More than you might think.  This Blog entry is targeted at Bankruptcy practitioners, although anyone interested in constitutional issues may enjoy this discussion.

The United States Supreme Court took up Anna’s case last year in Stern v. Marshall, 131 S.Ct. 2594 (2011).   Anna was married to one of the richest men in Texas before his death, J. Howard Marshall.  Marshall died without giving Anna a substantial gift from his vast fortune.  Anna apparently believed that Marshall intended to give her a large gift but his son, (hereafter “son”), improperly prevented Marshall from doing so.   Anna told the press this theory and son became angry.

Fast forward.  Anna files bankruptcy.  Son files an adversary proceeding in the bankruptcy case and seeks to except from Anna’s discharge his claim for defamation.  Son claims that Anna defamed him when she told members of the press he prevented Marshall from making a large gift to her.  Anna files a counterclaim for tortious interference with an inter vivos gift for son’s improper prevention of Marshall’s gift.  The bankruptcy court throws son’s defamation claim out on summary judgment.  Then, after a bench trial, the court finds in Anna’s favor on her tortious interference claim and awards a her a judgment of over $400 Million.  So, Anna’s in the clear, right? Wrong.

Son appeals all the way to the Supreme Court (“SCOTUS”) to have the bankruptcy judgment set aside.  And, he’s successful — even though the BK court ruled he was the wrongdoer!

Why? SCOTUS held that the Bankruptcy Court did not have jurisdiction to enter final judgment on Anna’s counterclaim in the adversary proceeding.  (More specifically, the Court held that a bankruptcy court “lack[s] the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.”  Id. at 2620.)  The reason: doing so violated the Constitution’s separation of powers.  Bankruptcy Courts are Article I legislative courts whereas United States District Courts and the Circuit Courts of Appeals are Article III courts.  Chief Justice Roberts, writing the majority opinion, explained that where a lawsuit is “made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789 and is brought within federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts.”  Stern, 131 S.Ct. at 2609.

Article III, § 1 of the Constitution requires that judges who exercise the “judicial [p]ower” of federal courts “shall hold their Offices during good Behaviour” and “receive for their Services [] a Compensation [] which shall not be diminished” during their tenure.  Bankruptcy court judges, under the current scheme, serve 14-year terms, and are not entitled to irreducible compensation.  In Justice Roberts’ eyes, the Constitution protects liberty by specifying the characteristics of judges that can exercise federal judicial power.  And, it’s worth noting here that the Court appeared to equate exercising federal judicial power with entering final judgment in a case.

This of course does not mean that bankruptcy judges can no longer enter final judgments in adversary proceedings.  Indeed, the Stern Court was careful to explain that the issue it was addressing was a narrow one.  But it does call into question a bankruptcy judge’s power to enter final judgment on any claim in an adversary proceeding that would not necessarily be resolved in ruling on the creditor’s claim against the estate.  That likely will be the biggest take-away from the Stern opinion.  To wit, after Stern, if a creditor brings an adversary proceeding seeking a non-dischargeability determination on its claim, and also brings other unrelated claims in that action, the bankruptcy judge likely does not have the constitutional authority to enter final judgment on the claims unrelated to the claim for non-dischargeability.  Yes, that’s a mouthful.

Stern is rich fodder for law review notes and scholarly articles.  If you’re interested in reading more about Stern and its implications, check out Professor Ralph Brubaker’s excellent article:  Ralph Brubaker, Article III’s Bleak House (Part II): The Statutory Limits of Bankruptcy Judges’ Core Jurisdiction, 31 Bankr. L. Letter No. 9, at 41 (Sept. 2011).  Professor Brubaker carefully parses the opinion and provides concrete examples to make Stern’s implications understandable.

If you have questions about Stern, or even better, alternative interpretations, please comment or contact us. We enjoy this stuff.




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