Estate of Denial: The U.S. Supreme Court’s recent decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), has a narrow holding, but potentially enormous implications for bankruptcy courts and litigation in the federal courts. The authority not just of bankruptcy judges but also of federal magistrate judges is now uncertain.
The case involved a dispute between Anna Nicole Smith and Pierce Marshall over inheritance from the very large estate of J. Howard Marshall. To make a long story short, Smith, the widow of Howard Marshall, filed for bankruptcy in the Central District of California. Pierce Marshall, Howard Marshall’s son, filed a proof of claim, primarily alleging that Smith had defamed him. Smith then filed a counterclaim asserting that Pierce Marshall tortuously interfered with her ability to recover from Howard Marshall’s estate. The bankruptcy court ruled in favor of Smith on her counterclaim and awarded her $425 million, which ultimately was reduced to $88 million.
Subsequent to the bankruptcy court’s decision, the Texas probate court ruled in favor of Pierce Marshall. This question, therefore, was one of preclusion. Did the bankruptcy court have the legal authority to issue a final judgment on the state law counterclaim, in which case there was preclusion of the Texas probate court’s decision?