Supreme Court rules on ‘Stern claims’

June 12, 2014

Security guards walk the steps of the Supreme Court before Justice Elena Kagan's investiture ceremony in WashingtonWhile reality star Anna Nicole Smith — or at least her television persona — may have led some to question her intellectual acumen, her legal battles with her former stepson over the estate of her deceased husband, Texas oil tycoon J. Howard Marshall II, caused highly sophisticated lawyers and judges alike to burn the midnight oil.

The first trip to the U.S. Supreme Court by Chapter 11 debtor Vickie Lynn Marshall, a/k/a/ Anna Nicole Smith, wasn’t so bad.  The high court sorted out a dispute involving federal bankruptcy law and Texas probate law.

But Anna Nicole’s second trip to the Supreme Court (an appeal heard, sadly, after her passing), created quite a stir in the bankruptcy community.

For decades, the jurisdiction of bankruptcy courts has been a contentious matter.  In Stern v. Marshall, the Supreme Court decided the appeal of Howard K. Stern (Anna Nicole’s executor) against the estate of the also recently deceased stepson, E. Pierce Marshall.

The court held that although the bankruptcy court had the statutory power to enter a final judgment on Anna Nicole’s counterclaim against E. Pierce, the bankruptcy court lacked the constitutional power to do so.

And so, “Stern claims” were born.

Stern claims are those in need of a home in terms of which court — bankruptcy or district — can enter final judgment.  Some have argued that all Stern claims must be heard by district courts in the first instance, leaving the bankruptcy courts powerless to act in such lawsuits.

That would entail a huge shift in the division of labor between the courts.

Enter the Supreme Court’s June 9, 2014, decision in Executive Benefits Insurance Agency v. Arkinson, 2014 WL 2560461 (U.S.) (12-1200), which involved a bankruptcy trustee’s fraudulent conveyance lawsuit, and settles some of the Stern claim debate.

The Supreme Court held that when, under Stern’s reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, the bankruptcy court may nevertheless issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court.

But there are still Stern issues to be decided, as Doron Kenter of Weil’s Business Finance & Restructuring Department points out in this blog post.

Not the least of the remaining issues is whether parties can consent to a bankruptcy court’s final adjudication of a Stern claim.