The battle over the fortune of the late Texas tycoon J. Howard Marshall, who married former Playboy playmate and model Anna Nicole Smith shortly before his death, is heading to the U.S. Supreme Court for the second time.
And legal experts say the ruling could have a dire and unintended consequence: Quashing meritorious civil rights and contract actions. Legal groups from both sides of the ideological spectrum recently filed briefs in the ongoing case between the estates of the oil tycoon’s son and Smith. Though the groups cite different adverse impacts from a ruling in favor of Smith’s estate, both agree on one point: allowing a bankruptcy court to upend a ruling by a civil court would be both unconstitutional and dangerous.
“To suggest that whenever there is a [state law-based] counterclaim in bankruptcy court that a bankruptcy judge can overrule a civil jury trial, that is really concerning to us,” Lanny Davis, a former special counsel to President Bill Clinton and co-author of an amicus brief filed on behalf of the National Black Chamber of Commerce, told reporters in a conference call after filing the brief.
On Jan. 18, the court is set to hear oral arguments in Stern v. Marshall, the legal battle that began when Smith claimed Marshall left her half of his nearly $1 billion estate. Her stepson, E. Pierce Marshall, fought her in court, beginning what would become a legal dispute that not only survived the deaths of both Smith and the younger Marshall, but has also landed before the Supreme Court twice.
At the heart of the complicated case is the question of whether a bankruptcy court has the jurisdiction to rule on a compulsory counterclaim involving matters normally reserved for civil courts to consider. In the Smith case, the answer will determine what trumps — a California bankruptcy court rulinggranting Smith half of her late husband’s billion-dollar fortune, or a Texas state probate court decision in favor of the family.
The Ninth Circuit ruled that the Texas probate court’s ruling should be afforded preclusive effect because the bankruptcy court exceeded its statutory authority when it entered a final judgment in favor of Smith in what was essentially a state-law tort case. The bankruptcy court lacked jurisdiction to enter a judgment on the state law issue, the Ninth Circuit concluded.
‘Debtors’ rights, not civil rights’
The National Black Chamber of Commerce’s brief, authored by Davis and David Rivkin, an attorney who served in the administrations of Presidents Ronald Reagan and George H.W. Bush, urged the Court to affirm the Ninth Circuit and hold that bankruptcy courts have no authority to weigh in on matters normally reserved for civil courts.
“Bankruptcy means creditors’ and debtors’ rights, not civil rights,” Davis told reporters.
Allowing bankruptcy courts, which are not created by Article III of the Constitution and do not have the same protections for litigants as federal and state civil courts, to rule in civil matters would endanger civil rights, the brief states.
If the Supreme Court reverses the Ninth Circuit ruling, then defendants can sidestep civil judgments by heading to bankruptcy courts for relief, the attorneys argued.
“A state court jury could hand down a verdict, after a complete trial, that the defendant violated someone’s civil rights, and [the defendant] could walk into bankruptcy court and try to contradict that jury verdict,” Davis told reporters.
“Our concern,” Davis continued, “is that this would threaten the ability of people who have been discriminated against, whose privacy has been violated, who have suffered civil rights violations, to seek redress. Bankruptcy judges are an important part of the judicial system, but they were created to determine debtors’ rights and creditors’ rights, not civil rights.”
Second-thinking contract claims
W. Scott Welch, a shareholder in the Jackson, Miss., office of Baker, Donelson, Bearman, Caldwell & Berkowitz and past president of the American Board of Trial Advocates, said reversing the Ninth Circuit could also have a detrimental impact on contract law by putting bankruptcy judges in the position of ruling on private agreements between debtors and third parties.
“In a contract [action], you have people who have entered into a contract with each other, not with a bankruptcy judge,” Welch told reporters on the conference call.
The job of a bankruptcy judge, he said, is to decide claims that are filed against an individual who has filed for bankruptcy, not to decide claims that the debtor asserts against others.
Allowing such matters to be decided in bankruptcy court “would be a severe encroachment on the jurisdiction of Article III judges,” Welch said.
The Washington Legal Foundation, a conservative think tank, made a similar point in a brief it filed in the case, arguing that because federal bankruptcy judges are not federal judges created by Article III, they are not permitted to decide state-law issues without the consent of all parties.
“WLF is concerned that if the bankruptcy court is affirmed, the strict limitations that Congress sought to impose on bankruptcy court jurisdiction will have been largely abandoned,” said WLF Chief Counsel Richard Samp in a statement after filing the organization’s brief. Here, Samp contended, the bankruptcy judge essentially acted as jury.
“The bankruptcy court’s conduct of a trial in this case, and its award of $475 million to [Smith], far exceeded the bounds of both the Constitution and federal bankruptcy law,” he said.
A decision from the Supreme Court is expected later in the term.