinion, the majority references the state-law nature of Anna's claim, but the majority's reasoning would seem to sweep in even federal statutory claims. In fact, the majority relies on a previous bankruptcy case called Granfinanciera that involved a federal fraudulent conveyance action. If a federal statutory fraudulent conveyance action is beyond the authority of a bankruptcy court, then it seems possible that future courts could reason adjudication of claims under other federal statutes like RESPA and TILA also are beyond the power of the bankruptcy courts.

The majority's response to these concerns is, and I'm paraphrasing, "So what?" Even if these federal statutory defenses are beyond the constitutional authority of the bankruptcy courts, all a debtor has to do is ask for the case to be removed to the Article III district court and let it hear the defense. The dissent rightly points out the unrealistic nature of this solution given the added delay and complexity. I'll add another one -- attorney's fees. At current fee levels, it is not realistic to expect consumer bankruptcy attorneys to assert these defenses if they mean lengthy procedural wrangling and a trip to district court. As an aside, I'll also lay a bet that the district court judges would be happy to see TILA, RESPA, and similar disputes stay with the bankruptcy judges who have more experience with them. Sending these disputes from bankruptcy court to district court also could overwhelm the district courts, leading to delay and possibly more tragically clichéd references to Bleak House as cases drag on for years.

Anna's case, or Stern v. Marshall as it will go down in history, could make life a little tougher for bankruptcy courts and consumer debtors as they try to wrestle with the implications of the majority's reasoning. I predict that lower courts, who are probably more concerned with keeping the system working than federal courts theory, will try to interpret the decision narrowly. My musings above will be worst-case scenarios that will not come to pass in the short run. As time goes by and cases work their way up the federal court appellate structure, Anna's case could have significant effects on practice in the federal bankruptcy courts.

Comments

I wonder if you're right that pragmatism will cause lower courts to read Stern as narrowly as possible. Lower federal courts take their cues in these matters from their court of appeals. If the court of appeals tends to be populated with jurisdiction mavens who believe federal jurisdiction is limited (the Seventh Circuit, for example), bankruptcy courts in that circuit will likely read Stern broadly and their own jurisdiction narrowly. I would, in short, be afraid. Very afraid.

Does it make sense to turn Bankruptcy Courts into Article III courts? The District Judges would escape having to hear the bankruptcy issues they now might have to deal with, as the post outlines, but would have their staus perhaps somewhat diluted by having more Article III judges around. What would the appellate scene look like? Would appeals still go from Bankrutpcy Court to District Court, at least where ther's no B.A.P.? What are the politics involved, aside from the confirmation issues that arise from a Democrat in the White House, and enough Republicans in the Senate to make confirmation a mess going forward? Surely the vast majority of incumbent Bankruptcy Judges ought to be able to obtain confirmation, so the issue is really one for the future. After all, if the judicial-nomination/confirmation pie gets bigger, everyone can have a slice.

Bankruptcy Judges getting Article III status is an old war that may be heating up again.

District judges have been strongly against it in the past.

In the current political climate - where we can't even get federal judges decent salaries - there are going to be budgetary concerns about making bankruptcy judges Article IIIs.

This also dovetails with the arguments about what roll bankruptcy courts should have. Prior to Northern Pipeline, the jurisdiction and discretion provided by the Bankruptcy Code were huge. The tendency, over time, has been the whittling away of jurisdiction and the discretion of the bankruptcy courts. Making the bankruptcy judges Article IIIs would cut against that secular trend.

So, making bankruptcy judges Article IIIs is a good idea that is unlikely to actually happen, IMHO.

The budgetary effect would be minimal. A bankruptcy judge gets paid 92% of a district judge's salary, which is around $170,000. There are something like 400 or 500 bankruptcy judges. So $10,000 x 400/500 = . . . Not that much in the grand scheme of things. Then there are retirement benefits, but I bet bankruptcy judges get retirement benefits now. The effect would still be minimal.

I don''t know this will be so traumatic. It's a very modest fraction of bankruptcy court caseloads. Certainly the system adjusted to deal with Northern Pipeline relatively quickly - and back in 82, there was a whole lot more going on with a new substantive regime as well - and this is merely an application of that case.

It wouldn't be that hard, for instance, for a circuit to designate its least busy judges to hear these cases, or for a district judge to transfer venue of an adversary - indeed, the decision seems to remove one argument for not transferring venue of an adversary, namely the bankruptcy court's familiarity with the overall situation.

No doubt the court system will adapt to this as they always do. But if it negatively impacts people merely trying to resolve their financial difficulties by increasing delays and, more importantly, legal costs, then that is a sad thing.

"the Supreme Court was compelled to make the obligatory, clichéd reference to Dickens's Bleak House." Now that I find to be a very sad statement. Obligatory and cliched to me mean that this sort of thing happens way too often. No wonder folks have a generally bad view of lawyers and the courts - everything takes just too darn long (and therefore costs too much).

In 2004, the estate of Enron Inc. commenced an action against *all* of the major investment banks seeking to (a) avoid all repayments of loans taken out by Enron, and (b) recover hundreds of billions of dollars in common law tort damages.

Enron's jurisdictional theory was that because the banks had filed proofs of claim for outstanding loans -- a few millions to a hundred million or so -- the banks had consented to have the Bankruptcy Court hear, without a jury, common law claims on highly attenuated grounds seeking, as above, hundreds of billions of dollars in damages, which the plaintiffs sought to treble.

Many Courts used the Grafinamerica decision as supporting a narrow interpretation of Northern Pipeline under which filing a proof of claim -- for any sum -- abandoned the filer's 7th Amendment jury trial rights for utterly unrelated tort or contract actions that District Courts were happen to dump-off on the bankruptcy courts. Courts that defendants almost universally perceive as grotesquely biased in favor of estate plaintiffs.

Practicing bankruptcy lawyers have always known that those decisions were constitutionally suspect under Northern Pipeline. Pierce v. Marshall ends the game.

Court is on defensive here, sending signals to Congress to take careof this elephant: Article I judges cannot bask or mask in Article III light. Further, I am very pleased with the decision, as a practising consumer bankruptcy attorney, I see what really happens in these bankruptcy forums. Judges are moody; chapter 7 trustees play havoc with consumer debtors, if they find one penny more exempted or saved. Law is highly proteus, nothing is predictable here in these courts. It is matter of seconds before these judges jump from equity to equinox.
The Court has rightly put a check on it, rather it reminds them that law has to be followed. Further, making these referees as Article III judges would definitely dilute the efficacy, respect and standard of judiciary. The solution is that bankruptcy courts must be scrapped and let cases stay within District Court handled by magistrates and supervised (in real sense as adjunct + unit) by Judges.

I hope that at some point in the future, the mere assertion of: 'it was a Roberts Court majority opinion' will be sufficient to seriously bring into question the soundness of any legal argument that employs said decision.

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