Stern v. Marshall

In this case, the Supreme Court must determine whether Congress intended for compulsory counterclaims raised by an estate against a creditor to be considered a core proceeding, and therefore subject to the jurisdiction of bankruptcy courts. See Brief for Petitioner, Howard K. Stern at 1. If the Court rules that they are core proceedings, this would give bankruptcy courts the authority to render final judgments on these counterclaims when they arise during a bankruptcy proceeding. See Id. The Supreme Court’s decision will rest on their interpretation of the language of 28 U.S.C. § 157(b)(2). This statute gives bankruptcy court judges authority to hear any and all non-federal issues that may arise in a bankruptcy case. See 28 U.S.C. § 157(b)(2). The authority of a bankruptcy court to hear these claims can only be granted by Congress. See U.S. Const. art. III.

Vickie argues that it is clear that Congress intended to give bankruptcy courts the authority to render final judgments on compulsory counterclaims by the estate. See Brief for Petitioner at 26. Vickie posits that the Court should look to the plain language of Section 157(b)(2) and to the legislative history in order to accurately determine Congress’ intent. See Id. at 26–32. First, Vickie contends that the language of the statute includes a list of proceedings that Congress deemed to be core proceedings entitled to bankruptcy court jurisdiction. See Id. at 26. Vickie claims that this list of proceedings, while non-exhaustive, includes compulsory counterclaims. See Id. Vickie further argues that this designation allows bankruptcy courts to render final judgments on these counterclaims by estates. See Id. Vickie points out that Congress’ inclusion of compulsory counterclaims on the list of core proceedings is especially fitting given the fact that these counterclaims are mandatory and subject to res judicata limitations. See Id. at 28.

Secondly, Vickie posits that the legislative history of Section 157(b)(2) further proves that Congress intended compulsory counterclaims to be considered a core proceeding. See Brief for Petitioner at 28. Vickie argues that Congress recognized that almost all proceedings held before bankruptcy judges would be core proceedings because they are almost all part of the core bankruptcy function of “restructuring and adjusting debtor-creditor rights.” See Id. at 31–32. Therefore, Vickie asserts, compulsory counterclaims would arise under federal law (and thus be subject to the jurisdiction of bankruptcy courts) even though they may involve issues of state law. See Id. at 32.

In response, Pierce argues that petitioner’s alleged cause of action for tortious interference with an expectancy of a gift is at best a “related to” matter, and not a part of the core proceeding. See Brief for Respondent, Elaine T. Marshall at 35. Pierce contends that this is so because the bankruptcy court was not required to make a final ruling on petitioner’s claim in order to allow or disallow respondent’s claim. See Id. Pierce acknowledges that although the list of core proceedings found in Section 157(b)(2) is non-exhaustive, there are inherent limitations contained in the statute itself. See Id. at 51. Namely, Pierce contends, the overall structure of the statute is proof that Congress intended that only proceedings that “arise under” and “arise in” the bankruptcy court’s jurisdiction are those that should be heard by that court. See 28 U.S.C. § 157(b)(1); Brief for Respondent at 36. Pierce contends that the petitioner’s tort claim does not “arise under” the code, because it is a state law claim, and therefore “arises under” state law. See Brief for Respondent at 36. Pierce asserts that just because the tort claim has been raised as a counterclaim to a proof of claim does not alter this analysis, especially because it is not necessary to adjudicate the claim in order to allow or disallow the creditor’s proof of claim. See Id.

Vickie argues that the Ninth Circuit’s opinion contravenes Congress’ intent as well as the plain language of Section 157(b)(2). See Brief for Petitioner at 32–33. Vickie posits that the Ninth Circuit erroneously read Section 157(b)(2) too narrowly to avoid dealing with the issue of whether or not the statute is constitutional. See Id. at 32. Vickie acknowledges that while the practice of avoiding the constitutional question is acceptable, the Supreme Court has held that this practice should be avoided when it would force a court to ignore congressional intent. See Id. Vickie asserts that by construing Section 157(b)(2) as narrowly as it did, the Ninth Circuit not only reformulated the statute to comport with its own view of constitutionality, it also ignored Congress’ explicit intent to include compulsory counterclaims in the category of core proceedings. See Id. at 33. Specifically, Vickie argues that the Ninth Circuit’s interpretation of Section 157(b)(2) would contravene Congress’ goal to make bankruptcy proceedings efficient and expeditious. See Id. at 34. Vickie points to the fact that if counterclaims are not considered core proceedings, and therefore not subject to the jurisdiction of bankruptcy courts, it would split a bankruptcy proceeding into separate actions that must be tried in different courts. See Id. at 35–36. Vickie asserts that this would cause the absurd result of endless litigation, confusion of jurisdictional limits, and the mayhem of claim and issue preclusion. See Id. at 36.

Pierce contends that the Ninth Circuit was justified in construing Section 157(b)(2) narrowly to avoid the serious constitutional questions that would otherwise be raised. See Brief for Respondent at 37. Pierce, pointing to the language found in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), argues that Congress is not allowed to assign to a specialized non-Article III court (such as a bankruptcy court) the authority to adjudicate private rights of actions. See id. at 39. Pierce contends the Supreme Court has held that suits arising under state common law (such as the tort action in this case) are prime examples of private rights of actions. See Id. Furthermore, Pierce posits that in Northern Pipeline v. Marathon Pipeline, 458 U.S. 50 (1982), the Supreme Court held that Congress could not give non-Article III courts the power to hear and render final judgments in traditional contract lawsuits that arise under state law, unless the parties consent. See id. at 40. Pierce contends that since petitioner’s claim is a paradigmatic example of a private-right action arising under state law, and because both parties have not consented to jurisdiction, a bankruptcy court cannot decide this lawsuit. See Id.

Finally, Vickie argues that Section 157(b)(2)(C)’s inclusion of compulsory counterclaims in the category of core proceedings is constitutional. Vickie states that by submitting a claim against an estate in bankruptcy court, a creditor is subjecting itself to the jurisdiction of that court to hear all claims that arise out of the proceeding. See Brief for Petitioner at 39. Vickie asserts that this principle has been upheld by the Supreme Court in Granfinanciera and in Langenkamp v. Culp, 498 U.S. 42 (1990). See Id. at 41. In both of those cases, Vickie posits, the Supreme Court found constitutional Congress’ assignation of the right to hear state law claims to non-Article III courts. See Id. at 43. Furthermore, Vickie argues that in Katchen v. Landy, 382 U.S. 323 (1966), the Supreme Court established the rule that a creditor cannot invoke the help of a bankruptcy judge by filing a claim against an estate and then try to deny that same court’s ability to render a final judgment in the entire dispute. See Id. at 49. Vickie contends that along with gaining all of the benefits, a creditor must risk the disadvantages that flow as a consequence of invoking the aid of the bankruptcy court in its claim against an estate. See Id.