S.Ct.: Bankruptcy court cannot enter judgment on state law counterclaim

The Supreme Court, divided 5-4 along ideological lines, held that Article III of the Constitution does not allow a bankruptcy court to enter judgment on a state law counterclaim. Stern v. Marshall, No. 10-179, 2011 WL 2472792 (June 23, 2011). Chief Justice Roberts delivered the opinion of the Court, joined by Justices Scalia, Kennedy, Thomas, and Alito. Justice Scalia filed a concurrence. Justice Breyer wrote a dissenting opinion, which Justices Ginsburg, Sotomayor, and Kagan joined.

After J. Howard Marshall II died, his wife Vickie Lynn Marshall filed for bankruptcy. J. Howard’s son E. Pierce Marshall filed a complaint that Vickie had defamed him with allegations that he had induced J. Howard to exclude her from his will. Vickie filed a counterclaim that Pierce had tortiously interfered with J. Howard’s will. After bankruptcy court ruled favorably on Vickie’s counterclaim, Pierce challenged the court’s jurisdiction, asserting that it was not a “core proceeding” under 28 U.S.C. § 157(b)(2)(C).

After a long series of litigation, the instant decision represents the second time that the Supreme Court granted certiorari. The Court held that Vickie’s counterclaim qualifies as a “core proceeding” under § 157(b)(2)(C). However, it found that the Constitution does not allow bankruptcy courts to make a final judgment on the counterclaim. It noted that, lacking tenure and salary protections, bankruptcy court judges do not qualify as Article III judges. Highlighting the importance of separation of powers, it remarked that “in general, Congress may not ‘withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law….’” Murray’s Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284 (1856).

Then, the Court refuted Vickie’s arguments for constitutionality. First, distinguishing Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985) and Commodity Futures Trading Commission v. Schor, 478 U. S. 833 (1986), and following Granfinanciera, S. A. v. Nordberg, 492 U. S. 33 (1989); it decided that a state law claim does not fall under the “public rights” exception for non-Article III judges entering judgment since it does not involve the government as a party and “neither derives from nor depends upon any agency regulatory regime.” Second, distinguishing Katchen v. Landy, 382 U.S. 323 (1966), and Langenkamp v. Culp, 498 U.S. 42 (1990), it found irrelevant the fact that Pierce was a creditor in the proceedings, noting that Vickie’s counterclaim was “independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor’s proof of claim.” Third, distinguishing Crowell v. Benson, 285 U. S. 22 (1932), and relying on Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50, 85 (1982), it rejected Vickie’s argument that bankruptcy judges are merely adjuncts of the district court since they render final judgments. In addition, the Court disagreed with Vickie’s argument that bankruptcy proceedings would be more inefficient as a result and remarked that, even if inefficiency results, preserving separation of powers from even minor encroachment takes greater priority.

Justice Scalia’s concurrence stated his view that a “public rights” case should involve the government as a party. Questioning the “sheer surfeit of factors that the Court was required to consider in this case” (seven by his count), he indicated that Article III judges should be required “in all federal adjudications, unless there is a firmly established historical practice to the contrary” (emphasis in original).

Justice Breyer’s dissent agreed with the statutory interpretation of § 157(b)(2)(C) but disagreed that the bankruptcy court’s jurisdiction was unconstitutional. After interpreting the precedent cases differently, it followed Schor, 478 U.S. at 854 (1986), and articulated a balancing test with “factors [that] include: (1) the nature of the claim to be adjudicated; (2) the nature of the non-Article III tribunal; (3) the extent to which Article III courts exercise control over the proceeding; (4) the presence or absence of the parties’ consent; and (5) the nature and importance of the legislative purpose served by the grant of adjudicatory authority to a tribunal with judges who lack Article III’s tenure and compensation protections.” It conceded that the first factor weighed against constitutionality, but that the other four factors supported constitutionality, with factors (4) and (5) “strongly” doing so. Thus, the dissent decided that the risk of encroachment on the judicial power was minimal. Also, Breyer pointed to the resulting “inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy” from the majority’s ruling.

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