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Is Bankruptcy Court Jurisdiction in Flux Because of Anna Nicole Smith?

Business Law

Congress made one significant mistake in enacting the Bankruptcy Reform Act of 1978 (Reform Act).1 Although the Reform Act created new bankruptcy courts with expanded jurisdiction, Congress failed to grant bankruptcy judges status under Article III of the Constitution, with the protections of lifetime tenure and undiminished compensation. This decision has left the valuable work of bankruptcy judges in the area of general commercial litigation vulnerable to jurisdictional challenge. The constitutional underpinnings of bankruptcy court jurisdiction started to crack with the Supreme Court case of Northern Pipeline Construction, Co. v. Marathon Pipe Line, Co., 458 U.S. 50 (1982) (plurality opinion), and has now culminated with the court’s 2011 decision in Stern v. Marshall, 131 S. Ct. 2594 (2011),2 a seemingly endless and colorful probate dispute between Anna Nicole Smith and her stepson over the estate of her wealthy husband. This article briefly reviews the proceedings leading up to Stern v. Marshall, the statutory framework at issue, the Supreme Court’s conclusions, and how bankruptcy courts have responded to this latest challenge.

We start from the proposition that much general commercial litigation ends up in bankruptcy court, simply because one or more of the parties seeks bankruptcy protection. Bankruptcy courts often handle general commercial disputes removed from state court, as well as actions initiated in the bankruptcy forum on behalf of a debtor or a trustee. Bankruptcy courts are accessible, efficient, and timely. They have the capacity and knowledge to handle complex matters. Bankruptcy judges obviously specialize in Bankruptcy Code issues, but they also have developed expertise in the Uniform Commercial Code, real estate, and general commercial litigation issues as a result of the numerous businesses that end up in Ch. 11 reorganization and Ch. 7 bankruptcy. Although not generally set up to handle jury trials, appropriate disputes may be pretried by a bankruptcy court with the jury trial itself handled by the district court.

The Web of Litigation Leading to Stern v. Marshall
Who would have guessed that 89-year-old J. Howard Marshall II’s eye for a young dancer would result in the most recent constitutional challenge to bankruptcy court jurisdiction? J. Howard Marshall II (J. Howard) was a successful oil tycoon who, for three years, courted and then married a 26-year-old Vickie Lynn Marshall a/k/a Anna Nicole Smith (Anna Nicole), a former playboy bunny.3 Anna Nicole was J. Howard’s third wife; their marriage lasted one short year before J. Howard passed away.4 J. Howard promised Anna Nicole the moon, which did not make J. Howard’s son from a previous marriage, E. Pierce Marshall (E. Pierce), very happy at all.

In fact, the first lawsuit between Anna Nicole and E. Pierce was filed even before J. Howard’s death.5 Anna Nicole accused E. Pierce and his lawyers of tortiously interfering with her right to statutory support and her expectancy of an inter vivos gift from J. Howard, believed to be one of the wealthiest men in Texas.6 A fter J. Howard died in 1995, probate litigation began in earnest in Texas. Despite J. Howard’s generous attitude toward Anna Nicole during his lifetime, he apparently failed to include her in his will. Anna Nicole maintained that E. Pierce fraudulently induced his father to execute a living trust document that excluded her, thereby depriving Anna Nicole of half of his estate.7

During the pendency of the Texas probate litigation, Anna Nicole filed for Ch. 11 bankruptcy protection in California.8 In May 1996, before the entry of a judgment in the Texas probate litigation, E. Pierce filed an adversary proceeding in the bankruptcy court for defamation and alleged that the defamation claim was nondischargeable under §523(a)(6) of the Bankruptcy Code.9 E. Pierce also filed a proof of claim in Anna Nicole’s bankruptcy, asserting the same claim for defamation.10 Anna Nicole asserted her tort claim (substantially the same as the one she raised in the Texas probate litigation) as a counterclaim to E. Pierce’s proof of claim.11

Ultimately in 2000, the California bankruptcy court awarded Anna Nicole approximately $475 million.12 Anna Nicole did not have the same success in Texas. Not only did the Texas probate court refuse to honor the bankruptcy court judgment, but it also sided with E. Pierce, ruling that Anna Nicole was not entitled to any distribution from J. Howard’s estate and denying her any relief on her claims against E. Pierce.13 Meanwhile, back in California, E. Pierce appealed the $475 million judgment entered against him to the California federal district court. On appeal, the district court considered the matter de novo, disregarded the Texas judgment, and entered a judgment in favor of Anna Nicole in the reduced amount of $90 million.14

Confusion at this point is understandable, and unfortunately the limitations of this article do not support a complete law review analysis of each of the three conflicting decisions addressing Anna Nicole’s tortious interference claims against E. Pierce. In terms of timing, however, it is important to note that the California bankruptcy court’s $475 million judgment in favor of Anna Nicole was first, the Texas probate court’s judgment against Anna Nicole was second, and the California district court de novo judgment of approximately $90 million in favor of Anna Nicole was third.

Of course, after his setback in the California bankruptcy court, E. Pierce appealed the $90 million judgment to the Ninth Circuit Court of Appeals.15 The Ninth Circuit ultimately ruled that the bankruptcy court did not have jurisdiction to enter a final judgment in favor of Anna Nicole on her tortious interference counterclaim.16 Section 157(b)(2)(C) of Title 28 clearly states that a debtor’s counterclaim to a creditor’s proof of claim (like Anna Nicole’s counterclaim to E. Pierce’s proof of claim) creates “core” bankruptcy court jurisdiction, giving the bankruptcy court statutory authority to enter a final judgment. Nevertheless, the Ninth Circuit limited that jurisdiction of counterclaims to the extent that they are necessary to determine the proof of claim.17 As a result, the earlier bankruptcy court judgment was not final at the time the Texas probate court entered its judgment in favor of E. Pierce.

the time the case wound its way to the Supreme Court, both Anna Nicole Smith and E. Pierce Marshall were themselves deceased, and the dispute became a battle between their respective estates. The real issue before the court was which of the three conflicting decisions came first. To further complicate matters, the Ninth Circuit concluded the issues had been “actually litigated” in all three courts.18 Thus, if the bankruptcy court did not have jurisdiction to enter a final judgment, then the Texas probate decision was first and was entitled to collateral estoppel effect.19 The Supreme Court was faced squarely with two issues: 1) whether the California bankruptcy court had the statutory authority under §157(b) of Title 28 to render a final judgment on Anna Nicole’s counterclaim; and 2) if so, whether Congress’ grant of such authority to the bankruptcy courts was constitutional.20

Legislation Leading to Stern v. Marshall
The Supreme Court’s deliberations in Stern v. Marshall arose against the backdrop of the Reform Act, the Bankruptcy Amendment and Federal Judgeship Act of 1984 (BAFJA),21 and the court’s prior pronouncements on the nature and scope of bankruptcy court jurisdiction.

Prior to the Reform Act, bankruptcy proceedings were conducted by referees, unless the district court decided to withdraw a particular case from the referee.22 The Reform Act eliminated the referee system and created bankruptcy court jurisdiction over all matters “arising in,” “arising under,” and “related to” a bankruptcy case under Title 11, creating new bankruptcy courts to exercise this broad grant of jurisdiction.23 O verall bankruptcy jurisdiction was granted to the federal district courts, but the new bankruptcy courts were granted the power to exercise the bankruptcy jurisdiction conferred on the federal district court.24 Yet, with its expanded jurisdiction, the new bankruptcy courts were designated as “units” of the federal district court, and the new bankruptcy judges were not afforded the status of Article III judges. Bankruptcy judges were not granted life tenure or undiminished compensation; instead, they were to be appointed by the president with advice and consent of the Senate for 14-year terms25 and were subject to salary adjustments under the Federal Salary Act.26

Shortly after its enactment, the Supreme Court struck down the jurisdictional underpinnings of the Reform Act in Northern Pipeline, in the context of a general breach of contract action brought by a debtor to recover a prebankruptcy debt.27 The Reform Act’s jurisdictional scheme was found to violate Article III of the Constitution because it transferred the essential judicial attributes of an Article III federal district court (bankruptcy jurisdiction) and vested that power with non-Article III bankruptcy courts that were essentially adjuncts of the federal district court.28 Although a plurality decision, a majority of the court agreed that the new Article I bankruptcy judges did not have jurisdiction to decide purely state law contract claims.29

The response of Congress to Northern Pipeline was to enact BAFJA in 1984. BAFJA’s proposed solution to the jurisdictional crisis created by Northern Pipeline was to leave bankruptcy court jurisdiction with the Article III federal district courts and to permit district courts to refer bankruptcy cases and proceedings to the bankruptcy courts.30 The jurisdiction of the bankruptcy court to enter a final judgment thereafter depended upon whether the matter at issue involved a “core proceeding” or a “noncore proceeding.”31 In a core proceeding, the bankruptcy court had the authority to enter a final judgment. In a noncore proceeding, or a proceeding that is simply “related to” the bankruptcy case, the bankruptcy court functions more like a federal magistrate, recommending proposed findings of fact and conclusions of law to the district court.32 The district court then considers the proceeding de novo and enters a final judgment.33 This remains in effect today.

A nonexclusive list of core proceedings is set forth in §157(b)(2) of Title 28. Notably, the list specifically includes “counterclaims by the estate against persons filing claims against the estate.”34 This is the provision at issue in Stern v. Marshall, and the context is Anna Nicole’s tortious interference counterclaim to E. Pierce’s defamation proof of claim.

The Supreme Court’s Ruling
Writing for the court, Chief Justice Roberts found that the bankruptcy court had the statutory authority to consider Anna Nicole’s counterclaim, but that the statute itself35 was unconstitutional as applied to her state law counterclaim.36 Because the counterclaim could not be resolved in the process of ruling on E. Pierce’s defamation proof of claim, it had to be tried by an Article III court.37 The court also reiterated that adjudication by an Article III court is required by the Constitution to prevent Congress from establishing its own system of courts and circumventing the delicate separation of powers incorporated in our structure of government.38 The decision was 5-4.

As Justice Scalia observed in his concurring opinion, the court’s majority gave at least seven different reasons for concluding that an Article III judge was required to adjudicate Anna Nicole’s counterclaim: 1) Her claim was under state common law and was “not a matter that can be pursued only by grace of the other branches”; 2) it was “not completely dependent upon adjudication of a claim created by federal law”; 3) E. Pierce did not truly “consent” to resolution of Anna Nicole’s claim in the bankruptcy court case; 4) the asserted authority to decide Anna Nicole’s claim is not limited to a “particularized area of the law”; 5) there was never any reason to believe that the process of adjudicating E. Pierce’s proof of claim would necessarily resolve Anna Nicole’s counterclaim; 6) the counterclaim was not a right of recovery created by federal bankruptcy law; and 7) the bankruptcy judge had the power to enter “appropriate orders and judgments — including final judgments — subject to review only if a party chooses to appeal.”39 The court rejects resolution of the case on grounds of statutory construction40 and moves quickly to its constitutional analysis. However, when all is said and done, the Supreme Court’s ultimate ruling is narrowed by the majority’s final comments:

Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.41

Although the actual ruling is narrow, the Supreme Court’s over analysis (in the view of Justice Scalia) and sweeping language portends ominously for future cases that may come before the court. For example, Justice Scalia’s concurring opinion expresses significant skepticism about the jurisdiction of an Article I tribunal.42 Footnote 7 of the majority opinion also leaves open the possibility that restructuring debtor/creditor relationships itself is not a “public right” that can be adjudicated by an Article I court.43 Put together, these observations suggest a full challenge even to the “core” jurisdiction of bankruptcy courts ultimately may be entertained by the Supreme Court. But clearly, those issues are left for another day.

The practical impact of Stern v. Marshall today centers on the specific types of counterclaims that no longer fall within the jurisdictional grant of 28 U.S.C. §157(b)(2)(A). Anna Nicole’s tortious interference claim appears to be a compulsory counterclaim. Indeed, Justice Bryer’s dissent begins with the proposition that it is a compulsory counterclaim.44 Logic might dictate that only compulsory counterclaims fall within bankruptcy court jurisdiction when adjudicating a bankruptcy proof claim, but this is plainly not the holding in Stern v. Marshall. Instead, the court’s focus is on the state law nature of the claim and the ability to separate out the independent tortious interference counterclaim from the defamation claim.

The majority of the court agreed that E. Pierce consented to the bankruptcy court’s determination of his defamation claim,45 but that his consent did not extend to Anna Nicole’s seemingly compulsory counterclaim.46 The court reasoned that E. Pierce had no choice but to file a proof of claim if he wanted to recover anything from her bankruptcy case.47 In this regard, the court distinguished its decision of Langenkamp v. Culp, 498 U.S. 42 (1990) (per curiam). In Langenkamp, the Supreme Court deemed a creditor who filed a proof of claim in the bankruptcy case to have consented to bankruptcy court jurisdiction for purposes of an action for a preferential transfer.48 The court reasoned a “creditor’s claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy court’s equity jurisdiction. ”49 Therefore, in the absence of a proof of claim, a preference suit constitutes a legal action and triggers a right to trial by jury; with a proof of claim, there is consent to the bankruptcy court’s final adjudication of the preference action and, thus, no Seventh Amendment jury trial right.50

Notwithstanding the compulsory nature of Anna Nicole’s counterclaim and the Ninth Circuit’s finding that the “operative facts underlying [her] action” are the same as those underlying the defamation claim,51 The court’s majority reasons that E. Pierce’s defamation claim in no way effects the nature of Anna Nicole’s counterclaim for tortious interference.52 The tortious interference claim is “one in common law that simply attempts to augment the bankruptcy estate….”53 A ccording to the court, a preference claim is different in two respects. First, “[t]he preferred creditor’s claim in bankruptcy can be disallowed as a result of the preference, and the amounts paid to that creditor can be recovered by the trustee.”54 Second, the preference claim arises under the federal Bankruptcy Code. Finally, the court goes on to observe that Anna Nicole’s counterclaim is more like the fraudulent transfer action in Granfinanciera, S.A. v. Norberg, 492 U.S. 33 (1989), than a preferential transfer action.55 This observation suggests that the court’s majority might view a counterclaim for fraudulent transfer as beyond the bankruptcy court’s jurisdiction.56 The court’s implication seems to be that a fraudulent transfer counterclaim may stand alone, while a preferential transfer counterclaim may not, although both arise under federal bankruptcy law.

While it is entertaining to posit the future implications of Stern v. Marshall, and new challenges to bankruptcy jurisdiction will continue to emerge,57 the real and present reach of the court’s ruling extends to counterclaims (compulsory or not) that are based on state law and can stand alone from the proof of claim actually filed in the bankruptcy case. Examples of counterclaims that may now be beyond the bankruptcy court’s jurisdiction include the following: 1) A state law-based lender liability claim against a secured creditor filing a proof of claim; 2) a constructive eviction claim against a landlord filing a claim for rent; or 3) a separate breach of contract or commercial tort claim brought against commercial creditor or vendor, who file proofs of claim for goods sold.

Practical Approaches in Response to Stern v. Marshall
Initial reactions to Stern v. Marshall included “the sky is falling,” and bankruptcy court jurisdiction itself is in peril.58 But this is not the first time that bankruptcy courts have had to develop practical solutions to challenges to their jurisdiction. In the aftermath of Northern Pipeline, before the enactment of BAFJA, the bankruptcy courts of Florida developed a number of creative solutions to complete the tasks at hand. For example, from 1982-84, bankruptcy courts operated under an “emergency rule” proposed by the Judicial Conference of the United States and adopted by the Judicial Council for each circuit, which provided for the continuation of the Article I bankruptcy courts with significant involvement by the district courts.59 Then, with the enactment of BAFJA in 1984, federal district courts across the country entered administrative orders referring all cases under Title 11 to the bankruptcy courts in their districts.60 When the Supreme Court ruled in Granfinanciera that the right to trial by jury continued to exist in certain fraudulent and preferential transfer actions, procedures to handle such trials were developed between the district courts and bankruptcy courts.

In a recent opinion, Tampa Bankruptcy Judge Michael G. Williamson grappled with some of the issues raised by Stern v. Marshall and seems to have put the decision in its proper perspective, at least for the time being. In In re Safety Harbor, WL 3849639 (Bankr. M.D. Fla. Aug. 30, 2011), Judge Williamson addressed bankruptcy court jurisdiction in the context of confirmation of a Ch. 11 plan, which proposed substantial contribution of assets of the principals of the debtor’s parent company (who were nondebtor guarantors of the debt owed to the debtor’s secured lender) in exchange for releases of the principals.61 Instead of authorizing release for the debtor’s principals, the court imposed a four-year moratorium to protect the principals from actions on account of their guaranties.62 In response, the secured lender requested that the court impose “lock-up” restrictions on the principals and the debtor’s business, so that their assets would not be dissipated during the four-year moratorium.63 The debtor objected to the restrictions arguing that such action exceeded the court’s jurisdiction under Stern v. Marshall.

In ruling against the debtor and thereby imposing the “lock-up” restrictions, the court first considered whether the Supreme Court’s holding in Stern v. Marshall limited its jurisdiction to include the “lock-up” provisions in its confirmation order.64 In finding that he did have jurisdiction to include the “lock-up” provision, Judge Williamson noted that “nothing in the Supreme Court’s opinion actually limits a bankruptcy court’s authority to adjudicate the other ‘core proceedings’ identified in section 157(b)(2).”65 He then found that the “lock-up” provisions were a central part of the confirmed plan, and “unquestionably” fell within his court’s core jurisdiction pursuant to §157(b)(2)(L) of Title 28.66 Judge Williamson then considered whether parties to a bankruptcy proceeding may consent to a bankruptcy court’s final adjudication when the bankruptcy court only has “related to” jurisdiction.67 He determined that even after Stern v. Marshall, the bankruptcy court’s ability to finally adjudicate noncore matters with the consent of the parties remains untarnished.68 In making this determination, Judge Williamson relied on the Supreme Court’s finding that E. Pierce consented to the bankruptcy court’s jurisdiction for resolution of his defamation claim by his conduct, and could not later change his mind “now that he is sad.”69 The court also generally considered the impact of Stern v. Marshall on other types of proceedings deemed “core” under 28 U.S.C. §157(b)(2).70 In doing so, Judge Williamson opines that “years from now, the Supreme Court may hold that section 157(b)(2)(F), dealing with fraudulent conveyances is unconstitutional … [b]ut the job of the bankruptcy courts is to apply the law as it is written and interpreted today.”71

As Judge Williamson observed, today the bankruptcy courts should continue to function without too much of a hitch. Stern v. Marshall is a narrow holding, and two tools available to bankruptcy courts are consent and abstention. Although the Supreme Court discounted the fact that E. Pierce consented to bankruptcy court jurisdiction to adjudicate the counterclaim by implication — namely by filing his defamation proof of claim — E. Pierce could have affirmatively consented to have the counterclaim adjudicated by the bankruptcy court. Indeed, 28 U.S.C. §157(c)(2) permits a bankruptcy court to try noncore proceedings with the consent of the parties. This type of consent has consistently withstood constitutional challenge in the case of Article I federal magistrate judges.72 Stern v. Marshall simply suggests that consent must be express and not by implication.

In response to Stern v. Marshall, the bankruptcy courts in Florida are developing a mechanism to ensure that parties consent to their jurisdiction, so as not to waste the resources of the parties or the judiciary. The Bankruptcy Court for the Middle District of Florida has included new language it its Order Setting Pre-trial Conference, which is the initial order entered in every adversary proceeding. The language requires any party objecting to the entry of final orders or judgments by the bankruptcy court on any issue to file a motion requesting that the court determine whether the proceeding is a core proceeding within a certain time. Under this order, failure to file such a motion within the timeframe prescribed will result in a deemed consent by the parties to the bankruptcy court’s entry of all final orders and judgments in the proceeding, subject to review under §158 of Title 28. The Bankruptcy Court for the Southern District of Florida has adopted a similar procedure.

If a creditor does not clearly consent to adjudication of the counterclaim, the bankruptcy court has the power to abstain and to send the parties back to state court. For example, in In re Peacock, 2011 WL 3874461 (Bankr. M.D. Fla. Sept. 2, 2011), the bankruptcy court considered a defendant’s motion to dismiss an adversary proceeding or abstain from ruling on alleged violations of the Florida Consumer Collection Practices Act. Relying on Stern v. Marshall, the basis of the defendant’s motion was that the court did not have jurisdiction to adjudicate the matter.73 Judge Catherine McEwen denied the motion, finding that the defendant consented to jurisdiction in its answer to the complaint and could not change his tune a week before trial.74 Bankruptcy Judge McEwen’s opinion does suggest that abstention may be appropriate when there is no consent to jurisdiction for determination of a noncore, or “related to” matter, and the motion is not filed on the eve of trial.75

Stern v. Marshall is the culmination of decades of consternation and wasted resources that could have been avoided if bankruptcy courts had simply been granted Article III status in 1978.76 But for many reasons, stated and unstated, they were not. As a result, the bankruptcy courts and the attorneys who practice in this arena must work around this potential jurisdictional infirmity and go about the business of resolving disputes. The Safety Harbor decision seems to put Stern v. Marshall in its proper perspective. No fundamental shift in bankruptcy court jurisdiction should result from the Supreme Court’s most recent ruling. The efficiency and the specialized training of bankruptcy judges may continue to lead to many trials in bankruptcy court by consent through the various mechanisms that have been developing. Nevertheless, a shift away from expansive bankruptcy court jurisdiction may be on the Supreme Court’s future agenda. Justice Scalia unequivocally expressed his concurring opinion that “in my view an Article III judge is required in all federal adjudications, unless there is a firmly established historical practice to the contrary.”77 Even Judge Williamson acknowledges that fraudulent transfer counterclaims may be the next target. Thus, given another opportunity to review a bankruptcy court’s noncore jurisdiction, further constitutional limitations from the Supreme Court should not be surprising. In the meantime, bankruptcy judges will continue to handle the general commercial litigation that comes before them in the same efficient and professional manner as they have done since the decision to deny them Article III status in 1978.

1 P ub. L. 95-598, 92 Stat. 2549 (1978).

2 Howard K. Stern, Executor of the Estate of Vickie Lynn Marshall v. Elaine T. Marshall, Executrix of the Estate of E. Pierce Marshall, __ U.S. __, 131 S. Ct. 2594, 180 L.Ed.2d 475 (2011) (Roberts, C.J.).

3 Id. at 2596. In 1993, Anna Nicole Smith was featured as “Playmate of the Year” by Playboy magazine.

4 Id. at 2601.

5 Id. at 2596.

6 Id. at 2601.

7 Id. at 2595.

8 Case No. 2:96-bk-12510-PC. Her voluntary Ch. 11 petition was filed January 26, 1996, in the bankruptcy court for the Central District of California, Los Angeles Division.

9 1 1 U.S.C. §523(a)(6); Stern v. Marshall, 131 S. Ct. at 2601.

10 Stern v. Marshall, 131 S. Ct. at 2601.

11 Id.

12 Id.

13 In re Marshall, 600 F.3d 1037, 1047 (9th Cir. 2010); Stern v. Marshall, 131 S. Ct. at 2602.

14 Stern v. Marshall, 131 S. Ct. at 2602. The district court awarded Anna Nicole approximately $45 million in compensatory and approximately $45 million in punitive damages.

15 In re Marshall, 600 F.3d at 1040.

16 See In re Marshall, 600 F.3d 1037; Stern v. Marshall, 131 S. Ct. at 2602.

17 In re Marshall, 600 F.3d at 1057.

18 Id. at 1061-62.

19 Id.

20 Stern v. Marshall, 131 S. Ct. at 2600.

21 P ub. L. 98-353, 98 Stat. 333 (1984).

22 Northern Pipeline, 458 U.S. at 53.

23 See former 28 U.S.C. §1471; In re Marshall, 600 F.3d at 1051; see also Brown, Hon. William Houston, The Structure of the Bankruptcy Court Under the Bankruptcy Reform Act and the 1984 Amendments, 2
The Law of Debtors and Creditors §11:4 (2011).

24 See 28 U.S.C. §151.

25 See former 28 U.S.C. §152. In 1984, BAFJA modified 28 U.S.C. §152 changing the selection process of bankruptcy judges, who are no longer appointed by the president. Instead they are now appointed by courts of appeal for the federal judicial circuit in which they sit. See current 28 U.S.C §152.

26 See The Federal Salary Act of 1967, 2 U.S.C. §§351-361, which established a new system for the determination of federal judicial salaries.

27 See generally Northern Pipeline, 458 U.S. 50.

28 Id. at 50-52.

29 Id.

30 See text of 1984 amendments. The argument that the selection of bankruptcy judges by Article III judges somehow solves the constitutional problem was rejected by the Supreme Court in Stern v. Marshall, 131 S. Ct. at 2619.

31 Stern v. Marshall, 131 S. Ct. 2603-04.

32 Id.

33 Id.

34 2 8 U.S.C. §157(b)(2)(A).

35 2 8 U.S.C. §157(b)(2).

36 Stern v. Marshall, 131 S. Ct. at 2597.

37 Id. at 2611.

38 Id. at 2597, 2609.

39 Id. at 2621 (internal citations and quotations omitted).

40 Id. at 2604-05.

41 Id. at 2620 (emphasis in original).

42 Id. at 2621.

43 Id. at 2614, n. 7. Article I tribunals traditionally handle matters related to “public rights.” Overall readjustment of debtor/creditor relations is generally assumed to be within the bankruptcy power of the federal government, and thus subject to final adjudication by an Article I tribunal. See generally Northern Pipeline, 458 U.S. at 71. “Public rights” are necessarily distinguished from state-created “private rights,” that require adjudication by an Article III tribunal. Id. A detailed discussion of this distinction is beyond the scope of this article; however, any theory that the adjustment of debtor/creditor relations truly involves “private rights” would represent a far more serious challenge to the bankruptcy court jurisdiction than the limited holding of Stern v. Marshall.

44 Stern v. Marshall, 131 S. Ct. at 2621.

45 Id. at 2608.

46 Id. at 2614.

47 Id.

48 Langenkamp, 498 U.S. at 45.

49 Id. at 44 (emphasis in original).

50 Id. at 44-45.

51 In re Marshall, 600 F.3d at 1057.

52 Stern v. Marshall, 131 S. Ct. at 2598.

53 Id.

54 Id. at 2616.

55 Granfinanciera, S.A. v. Norberg, 492 U.S. 33 (1989). In an opinion delivered by Justice Brennan, the Supreme Court held parties who had not submitted claim against bankruptcy estate had the right to jury trial when sued by trustee in bankruptcy to recover allegedly fraudulent monetary transfer. The fraudulent transfer action in this case was brought pursuant to 11 U.S.C. §548. The Supreme Court, in considering the public rights exception, rejected the bankruptcy trustee’s assertion that a fraudulent transfer proceeding against a noncreditor fell within the exception.

56 Fraudulent transfer actions are authorized under 11 U.S.C. §548 of the Bankruptcy Code, and also state law fraudulent transfer claims, such as those under Florida’s Uniform Fraudulent Transfer Act, are incorporated in the Bankruptcy Code pursuant to 11 U.S.C. §544.

57 See, e.g., Nick Brown, JPMorgan Seeks to Move Lehman’s $8.6 Billion Lawsuit, Reuters, Sept. 27, 2011. In the Bankruptcy Court for the Southern District of New York, JPMorgan Chase & Co. recently attempted to move a lawsuit arising in bankruptcy court to district court in light of Stern v. Marshall. Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank, N.A., 10-ap-03266. The adversary proceeding filed by Lehman Brothers Holdings Inc. alleges JPMorgan Chase & Co. siphoned $8.6 billion from Lehman’s estate in the days leading up to its bankruptcy filing. JPMorgan argues that Lehman’s 49-count complaint goes beyond bankruptcy law, including accusations of fraud, coercion, and breach of contract. Lehman defended the bankruptcy court’s jurisdiction, reasoning that it challenges JPMorgan’s proofs of claim against Lehman.

58 See, e.g., In re Teleservices Group, Inc. , 2011 WL 3610050 (Bankr. W.D. Mich. Aug. 17, 2011).

59 See Emergency Rule, reproduced at Collier on Bankruptcy ¶ 3.01[2][b][ii] n. 16; see also materials from July 31, 1983, American Bar Association, Creditors Rights Subcommittee of Commercial Financial Services Committee of Corporation, Banking and Business Law Section Meeting. The constitutionality of the interim rule was upheld by the Fifth Circuit in the case of In re Braniff Airways, Inc. , 27 B.R. 231 (N.D. Tex. 1983).

60 See, e.g., Administrative Order by District Court for Middle District of Florida referring Title 11 Cases to Bankruptcy Court, 84-MISC-152 (July 11, 1984).

61 In re Safety Harbor Resort and Spa, 2011 WL 3849639 at *1 (Bankr. M.D. Fla. Aug. 30, 2011).

62 Id. at *1.

63 Id. at *2. Four years is the timeframe under the confirmed plan for the debtor to make its final balloon payment to the secured lender. The effect is that as long as the debtor performed under the confirmed plan, the secured lender would be enjoined from pursuing the principals on account of their personal guaranties. Id.

64 Id. at *9.

65 Id. at *9-10.

66 Id. at *12.

67 Id. at *9.

68 Id. at *11.

69 Id. at *5, *12 (citing Stern v. Marshall, 131 S. Ct. at 2608).

70 Id. at *9.

71 Id. at *11.

72 The Federal Magistrates Act of 1968, 29 U.S.C. §§631, et seq. See General Trading, Inc. v. Yale Materials Handling Corp., 119 F.3d 1485 (11th Cir. 1997) (finding that express or implied consent to trial by a federal magistrate waives any constitutional right to trial by an Article III judge).

73 In re Peacock, __B.R.__, 2011 WL 3874461 at *1 (Bankr. M.D. Fla. Sept. 2, 2011).

74 Id. at *2.

75 Id.

76 The court in Teleservices Group raised the question of whether Article III status will even solve the jurisdictional quandry. If ultimately bankruptcy is a public right, then arguably the core bankruptcy matters may not be susceptible to adjudication by an Article III judge. 2011 WL 3610050.

77 Stern v. Marshall, 131 S. Ct. at 2621 (emphasis added).

Roberta A. Colton is shareholder with Trenam Kemker in Tampa. She is a former chair of the Business Law Section and the Bankruptcy/UCC Committee. She is a graduate of the McIntire School of Commerce at the University of Virginia and William & Mary Law School. Before joining Trenam Kemker, she was a judicial law clerk for James C. Hill at the U.S. Court of Appeals for the 11th Circuit.

Stephanie C. Lieb is an associate with Trenam Kemker in Tampa practicing in that firm’s business reorganization and bankruptcy areas. Prior to joining Trenam Kemker, she served in the U.S. Bankruptcy Court, Tampa Division, as judicial law clerk to Judge Catherine Peek McEwen from 2006-08, and acting judicial law clerk to Judge Michael G. Williamson in 2008.

This column is submitted on behalf of the Business Law Section, Mindy Mora, chair, and Melanie E. Damian and Peter F. Valori, editors.

Business Law