In Stern v. Marshall, 564 U.S. ____ (June 23, 2011), the U.S. Supreme Court, in a 5-4 decision, held that the bankruptcy court could not, as a constitutional matter, enter a final judgment on a counterclaim that did not arise under Title 11 or in a case under Title 11, even though 28 U.S.C. § 157(b)(2)(C) expressly permits it to do so. In a dispute concerning the estate of the late J. Howard Marshall II, Pierce Marshall filed a complaint in Vickie Lynn Marshall's bankruptcy case alleging that Vickie defamed him and that such defamation claim was not dischargeable. Vickie counterclaimed for tortious interference with a gift expected from her late husband J. Howard. The bankruptcy court granted Vickie summary judgment on Pierce's claim for defamation and awarded Vickie more than $400 million on her counterclaim against Pierce.
While the narrow holding of the case would not likely cause substantial disruption to typical bankruptcy litigation since state law counterclaims to a claim are not frequent, a fair reading of the plurality and concurring opinions points to a future extension of the Stern holding, removing from the bankruptcy court its right to enter final judgments in typical fraudulent transfer and preference avoidance litigation. Because of the sheer volume of such litigation, such extension of the Court's rationale could well have a major impact on the adjudication of these actions in both the bankruptcy and district courts by transferring most of the avoidance actions from the bankruptcy courts to the district courts.
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