March 2013 Bar Bulletin
 
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March 2013 Bar Bulletin

Jurisdictional Madness: Stern v. Marshall and Bankruptcy Court Jurisdiction

By Jamie Drozd Allen

 

Jurisdiction for matters in bankruptcy courts became more complicated in 2011 when a holding by the U.S. Supreme Court in Stern v. Marshall changed the landscape of when bankruptcy courts can issue final orders, instead of leaving the ultimate decision to a district or appellate court.1 Stern has engendered a developing body of jurisprudence to interpret and apply its holding.

For legal outsiders, Stern was better known for its celebrity gossip than for its legal issues. The case arose out of the fight between the heirs of Playboy playmate Anna Nicole Smith (nee Vickie Lynn Hogan) and the estate of her much-older deceased husband, J. Howard Marshall. Long after the tabloid sheen wore off, Stern is still well-known to legal scholars, particularly those who practice in bankruptcy courts, as synonymous with the threshold inquiry that a bankruptcy court must now make to determine whether, as a constitutional matter, it may enter a final judgment.

By way of background, bankruptcy courts are restrained both statutorily and constitutionally as to the types of cases in which they can issue final orders; they are statutory creatures that do not enjoy the same constitutional authority and protection as those federal courts created under Article III of the Constitution.

As part of the differentiation, district courts retain exclusive jurisdiction over all cases under the bankruptcy code, pursuant to 28 U.S.C. 1334(b); but through 28 U.S.C. 157(a) they may refer all cases within that jurisdiction to the bankruptcy court. However, in some cases, the district court or Article III court is the only court that can issue final orders and the bankruptcy court is limited to issuing proposed findings of fact and conclusions of law. Just when and how this works is at the heart of the Stern decision and those following it.

The types of hearings in bankruptcy court are classified under 28 U.S.C. 157 into two main categories: core and non-core proceedings. In core proceedings, bankruptcy courts can issue final, determinative orders; in non-core proceedings, the bankruptcy court can only issue proposed findings of fact and conclusions of law to the district court.2

The district court has the sole authority to issue the final orders in non-core cases. Bankruptcy courts determine whether the matters are "core" proceedings that arise in or under title 11,3 and 28 U.S.C. 157(b) identifies 16 examples of core proceedings, but the list is not exhaustive.

The dispute began when Smith filed a state court complaint against the executor of the Marshall estate, Pierce Marshall, alleging that he fraudulently induced his father to enter into a living trust that excluded Smith.4 Later when Smith filed for bankruptcy, Marshall filed a complaint alleging defamation against Smith.5 He also filed a proof of claim and claimed that the defamation claim could not be discharged.6

Smith counterclaimed, with essentially the same claim she had brought in state court, that Marshall was tortiously interfering with a gift expected from her deceased husband.7 The bankruptcy court granted Smith summary judgment on the defamation claims and awarded her more than $400 million on her counterclaim.8


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