Supreme Court: Bankruptcy Courts Cannot Decide Debtors’ State Law Counterclaims

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In a decision that may have significant practical implications to the practice of bankruptcy law, the U.S. Supreme Court recently declared, on constitutional grounds, that a bankruptcy court cannot exercise jurisdiction over a debtor’s state law counterclaims, thus considerably limiting the ability of the bankruptcy court to fully and finally adjudicate claims in a bankruptcy case. Stern v. Marshall, No. 10-179 (June 23, 2011).

Stern is the latest chapter in the long-running saga over entitlement to nearly half a billion dollars from the estate of oilman J. Howard Marshall II. The key players are Vickie Lynn Marshall (aka Anna Nicole Smith) and her late husband’s son, Pierce Marshall. After Vickie filed for bankruptcy, Pierce filed a proof of claim, asserting damages due to alleged defamation by Vickie. Vickie filed a counterclaim for tortious interference with the inheritance she expected to receive from her late husband. The bankruptcy court agreed with Vickie and ruled in her favor to the tune of over $400 million. Pierce then argued that the bankruptcy court did not have jurisdiction to decide Vickie’s counterclaim, and the district court agreed—but accepted the bankruptcy court’s “proposed” ruling and upheld the verdict. After the court of appeals failed to resolve the issue to the satisfaction of the Supreme Court, the latter agreed to hear the case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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