Supreme Court Clarifies Bankruptcy Judge Powers

Legal Adviser January 16, 2015
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US-Bankruptcy-CourtIt’s no secret that the Supreme Court is one of, if not the most powerful institution in government. The court doesn’t have the power to create laws or enforce them, but it can decide what a law can do (or even if it makes sense), as well as deciding how enforcement should be done. The highest court in the land exercised a bit of its power recently when it started discussions on clarifying the powers of around a thousand bankruptcy judges in the federal court system.

This is an extremely important issue facing the justice system, considering what a bankruptcy can and can’t do have blurred considerably over the years. This condition was uncomfortably on full display in the high-profile inheritance case involving the estate of the late business magnate J. Howard Marshall, his wife playboy playmate Anna-Nicole Smith, and son E. Pierce Marshall.

Marshall v. Marshall

The battle between Smith and Pierce set off a series of litigations that garnered national attention for two reasons. The cases involved a formerly beloved celebrity on the verge of bankruptcy, and the subsequent decisions forced courts ask serious questions regarding the scope of their powers. The latter was appreciated in Stern v. Marshall.

During the initial case Marshall v. Marshall, Smith sued Pierce that he conspired to exclude her from the inheritance estate in the Texas Probate Court. This is known as wrongful or tortious interference. During the proceedings, Smith filed for bankruptcy in California. Pierce sued Smith and her lawyers alleging that the statements regarding his interference in his father’s estate were libelous. Smith countersued, stating that her statements were true and interference did happen.

It’s important to note that at this point, there were two different courts – The Texas Probate Court, and the Bankruptcy Court – hearing the same case.

The Bankruptcy Court held that there was no libel, and decided in favor of Smith regarding the issue of Pierce interfering in the estate, awarding her $474 million, which was then reduced to $88 million by the Federal District Court. That decision couldn’t be farther from what the Texas Probate Court thought, and entered that the trust was valid, which means no interference occurred and Smith’s awards is null.

Stern v. Marshall

The case went to the Supreme Court who determined that the Federal District had authority to rule on the award. The case went back to the 9th Circuit Appellate Court, which then ruled that the decision of the Probate Court stands because they were the only ones that had jurisdiction over probate matters. The decision effectively told the bankruptcy court that it had no business in deciding the case.

The matter was naturally taken back to the Supreme Court, which argued regarding the validity of a 1984 Congress law that salvaged the authority of bankruptcy courts – Bankruptcy Amendments and Federal Judgeship Act of 1984 – against Article III of the Constitution.

Article III Section 1 states that the judicial power of the United States shall be vested in one Supreme Court and in such inferior courts as the Congress may from time to time ordain and establish. The judges, both of the supreme and inferior courts, shall hold their offices during good behavior, and shall, at stated times, receive for their services, a compensation, which shall not be diminished during their continuance in office.

Bankruptcy judges are not included in Article III, and can’t exercise the general judicial powers of the United States. The Supreme Court then voted 5-4 that specialized judges, such as bankruptcy judges, cannot decide in a final way a debtors’ claim that is based upon state law with no link whatever to federal law or regulations.

This limits the powers of a bankruptcy solely to Article I Section 8 Clause 4, which states that The Congress shall have power to… establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States. According to the Supreme Court, Congress overreached in expanding court powers in the 1984 Act.

In other words, bankruptcy courts can only decide on bankruptcy cases, and the award given to Anna Nicole Smith was nullified.

Current Questions

Currently, a case regarding a Chicago resident and Wellness International (Wellness International Network, Limited v. Sharif), are asking the same questions. Sharif owes half-a million dollars to Wellness, which sued him in bankruptcy court, claiming that assets in a family trust owned by Sharif can be used to pay the debt.

The case is essentially locked in a stalemate, because while the discussion is regarding Sharif’s bankruptcy, it also concerns state laws regarding trusts, which bankruptcy courts can’t decide. The only way to solve that deadlock is for both parties to consent that the bankruptcy court can rule on it (unlikely), or the Supreme Court decides for them.

It’s interesting to take note of the timeline of these cases and how each case ties to future ones down the line:

(1995) J. Howard Marshall II dies.

(2006) The Supreme Court decision granting Federal District Courts had authority to rule on probate cases.

(2006) E. Pierce Marshall dies.

(2007) Anna Nicole Smith dies.

(2010) The Supreme Court agrees to hear the case again.

(2011) The Supreme Court upholds the 9th Circuit Court decision and strips Smith of her award.

(2015) The Supreme opens discussions to clarify powers of bankruptcy judges for Wellness v. Sharif.

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