Argument preview: Legal soap opera runs on

At 1 p.m. Tuesday, the Supreme Court will hold one hour of oral argument on a basic issue of bankruptcy law, in the Justices’ second review of competing claims to a Texas  oil tycoon’s estate (Stern v. Marshall, 09-179).   Arguing for the estate of Vickie Lynn Marshall will be Kent L. Richland of Greines, Martin, Stein & Richland in Los Angeles.  Deputy Solicitor General Malcolm L. Stewart will support the estate on behalf of the federal government, as an amicus.  Roy T. Englert, Jr., of Robbins, Russell, Englert, Orseck, Untereiner & Sauber in Washington, D.C., will represent the estate of E. Pierce Marshall.

Background

A long-running legal soap opera, fit in some ways for daytime television yet involving serious questions of law, has unfolded in five courts as a former topless performer and Playboy model – and, since her death, her estate — pursued her claim that an oil tycoon promised her more than $300 million as a gift during their brief marriage.  Now, for the second time, the Supreme Court takes another turn sorting out some, but not all, of the complex questions that remain in the case after almost 16 years of litigation.  It is unclear, though, whether the decision the Justices will make will finally end the case — any more than its first decision, more than four years ago, did.

The case, of course, has drawn the public’s fancy not because of the consequential legal questions at stake, but because of the tabloid celebrity of Vickie Lynn Hogan.  Born to a poor family in Texas, she would go on – as Anna Nicole Smith – to a career as a reality TV show personality, a strip club dancer, a Playmate of the Year model for Playboy magazine, the wife of a rich Texan more than 60 years her senior, and a sometimes tragic figure  whose life ended prematurely at age 39.

The facts of the legal fight have been equally melodramatic: the oil tycoon’s trophy wife in only 14 months of marriage jousting in bitter courthouse battles with the tycoon’s son, with legal documents filled with caustic accusations of destruction of legal papers and greed and counter-charges of scurrilous lies, played out with hundreds of millions of dollars on the line.

It began in a state court in Texas in April 1995, and has continued, back and forth, in that court and in a federal bankruptcy court and a U.S. District Court in California,  the Ninth Circuit Court based in San Francisco, and the Supreme Court.

With the Justices’ grant of new review of the case last September, the Court is taking on the task of interpreting both a federal law — the Bankruptcy Code of 1984 — and the Constitution’s Article III spelling out the powers of the federal judiciary.  The Court in essence will be reexamining constitutional issues that led to a widely splintered ruling in 1982 in the case of Northern Pipeline Construction v. Marathon Pipeline. There, the Court struck down part of an earlier bankruptcy law because it assigned tasks to judges not chosen under Article III.   Under that provision, only judges with life tenure can make final decisions.

In fact, since that ruling in 1982, the courts, federal court administrators, and Congress have repeatedly sought to clarify the powers of the specialized courts that handle debtors’ bankruptcy — courts that are far more often involved with mundane problems of average debtors than with multi-million-dollar estates of the rich and famous.

Still,  Vickie Lynn Marshall’s claims about what her husband, J. Howard Marshall II, allegedly promised her during their marriage has emerged at the center of that pursuit of bankruptcy law’s meaning.  The case continues as Stern v. Marshall after each of the two principal figures died, with representatives of their estates carrying on.   Howard E. Stern, Vickie’s attorney and boyfriend, is executor of her estate and Elaine T. Marshall, the widow of Howard Marshall’s son Pierce, is executrix of his estate.

When the case was decided the first time by the Supreme Court in May 2006, as Marshall v. Marshall (Vickie and Pierce were still alive then),  the Justices ruled unanimously that federal courts have some authority in bankruptcy cases to decide issues that also are within the authority of state probate courts.  That decision overturned a ruling by the Ninth Circuit that there was a “probate exception” to federal court authority, so broad, the Circuit Court had found, that a U.S. bankruptcy court could not decide any issue affecting the distribution, under a will, of the assets in an estate.

The Ninth Circuit, in reaching that decision, had nullified rulings by a bankruptcy judge and a District Court judge in Vickie’s favor — a bankruptcy court award of more than $449 million, reduced by the District judge to $88.5 million.   The Supreme Court reversed the Ninth Circuit, but only on the point of its jurisdiction to rule on the dispute.  It left open other issues for the lower court to pass on first.

Some of those issues are now before the Supreme Court.  And the controversy brings up anew the complicated factual history of the case.

Not long after Vickie had married Howard Marshall, in June 1994, he completed a will that would leave most of his estate to son Pierce.  Vickie would later claim that Pierce had manipulated his failing father into cutting off any estate for Vickie.  Turned into a legal claim, that is at the center of the case as it returns to the Supreme Court.

In April 1995, Vickie began a lawsuit in Texas probate court, contending that her husband’s final estate plan not only was invalid, but that Pierce and his lawyers had illegally interfered with her right to receive a large gift that she asserted she had been promised by her husband.  He died in August 1995, and the probate case continued.  The couple had been married only 14 months.

During the probate case, Vickie’s lawyers made statements about Pierce that he and his lawyers considered to be defamatory, so he sued Vickie and two of her lawyers on that claim in a Texas court.

Meanwhile, in January 1996, Vickie filed for bankruptcy under Chapter 11 in California, seeking relief from her debts.  Chapter 11 allows an individual debtor to work out a plan to pay off at least some of the debts, in order to make a fresh start.  Under bankruptcy law, her claim against Pierce for allegedly interfering with her gift during her husband’s life became an asset of her estate for bankruptcy purposes.

Pierce’s lawyers then dismissed their defamation case in Texas court, and asserted the same complaint in the bankruptcy court as a claim against Vickie’s assets. (During the marriage, her husband had given her property and other gifts worth about $6 million.)  Pierce and his lawyers argued that what she would owe him for defamation was a claim that could not be scuttled (“discharged”) in her Chapter 11 proceeding.

In response, Vickie’s lawyers filed a claim in the bankruptcy court — a “counterclaim” against Pierce, again claiming that she was entitled to a gift but that Pierce had illegally interfered with it. Technically, this was the same “tortious interference” claim that she had made in the Texas court; it was based on state, not federal, law.

As the bankruptcy case was proceeding in California, the probate court in Texas finished its review of Howard Marshall’s estate plan, found that Vickie had not been promised a gift and could not assert claim to any of the estate, and upheld the plan that willed most of the assets to Pierce.  That ruling, emerging in December 2001, ultimately would undercut Vickie’s counterclaim in the bankruptcy case about the alleged interference with her gift.

But the proceedings in bankruptcy court, in Santa Ana, Calif., had gone ahead in the meantime, and were completed before the Texas court’s final decision.  That ruling went against Pierce and in favor of Vickie.  That court rejected Pierce’s defamation claim, ruled that Pierce had interfered with Vickie’s right to a gift, and awarded her $449 million in damages, plus $25 million in punitive damages.   That came down in December 2000 — a year before the Texas probate court would issue its ruling favoring Pierce.  Besides awarding Vickie those huge sums, the bankruptcy court rejected Pierce’s argument that the federal court had no authority over a probate matter, and ruled that it could issue a final decision on Vickie’s claim.

The difference in dates was important, because that would later work in Pierce’s favor and against Vickie in the Ninth Circuit in the decision that is now before the Supreme Court, on the theory that the bankruptcy court ruling was not a final judgment, and thus did not come before the Texas ruling, thus making the Texas ruling binding.

But that was in the future when the bankruptcy court ruled.  Refusing to accept the judgment against him, Pierce and his lawyers challenged the bankruptcy ruling in an appeal to the District Court, as federal law permits.  (When a bankruptcy court has authority to issue a final and binding decision, the first appeal from it goes to the District Court.  If the bankruptcy court does not have the power to issue a final ruling, it simply recommends an outcome for the District Court to consider.)

Reviewing the case on Pierce’s challenge, the District Court in Santa Ana ruled in March 2002 that Pierce had, in fact, illegally interfered with Vickie’s right to the gift but, using a different calculation, lowered the damages award to $44.3 million and added onto it an equal amount for punitive damages, for a total award of $88,585,534.66.

But, in part of its decision, the District Court ruled that the bankruptcy court did not have the authority to issue a final and binding decision.   It decided that Vickie’s “tortious interference” claim was not directly related to Pierce’s defamation claim, and the two had to be interrelated for the bankruptcy court to have final jurisdiction to decide it.

Both sides appealed to the Ninth Circuit, but it simply threw out Vickie’s case, concluding that the federal courts did not have jurisdiction to decide any issues that were within the power of a state probate court.  It left other issues, including several raised by Pierce, unresolved.

Vickie then took the case on to the Supreme Court, and the Justices agreed to hear it, to clear up confusion among federal courts on how far the so-called “probate exception” limited federal court jurisdiction.

That review resulted  in the 2006 decision that found federal bankruptcy jurisdiction over the probate dispute, and returned the case to the Circuit Court.  Among the issues specifically left open, Justice Ruth Bader Ginsburg’s opinion said, were Pierce’s claim that the bankruptcy court had no authority to issue a final decision, and his argument that the Texas probate court’s ruling in his favor should have barred (“precluded”) the bankruptcy court from even deciding Vickie’s claim.

The first of those issues turns on the meaning of several words that Congress used in the Bankruptcy Reform Act of 1984.  In that Act, Congress codified a temporary solution that the federal court system had adopted to cure the constitutional defect the Supreme Court had found in the Montana Pipeline case in 1982 — that is, giving bankruptcy courts broad power to make final and binding decisions. Such final authority, the Court said, would violate Article III.

The 1984 law spelled out that bankruptcy courts could issue final decisions, but only in “core” proceedings. One example of a “core” proceeding listed in the law has been relied upon by Vickie’s lawyers throughout the bankruptcy case.  That definition treats as a “core” proceeding a “counterclaim” that a bankrupt debtor asserts in the case against a creditor who has filed a claim against the debtor’s estate.  Vickie’s lawyers said her “tortious interference” claim was just such a counterclaim to Pierce’s defamation complaint.

For “non-core” proceedings, involving any matter that was “related to” the bankruptcy case, the 1984 law provides that a bankruptcy court can only make recommendations to a District Court on how to decide a case.

About a month after the Supreme Court ruled, Pierce Marshall died in the Dallas area, at age 67.  Vickie Lynn Marshall died in a south Florida hospital in February 2007.  The estates of both went ahead with the case as it returned to the Ninth Circuit.

Vickie’s claim failed again in the Ninth Circuit’s second ruling, issued  last March — almost four years after the Supreme Court decision, and nearly three years after the Circuit Court had held a new hearing.  It decided that her claim of illegal interference was not a “core” matter, but was only “related to” the bankruptcy case, so it was not an issue that the bankruptcy court could decide in a final way.

That made the bankruptcy court ruling in December 2000 only a proposed decision, and thus did not put it ahead of the Texas probate court’s final ruling a year later.   The Texas probate decision thus had come earlier than the District Court’s final March 2002 ruling in Vickie’s favor, and the District Court thus was bound to respect that ruling, the Circuit Court concluded.

On the “core” proceeding issue, the Ninth Circuit said that it would not embrace a broad definition of that concept, because that could raise constitutional questions under Article III and the Supreme Court’s Marathon Pipeline decision, since bankruptcy judges are not Article III judges.   It adopted a suggestion of a group of law professors that a counterclaim in bankruptcy could qualify as “core” only if that claim by the debtor is so closely related to the claim by the creditor that the debtor’s claim must be decided in order to decide the creditor’s claim.   The Circuit Court found that Vickie’s claim of “tortious interference” did not meet that test.   To prove her assertion that Pierce had interfered with the gift she expected would require canvassing a number of facts different from those in Pierce’s claim of defamation, it said.  That approach requires the two claims’ proofs to virtually overlap.

Petition for Certiorari

The late Vickie Lynn Marshall’s executor filed a new petition in the Supreme Court in August last year, raising four issues.   The first three related to the “core proceeding” dispute: whether the Ninth Circuit ruling virtually nullified the 1984 Act on that concept, whether Congress could constitutionally authorize bankruptcy courts to finally decide counterclaims like Vickie’s, and whether the Ninth Circuit decision created a split among the federal appeals courts on that issue.

The fourth issue urged the Court to rule that Pierce Marshall had consented to the bankruptcy court’s authority to decide Vickie’s counterclaim, by ending his defamation claim in state court and making it as a claim in the bankruptcy court.

Congress, the petition argued, intended to give bankruptcy courts full authority to decide counterclaims by debtors responding to claims made by creditors.  And, it contended, Congress came up with a solution that satisfied Article III at the same time that it improved the efficiency of the bankruptcy system.

Among  other arguments, Vickie’s executors asserted that the Ninth Circuit decision “effects a sea change in bankruptcy practice that will confound efficient bankruptcy administration by saddling courts with jurisdictional battles and splintering inextricably linked claims between bankruptcy and district courts.”

Few bankruptcy cases, it added, reach the appeals court level, so “decades could pass before this Court has another opportunity to review this important issue.”

Pierce Marshall’s estate urged the Court to deny review, contending that there actually is no split among the appeals courts on the issue, and that the Ninth Circuit ruling has not caused confusion for bankruptcy lawyers and judges.  Moreover, it argued, this case would be a “poor vehicle” for confronting the “core proceedings” issue.  “To say the least,” it remarked, “the facts of this controversy are atypical.”

Moreover, Pierce’s executrix contended that the case was “quickly approaching its third decade,” and argued that the Ninth Circuit ruling “fully and fairly resolves the matter” by making the Texas probate court’s ruling the controlling outcome.

It cautioned the Court that, if the case is not left where the Ninth Circuit left it, there would then arise a number of issues that Pierce’s estate still could raise, including whether he was entitled to a jury trial, whether Vickie’s claim against him was barred by Texas state law, whether Pierce’s due process rights were violated, whether Vickie had any evidence of wrongdoing by Pierce, and jurisdictional issues, including whether the bankruptcy court even had jurisdiction over Pierce’s defamation claim.

The Court spent little time considering the case, and granted it on Sept. 28, in the first round of grants for the new Term.  It limited its review to the three initial questions in the petition, thus leaving out whether Pierce had waived any objection to the bankruptcy court’s jurisdiction.

Merits Briefs

Executor Howard Stern’s brief on the merits for Vickie’s estate is basically a plea for the Court to decide the case on the specific language of the 1984 Act, in its reference to counterclaims in response to creditor claims as being “core proceedings.”  By listing that specific issue as a “core” matter, to be decided finally by a bankruptcy court, Congress intended that all such claims were encompassed within that authority.  “Congress meant what it said,” the brief argued.

Once the Court focused on the plain language, Stern’s brief asserted, the “true question” becomes whether such a broad grant of authority to bankruptcy courts would satisfy Article III.  Its argument on that point is essentially a waiver argument: by making a claim for some of the assets of a bankrupt’s estate, the brief said, a creditor “must also accept the burdens of the bankruptcy process,” including the bankruptcy court’s power to issue complete relief over the entire dispute that the creditor placed in issue.”

Insisting that the assignment of such authority to bankruptcy courts is constitutional, the brief contended, would show respect for “the practical consequences” that Congress intended in adopting the 1984 Act.   This, it added, would show respect for Congress’s “plenary Article I power over bankruptcies,” with only a minimal “intrusion” on the separation-of-powers concerns that lie behind Article III and the Supreme Court’s 1982 ruling.

Congress, it summed up, has adopted a number of non-Article III mechanisms to decide public rights, and the private rights issues that are closely integrated with the governing schemes.

Executrix Elaine Marshall’s merits brief has its own plain language argument.  It cites a provision in the 1984 Act that says explicitly that “personal injury tort…claims shall be tried in the District Court” — that is, not by the bankruptcy court.  That is exactly what Pierce’s defamation claim was, the brief said.  Thus, it suggested, the bankruptcy court simply had no authority to address that claim, and, therefore Vickie’s counterclaim to it.

In a second major argument, the brief for Pierce’s estate likened Vickie’s claim to the kind of claim that the Supreme Court, in its 1984 decision, said could not be decided by a non-Article III court — that is, a claim that arose before the bankruptcy case was filed and was based upon state law.  It is thus merely “related to” the bankruptcy case, and so it could not be decided finally by the bankruptcy court, according to that brief.

This same argument is also advanced in the brief as a plain language contention, saying that a claim based upon state law and pre-dating bankruptcy is not one that arose under the bankruptcy law, citing language to that effect in the 1984 statute.  Moreover, the brief asserted, resolution of Vickie’s claim was not necessary for the court to decide Pierce’s claim.

Vickie Marshall’s estate’s claim is bolstered by the support of the federal government, as an amicus.  On the constitutional issue, the Justice Department brief said that the Court has always drawn a distinction in weighing bankruptcy judges’ powers between those who file claims against the estate, and those who do not.  “By invoking the assistance of the bankruptcy court and seeking a portion of the res,” the brief said, Pierce Marshall “subjected himself to the court’s authority, and the court could thereafter resolve all contested issues” between him and Vickie.

The kind of claim Vickie asserted, closely linked to the creditor claim it seeks to defeat, is well within the constitutional authority of a bankruptcy court, and would not substantially expand the bankruptcy court’s powers, the Department said.   Moreover, the brief contended, Congress wrote into the 1984 Act a number of safeguards to assure that bankruptcy courts function within Article III, independent from Congress and the White House.   District Courts not only have the authority to refer matters to the specialized bankruptcy courts, but also name those judges, the Department noted.

The Department also explicitly denounced the Ninth Circuit’s new definition of what qualifies as a “core proceeding” that a bankruptcy court may finally decide.   The Circuit Court erred, it said, in “placing artificial limits” on the authority of these courts.   Nothing in Article III, it contended, bars Congress  from giving a District Court the authority to put a debtor’s claim ” on equal footing” with a claim brought to that court by a creditor — especially when the two competing claims arise from the same transaction, as in this case.

Also supporting Vickie’s estate’s side in the case is the National Association of Bankruptcy Trustees, and a collection of law professors — the latter seeking to counter a brief on Pierce Marshall’s side by a separate group of law professors.   The academics supporting the Ninth Circuit ruling argue that the case is about only one issue: the limits that Article III puts on Congress’s authority to structure the bankruptcy system.

Analysis

The Court has developed a familiarity with this entire case, and clearly sees the issues it now raises — as it did with the issues in 2006 — as critical to the functioning of the federal bankruptcy system.   It thus was no surprise whatever that the Court accepted the case, seeing it as a proper sequel to its decision some four years before.

The issues this time, however, appear to be considerably more complex, especially since it does appear that the Justices cannot answer the questions over the meaning of the words in the 1984 Act without also answering the question of just how far Congress can go, under Article III, in expanding the conclusive authority of bankruptcy courts.

In fact, given the strength with which each side made its arguments about statutory meaning, the Court could get by with accepting either one as authoritative.  If it sided with Vickie’s estate, it would be holding that Congress did, indeed, mean what it said in one passage, seemingly recognizing just such claims as hers as “core” in nature.  And if it sided with Pierce’s estate, it would be holding that Congress did, indeed, bar bankruptcy courts from hearing claims like Pierce’s and, therefore, had barred them from weighing counterclaims like Vickie’s.

Either way, the question would then immediately arise: so what does Article III say about the 1984 Act, read in one or the other of those ways?   The Court, in confronting that ultimate constitutional query, would likely have to go back and analyze, primarily, what it said in 1982, to settle just when “private rights” can become the business of the specialized tribunals Congress has created to serve the public policy interests in resolving debtors’ financial woes.  It won’t be easy.

There is no timetable for the Court to decide the issue, although a ruling is expected before Term’s end.