On Tuesday, Manhattan federal judge Jed Rakoff agreed to decide whether Irving Picard’s $267 million clawback case against ABN Amro and related defendants belongs in federal court rather than in Manhattan bankruptcy court, where the Bernard Madoff bankruptcy trustee filed it as an adversary proceeding. That’s bad news for Picard and his team at Baker & Hostetler. So far, Judge Rakoff has decided that he has jurisdiction over at least part of every Madoff case he’s considered, and he’s proceeded to decimate Picard’s recovery theories in his HSBC and Mets rulings.
What’s intriguing about the ABN Amro withdrawal motion, though, is that the bank’s lawyers at Latham & Watkins, as well as Morrison & Foerster on behalf of co-defendant Rye Portfolio, are pointing to a June 23 U.S. Supreme Court opinion involving Anna Nicole Smith’s claim to part of her billionaire husband’s estate. Sadly, neither the former Playboy Playmate nor the stepson she sued to recover more than $400 million lived to see the high court’s ruling. But the Supreme Court’s opinion in Stern v. Marshall could turn out to be the most important legacy of the onetime tabloid darling Anna Nicole Smith, or, as she’s known to the Justices, Vickie Lynn Marshall.
The Supreme Court’s controversial 5-to-4 decision isn’t one of those rulings whose implications are immediately evident, like, say, Morrison v. National Australia Bank. Indeed, to call the facts underlying Stern v. Marshall idiosyncratic would be sort of like saying Anna Nicole was buxom. Here’s a highly abbreviated version of the story: Anna Nicole’s billionaire husband (of a little more than a year) left her nothing in his will. She filed for bankruptcy. Her stepson, Pierce Marshall, filed a claim in the bankruptcy, alleging that Anna Nicole defamed him when she said in state probate court that he fraudulently induced his father to disinherit her. Anna Nicole responded to her stepson’s bankruptcy court claim with a counterclaim for tortious interference. After a bench trial, the bankruptcy court agreed with Anna Nicole and entered a $400 million judgment against Marshall.
The Supreme Court, however, found that Anna Nicole’s bankruptcy judge did not have the right, under the U.S. Constitution, to enter final judgment on a claim that doesn’t fall under the Bankruptcy Code’s definition of core bankruptcy issues and isn’t part of the bankruptcy estate’s claims process. (Congress created federal bankruptcy courts; the Constitution created federal district courts.) Claims involving non-core bankruptcy issues outside of the bankruptcy claims process, under the Supreme Court’s ruling, have to receive final adjudication from a federal district court. Bankruptcy judges may only issue findings of fact and recommendations, as if they were federal magistrates.
For Anna Nicole’s estate, the consequences of the Court’s ruling were all too clear: Her heirs don’t get the money the bankruptcy court awarded. But for everyone else, figuring out what Stern v. Marshall means has not so easy. In part, that’s because of the Court’s insistence that its ruling is intended to be narrowly construed. “We do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute,” wrote Chief Justice John Roberts for the majority. The Court weighed in, the Chief Justice wrote, because “We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.”