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BANKRUPTCY CASES

 

Summary of Hamilton v. Lanning, 130 S. Ct. 2464, 2010

 

The Supreme Court of the United States decided on June 7, 2010 with Justice Alito delivering the opinion of the Court.    Chapter 13 debtors agree to a court-approved plan paying creditors out of future income.  Debtors are required to pay unsecured creditors in full or all projected disposable income during the plan.  How should a bankruptcy court determine projected disposable income?

The Court decided against the mechanical approach in favor of the forward looking approach.  The mechanical approach multiplies monthly income by plan months and then determines what part is disposable.  The alternative is to account for foreseeable changes in future income.  BAPCPA,  although not defining projected disposable income, specified  how it should be calculated.  Current monthly income is reduced by reasonable necessary expenses for debtor’s maintenance, support, charitable contributions and business expenses.  Current monthly income is an average of the 6 months prior to filing.  Below median income debtors expenses are the full amount needed for maintenance and support.  Above median income allows only specified expenses.

Debtor in this case had insufficient income to pay unsecured creditors in full.  The Bankruptcy court accepted Debtors schedule “I” income but required a 60 month plan.  The Tenth Circuit Court found a rebuttable presumption in the mechanical approach with a focus on a substantial change in debtor’s circumstances.  The Supreme Court looked at the ordinary meaning of projected, language in the Bankruptcy Code, and pre BAPCA case law to find in favor of the forward looking approach.

The Court concluded that where disposable income during the 6 month look back period is substantially lower or higher than the debtor’s disposable income during te plan period, the mechanical approach would produce senseless results which Congress did not intend. 

 

 

 

Notes from Stern v. Marshall, decision of June 23, 2011

SUPREME COURT OF THE UNITED STATES

No. 10–179

HOWARD K. STERN, EXECUTOR OF THE ESTATE OF VICKIE LYNN MARSHALL, PETITIONER v. ELAINE T. MARSHALL, EXECUTRIX OF THEESTATE OF E. PIERCE MARSHALL

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

[June 23, 2011]

The Chief Justice delivered the opinion of the Court.  This was the Court’s second dealing with the issues between Vickie Lynn Marshall and E. Pierce Marshall and the Texas fortune of J. Howard Marshall II.  Courts in Louisiana, Texas and California have made decisions on this case.  The Court of Appeals said that the Texas decision controlled and that the Bankruptcy Court lacked the authority to enter final judgment on a counterclaim that Vickie brought against Pierce in her bankruptcy proceeding.

Whether the Bankruptcy Court had statutory authority under 28 U.S.C. § 157(b) to issue a final judgment on Vickie’s counterclaim and if so, whether such grant of authority is constitutional.

Article III, §1 of the Constitution commands vesting of power of the United States in one supreme court and inferior courts as Congress may establish.  Judges of those courts shall hold their offices during god behavior without reduction of salary.  Bankruptcy judges do not have tenure or salary protection.  In spite of the statutory authority to decide Vickie’s counterclaim it lacked constitutional authority to do so.

Vickie is Anna Nicole Smith who was the third wife of J. Howard Marshall.   She was not included in his will.  Vickie filed a Texas probate court action claiming that Marshall’s son, E. Pierce Marshall fraudulently induced execution of a living trust that excluded her.  Vickie filed a bankruptcy petition in California in which Pierce filed a complaint alleging defamation which drew Vickie’s counterclaim of tortious interference with the expected gift of half of J. Howard’s estate.   The Bankruptcy Court ruled against the defamation claim and awarded Vickie $400 million compensatory and $25 million punitive damages.

Pierce then argued that the Bankruptcy Court lacked jurisdiction as a core proceeding which would require it to submit proposed findings of fact and conclusions of law to the district court for the district court to issue final judgment.  The Bankruptcy Court found Vickie’s counterclaim to be a core proceeding under §157(b)(2)(C) enabling it to enter judgment on the counterclaim.

The District Court decided that it was not a core proceeding and ignore a Texas state court decision in favor of Pierce.  An award of $44,292.767.33 was made by the District Court.

The Court of Appeals found that the counterclaim could only be decided by the Bankruptcy Court if it was necessary to the determination of the Proof of Claim of Pierce.  It then found that the Texas decision should be given effect, finding for Pierce.

The 1984 Act provided for the appointment of Bankruptcy judges for 14 year terms by the courts of appeals.

Vickie’s counterclaim was found to be a core proceeding under the plain text of §157(b)(2)(C).  Pierce’s argument that there is a category of matters that do not arise under Title 11 or in a Title 11 case was found unsound.  “Oxymoron is not a typical feature of congressional drafting.”  The Court found that it would have to rewrite the statute not interpret it to follow Pierce’s argument.

The Court found further that Pierce had waived any claim of subject matter jurisdiction regarding the Bankruptcy Court’s determination of his defamation claim.

Going on to Article III of the Constitution which defines the power and protects the independence of the judicial branch was said to ensure clear heads and honest hearts rather than have judges doing the bidding of the executive or legislature. 

The Court looked at Vickie’s contention that Pierce is a creditor in the bankruptcy and found her claim to be a state law action independent of bankruptcy law and not necessarily resolvable in a decision on the proof of claim.  Vickie’s counterclaim was found to require an Article III court.  “Congress may not bypass Article II simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.”  The Court concluded that Congress had exceeded the limitations of the Constitution in the Bankruptcy Act of 1984 by allowing entrance of final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.

 

 

 



  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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