March 14, 2011
Rotunda on Compulsory Counterclaims in Bankruptcy Court
Ronald Rotunda (Chapman University) has posted Stern v. Marshall, and the Power of Bankrupcty Courts to Issue Final Orders On All Compulsory Counterclaims to SSRN.
Article III of the Constitution grants federal district judges, appellate court judges, and Supreme Court Justices important constitutional protections (lifetime tenure and no salary diminution) to guarantee their independence. However, the Supreme Court has allowed Congress to create, under Article I, a different class of judges (called "Article I judges"). These judges (such as tax court and bankruptcy court judges) do not have Article III protection and thus do not share Article III independence. Although we might think of Article I judges as administrative law hearing officers, they do exercise some judge-like powers. The extent of those powers raises fundamental questions because we do not want Congress to avoid the guarantees of Article III by simply shifting Article III powers to Article I judges.
In Stern v. Marshall, the Supreme Court will examine the scope of the power of Article I judges. For "core matters," bankruptcy judges have full power to enter final orders. For "non-core" matters, bankruptcy judges can only issue proposed orders, which Article III courts review de novo. Does the Constitution permit Article I judges to issue final orders simply because a claim is a compulsory counterclaim?
Stern v. Marshall involves the probate dispute between Anna Nicole Smith (former Playboy Playmate) and E. Pierce Marshall, the son of billionaire J. Howard Marshall. Smith’s claim in the bankruptcy court was that Pierce Marshall had tortiously interfered with his father’s oral promises to Smith. However, the probate court, after a jury trial, rejected that claim, before the Article III district court heard the issue. If this tort dispute is not a "core" matter, the probate court’s decision is collateral estoppel and bars Smith. If it is core simply because it is a compulsory counterclaim, then the bankruptcy court’s contrary decision supporting Smith is not merely proposed but final. Then, it governs because it came before the probate courts’ decision. This lengthy litigation (continuing for approximately 15 years, with both of the original parties now dead) has all the elements of a TV drama. However, the legal issues are quite serious. If the Court allows Article I courts to issue final orders simply because the rules of procedure designate a counterclaim as compulsory, that will greatly broaden the powers of Article I judges.
I only hope that the justices will be thorough and consistent in their intent to limit bankruptcy jurisdiction. Carefully made estate plans should not have to contend with the uncertainty of forum shopping.
Posted by: noodlemonkey | Mar 15, 2011 11:51:00 AM