July 2011: Bankruptcy Litigation Update

Supreme Court Limits Bankruptcy Court Authority to Render Final Orders on State Law Counterclaims: The Supreme Court recently issued a decision resolving “two issues: (1) whether the Bankruptcy Court had the statutory authority under 28 U.S.C. § 157(b) to issue a final judgment on [a debtor’s counterclaim against a creditor]; and (2) if so, whether conferring such authority on the Bankruptcy Court is constitutional.” Stern v. Marshall, 131 S.C. 2594, 2600. Stern involves a dispute between Vickie Marshall (professionally known as Anna Nicole Smith) and Pierce Marshall regarding the disposition of the assets of J. Howard Marshall, Vickie’s husband and Pierce’s father.

During the pendency of this dispute, Vickie filed for chapter 11 bankruptcy protection. Pierce filed a proof of claim in Vickie’s chapter 11 case in respect of a pending litigation over defamation of character. Vickie responded by asserting a counterclaim for tortious interference with a gift she expected from J. Marshall. The Bankruptcy Court for the Central District of California subsequently entered judgment in Vickie’s favor. The District Court held that the Bankruptcy Court lacked authority to enter a final order, but ultimately affirmed the Bankruptcy Court’s holding. However, by the time the California District Court entered its order on appeal, a jury paneled in Texas State Court found for Pierce on his defamation claim. The Ninth Circuit ultimately held that because the Bankruptcy Court lacked authority to enter a final order, the Texas State Court judgment, as the first final judgment entered by a court of competent jurisdiction, controlled.

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