Ninth Circuit Decision in Marshall v. Stern (formerly Marshall v. Marshall):

On Friday, the Ninth Circuit handed down its decision in Marshall v. Stern (formerly Marshall v. Marshall).  The Court held–correctly in my view–that the Bankruptcy Court’s decision in Anna Nicole Smith’s (formerly Vickie Lynn Marshall, whose estate is now administered by Executor Howard K. Stern) bankruptcy case that gave Smith half of Marshall’s estate (later reduced on appeal to $88 million) was not a core proceeding.  Because the proceeding was not core, the Bankruptcy Court’s ruling was merely a report and recommendation to the District Court and not a final judgment.  This meant that the judgment of the Texas probate court holding that Smith was not entitled to anything–and which was entered after the bankruptcy court’s report and before the District Court’s final judgment–took precedence over the federal court’s judgment.

Interestingly, the Ninth Circuit rejected both of the parties’ definitions of whether the counterclaim she raised in the case was a “core” matter and instead adopted the definition proposed in an amicus brief submitted on behalf of myself, Marcus Cole, S. Todd Brown, and Ron Rotunda (see page 4524) that argued that a counterclaim “is properly a ‘core’ proceeding ‘arising in a case under’ the [Bankruptcy] Code only if the counterclaim is so closely related to the proof of claim that the resolution of the counterclaim is necessary to resolve the allowance or disallowance of the claim itself.”  The Court held that on the facts here that test was not met.

I think that is both the right test and the right result here.

Our amicus brief was based on the article that Marcus and I have written (working paper here) which is currently under submission to law reviews.

Judge Kleinfeld’s concurring opinion seems to implicitly adopt the same test as the majority, but I think he goes even further to touch a bit closer to the underlying forum-shopping policy issues implicated.  In particular, he does an excellent job at getting at the underlying nature of the claims–noting that the issue raised by Pierce Marshall was to determine the dischargeability of his defamation claim, to which Smith raised her counterclaim.  As Judge Kleinfeld notes, a claim for nondischargeability is the sort of claim that properly belongs in bankruptcy court.  That has nothing to do with Smith’s underlying claim against Marshall’s estate, which is properly a matter of state law.  As Judge Kleinfeld notes, “Bankruptyc court is the right place to litigate whether a debt was dischargeable….  Bankruptcy court is the wrong place to litigate a common law claim for personal injury to final judgment, and Pierce did not seek to litigate his personal injury claim there.”

I think Judge Kleinfeld’s observations on this point are important because recognizing this line clearly is the key to preventing the sort of forum-shopping that Marcus and I criticize in our article.  A clear line between state law and bankruptcy court is important to keep cases like this from arising in the future.

In the meantime, it is good to see that the Ninth Circuit got this right.  I assume that Stern will seek rehearing and cert, but I’d be awfully surprised if they got it.  The Ninth Circuit’s opinion seems right on target to me, from adopting the right test to the application to the complicated facts here.

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