Anna Nicole Smith May Be More Than Just the Only Loser on This One

Vickie Lynn Marshall, as she is known to bankruptcy mavens, or Anna Nicole Smith, as she is known to normal people, lost today in her second round before the Supreme Court. In his last post with us, John Pottow provided a good summary of the issues, and guest blogger Troy McKenzie also had offered some thoughts about what the case might mean for some other areas of bankruptcy law (here and here). Now that the opinion is out, I would describe it as scary for the daily workings of the bankruptcy system.

Given the case summaries available just on this blog, I will not belabor the facts, but a little context is necessary. Anna married a much older and much wealthier man (J. Howard Marshall) who died a year after the marriage. He left all of his money to his son, Pierce. In the Texas probate court, Anna claimed Pierce had tortiously interfered with her inheritance. Anna then filed bankruptcy in Los Angeles. When Pierce filed a claim in Anna's bankruptcy, Anna defended with a counterclaim alleging the tortious interference. Pierce won in the Texas state probate court, but Anna won in the bankruptcy court. The case went up to the Supreme Court once, and Anna won. On remand to the lower courts, however, she ended up on the losing side, and appealed again to the Supreme Court. By the second trip to the Supreme Court, the case had been proceeding for sixteen years, and everyone just mentioned had long since passed away. Most tragically, given the long history of the litigation, the Supreme Court was compelled to make the obligatory, clichéd reference to Dickens's Bleak House.

The legal issue turned on whether the bankruptcy court had the constitutional authority to rule on Anna's counterclaim. Bankruptcy judges are not "regular" federal judges in the sense that they do not, among other things, have life tenure. This means that bankruptcy judges cannot do things "regular" federal judges can do such as ride the judges' elevator in the federal courthouse--or at least such was the case in the federal courthouse where I was a judicial law clerk twenty-two years ago. Bankruptcy judges also cannot exercise the "judicial power" of the federal government because Article III of the U.S. Constitution reserves the judicial power only to "regular" federal judges. For this reason and because it is more politic (albeit less fun) than reminding your friend that he is just not a "regular" federal judge, lawyers talk about Article III and non-Article III judges.

Today, the Supreme Court ruled that deciding Anna's counterclaim was an exercise of "judicial power" and was something bankruptcy courts could not do. Because the bankruptcy court order cannot stand, the order of the Texas probate court will. Anna loses, which means as a practical manner that her heirs lose.

The Court's reasoning revolves around what constiutes a "public right," how to count former Chief Justice Burger's vote based on two sentences in his concurring opinion in the 1984 Northern Pipeline case, and an 1856 Supreme Court case involving someone who has suffered the ignominious fate of going down in posterity simply as "Murray's Lessee." Frankly, I don't care. There was plenty of support for the case to come out either way as evidenced by the 5-4 vote.

The majority builds an elaborate federal courts castle in the sky, treating grand theories of federal court jurisdiction almost as if they were preordained by some universal moral theory. The majority's invocation of Article III safeguards as protections against encroachments to liberty come across as having doth protested too much given the context of the dispute. None of these grand theories of federal jurisdiction will matter much to the 2,000,000 persons who will file bankruptcy cases this year and who could be affected by the Court's decision. The majority recognizes its opinion could have practical consequences for the bankruptcy court system. The dissenting also does so even more pointedly. It is these implications of these effects that I suspect for the reason why the Court split along ideological lines on an issue that must strike nonlawyers as incredibly technical and arcane.

After this case, bankruptcy courts will still be able to receive bankruptcy petitions and do most all of the work bankruptcy courts do. Among these powers, they will be able to decide creditor's claims and adjudicate any defenses the debtor might have arising out of federal bankruptcy law that necessarily gets completely resolved in the context of resolving the claim. An example might be that the creditor's claim asks for more than one year of rent on a lease, a claim generally barred by the Bankruptcy Code. The majority's opinion, however, seems to suggest that many defenses to a a creditor's claim cannot be adjudicated by the bankruptcy court. In dissent, Justice Breyer offers the example of a bankruptcy debtor's defense that a residential lessor failed to satisfy obligations under a lease and made misrepresentations to a landlord-tenant court, an example drawn from a real-life case. According to Justice Breyer, it is not clear the bankruptcy court could now hear that defense. The majority does not appear to dispute the point.

That brings me to a bigger concern in today's enviroment. In light of all the housing problems and with misconduct by many in the mortgage lending industry, many debtors have been asserting defenses based on federal consumer protection statutes such as the Real Estate Settlement Procedures Act (RESPA) or the Truth-in-Lending Act (TILA). At a few points in the opinion, the majority references the state-law nature of Anna's claim, but the majority's reasoning would seem to sweep in even federal statutory claims. In fact, the majority relies on a previous bankruptcy case called Granfinanciera that involved a federal fraudulent conveyance action. If a federal statutory fraudulent conveyance action is beyond the authority of a bankruptcy court, then it seems possible that future courts could reason adjudication of claims under other federal statutes like RESPA and TILA also are beyond the power of the bankruptcy courts.

The majority's response to these concerns is, and I'm paraphrasing, "So what?" Even if these federal statutory defenses are beyond the constitutional authority of the bankruptcy courts, all a debtor has to do is ask for the case to be removed to the Article III district court and let it hear the defense. The dissent rightly points out the unrealistic nature of this solution given the added delay and complexity. I'll add another one -- attorney's fees. At current fee levels, it is not realistic to expect consumer bankruptcy attorneys to assert these defenses if they mean lengthy procedural wrangling and a trip to district court. As an aside, I'll also lay a bet that the district court judges would be happy to see TILA, RESPA, and similar disputes stay with the bankruptcy judges who have more experience with them. Sending these disputes from bankruptcy court to district court also could overwhelm the district courts, leading to delay and possibly more tragically clichéd references to Bleak House as cases drag on for years.

Anna's case, or Stern v. Marshall as it will go down in history, could make life a little tougher for bankruptcy courts and consumer debtors as they try to wrestle with the implications of the majority's reasoning. I predict that lower courts, who are probably more concerned with keeping the system working than federal courts theory, will try to interpret the decision narrowly. My musings above will be worst-case scenarios that will not come to pass in the short run. As time goes by and cases work their way up the federal court appellate structure, Anna's case could have significant effects on practice in the federal bankruptcy courts.