Anna Nicole Smith and the Supremes

While it may appear that Anna Nicole Smith's legacy will be her controversial public persona, her real legacy will likely be the Supreme Court's confusing decision in Stern v. Marshall, 131 S. Ct. 2594 (2011).  This decision casts doubt on a bankruptcy court's authority to issue final and binding orders when an action in bankruptcy is based on a state law and leads to uncertainty as to the enforceability of those bankruptcy court orders.

Anna Nicole married a wealthy man decades her senior, and after his death, sued his son in a Texas state court under a Texas law prohibiting "tortious interference with a gift."  In short, she accused the son of fraudulently convincing her husband to keep her out of the will.

She then filed bankruptcy and the son filed a proof of claim and an adversary alleging the Texas suit defamed him. She filed a counterclaim, claiming the same tortious interference as she did in the Texas case.  The bankruptcy court found the son did tortiously interfere with her inheritance and awarded her millions. However, the Texas court later found the opposite and awarded her nothing.  The son appealed the bankruptcy court's decision to the federal district court, which agreed with the bankruptcy court, but slashed the award.

Eventually, the Supreme Court was called upon to sort the mess out.  The son argued that the bankruptcy court did not have authority to enter an order on Anna Nicole's counterclaim.  The Supreme Court agreed and disagreed.   It decided that while the Bankruptcy Code gives the bankruptcy court authority to enter a final order on the counterclaim arising under state law, the Constitution does not.  Ergo, the bankruptcy court's order awarding Anna Nicole her supposed widow's due was not a final and enforceable order.

The case then presents a murky definition of proceedings in which a bankruptcy order is final and enforceable:  1) If "the action at issue stems from the bankruptcy itself" or 2) If "the action would necessarily be resolved in the claims allowance process". 

Confused?  So are many bankruptcy and other federal judges.

It's safe to say that orders on routine matters like motions for relief from stay or objections to confirmation are final orders.  The murkiness arises when a claim involves a state court matter or a matter that has a parallel state law.  An example is fraud.  If a creditor has an action for nondischargeability of its claim based on fraud in bankruptcy, it would also have an action for fraud in the state court.   Can a bankruptcy judge issue a final and enforceable ruling of fraud? 

This article greatly simplifies the court's decision and is not intended to be a scholarly discussion of Stern and its many potential ramifications.  What it is intended to do is alert creditors of this case.  Federal and bankruptcy courts are beginning to issue decisions clarifying bankruptcy courts' authority, and tend to uphold the authority of the bankruptcy court to issue final orders, but the bankruptcy court's authority is not always upheld if the issue involves state law.  If you are a litigant in such an action in bankruptcy court, it would be wise to discuss this with your attorney to determine if any special steps need to be taken to either ensure a final order, or not... whichever is to your advantage.