Article III, Section 1 of the Constitution vests "the judicial Power of the United States" in courts whose judges "shall hold their Offices during good Behavior." (1) Bankruptcy courts are presided over by judges who lack such life tenure (2) and so are unable to wield Article III judicial power. Almost three decades ago, in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., (3) a splintered Supreme Court held that this limitation prevented a bankruptcy court from deciding a state-law contract claim. (4) Over the course of subsequent cases, the Court struggled to define the limits of Article III's prohibition, deploying an expanding set of factors to explain its rulings. (5) Last Term, in Stern v. Marshall, (6) the Supreme Court applied these factors to conclude that a bankruptcy court could not decide a state-law claim for tortious interference. (7) Although the Court insisted that the state-law origin of a claim lacked "talismanic power" (8) in the years between Northern Pipeline and Stern, the Stern majority rightly emphasized that factor in its analysis.
As the Court observed, the length and complexity of the litigation at issue in Stern approached Dickensian proportions. (9) Vickie Lynn Marshall (Vickie), also known as Anna Nicole Smith, was the widow of J. Howard Marshall II (J. Howard). (10) E. Pierce Marshall (Pierce) was J. Howard Marshall's son by a previous marriage. (11) Vickie's lawyers alleged--in court and to the press--that J. Howard intended for her to receive the gift of a catchall trust and that Pierce fraudulently sought to defeat that intention. (12) Pierce contended that these statements amounted to tortious defamation. (13)
While litigation over the estate continued in Texas Probate Court, Vickie filed for bankruptcy. (14) To ensure that he would be able to collect damages on his claims of tortious defamation, Pierce joined the bankruptcy proceedings by filing a proof of claim against the bankruptcy estate. (15) Vickie asserted truth as a defense and filed a counterclaim against Pierce for tortious interference with J. Howard's gift to her. (16) The bankruptcy court granted Vickie summary judgment and awarded her damages. (17)
Pierce argued that the bankruptcy court lacked the authority to enter judgment on Vickie's counterclaim, (18) Bankruptcy courts have statutory authority to enter final judgments in "core proceedings arising under title 11, or arising in a case under title 11." (19) Core proceedings are not explicitly defined, but they include "counterclaims by [a debtor's] estate against persons filing claims against the estate...." (20) By contrast, in non-core proceedings, bankruptcy courts simply make proposals to district courts; the Article III judges on the district courts then review the proposals and enter final judgment. (21) Pierce argued that Vickie's counterclaim was a non-core proceeding. (22) The bankruptcy court concluded that Vickie's counterclaim was a core proceeding, and that it thus had the power to enter judgment. (23)
The district court disagreed, concluding that Vickie's counterclaim for tortious interference was not a core proceeding. (24) Although the counterclaim fell within the literal statutory language describing core proceedings, the district court was concerned that such an expansive reading would unconstitutionally give judicial power to non-Article III bankruptcy judges. (25) To avoid this conclusion, the district court took a narrow view of "core proceeding" and held that Vickie's counterclaim was a non-core proceeding. (26) It thus regarded the bankruptcy court's conclusions as mere proposals. (27)
By this time, the Texas state court already had conducted a jury trial and found for Pierce. (28) But the federal district court denied preclusive effect to the state court judgment, finding instead for Vickie, and awarding her compensatory and punitive damages. (29)
The Court of Appeals for the Ninth Circuit reversed, holding that the lower courts had lacked jurisdiction to hear the case because it fell within a "probate exception" to federal jurisdiction. …