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January 19, 2011

Analysis: Oral Arguments Before the Supreme Court in Stern v. Marshall

by Prof. Jean Braucher

ABI Resident Scholar

The Supreme Court heard oral argument yesterday in Stern v. Marshall on the issue of whether a bankruptcy court may adjudicate a compulsory counterclaim brought by a debtor against a creditor who filed a proof of claim. The Court explored the constitutional scope of the power of bankruptcy courts, which are Article I courts. Justice Sonia Sotomayor opened the questioning about the authority of bankruptcy courts to adjudicate proofs of claim in light of Article III. Justice Elena Kagan also asked whether the 1984 bankruptcy law had brought the bankruptcy courts under the control of Article III courts, solving the constitutional problem identified in 1982 in Northern Pipeline Construction Co. v Marathon Pipe Line Co. The bankruptcy jurisdiction issue arises in a long-running legal battle between Anna Nicole Smith, whose real name is Vicki Lynn Marshall, and Pierce Marshall, the son of Smith's deceased husband, Texas oilman J. Howard Marshall II. Both Smith and Pierce Marshall, are now deceased, but their estates continue to pursue the legal issues. Pierce Marshall filed a proof of claim in Smith's chapter 11 case, asserting that Smith had defamed him as "greedy and miserly" and as scheming to keep her from inheriting from her husband. Smith responded with a compulsory counterclaim for tortious interference with a gift expectancy, which the bankruptcy court decided in her favor. The case has been to the Supreme Court once before. The bankruptcy court's decision conflicts with a later Texas probate court decision for Pierce Marshall. The current appeal is from a decision of the U.S. Court of Appeals for the Ninth Circuit, holding that Smith's counterclaim was not so closely related to Pierce Marshall's defamation claim that it must be resolved to allow or disallow his claim and thus was not "a core proceeding arising in" a bankruptcy case, within the bankruptcy court's power to adjudicate. Click here to read a transcript of yesterday's oral arguments in Stern v. Marshall.



FDIC Sets Out Rule to Resolve Claims Against Failed Firms



The board of the Federal Deposit Insurance Corp. yesterday approved a rule clarifying how the agency will treat certain creditor claims under its new authority to oversee the liquidation of failed non-bank financial firms, the Deal Pipeline reported yesterday. The authority was established by the Dodd-Frank financial reform bill enacted in July. The interim final rule approved yesterday differs in two ways from the proposal the FDIC issued in October. One, it clarifies that fair market value will be the basis for deciding the worth of collateral on secured claims and that contingent claims will be handled consistent with bankruptcy law. The rule also addresses other concerns raised in comments from the public, including concern that the proposed prohibition of any additional payments to holders of long-term debt - those with initial maturities of more than 360 days - meant that shorter-term creditors would be likely to receive such payments. Under the interim final rule, however, short-term debt holders are unlikely to meet the criteria for receiving additional payments beyond the pro rata share provided to the long-term debt holders, the FDIC said. Read more. (Subscription required.)



Panel Begins to Set Rules to Govern Financial System



The new regulatory board charged with overseeing the stability of the financial system took its first big steps yesterday to set out tentative guidelines to limit trading by banks for their own accounts and to restrict the growth of the biggest financial companies, the New York Times reported today. The Financial Stability Oversight Council, the council of financial regulators created by the Dodd-Frank Act, also proposed rules as to which large financial companies that were not banks would be regulated by the Federal Reserve because they constituted a potential threat to the nation's financial system's stability based on their size. Under the proposed rules, banks would have to sell or wind down their proprietary trading desks, set up a supervisory system to distinguish prohibited trading from legitimate market-making and capital-raising activities on behalf of customers, and refrain from investing in or sponsoring hedge funds or private equity funds. Regulators now have eight months to draw up specific regulations on proprietary trading, which are likely to include new quantitative measures to differentiate between permissible and banned activities. The law calls for the Volcker rule, named for former Federal Reserve chairman Paul A. Volcker, who championed the idea, to be set by mid-September. Read more.



Federal Officials Studying How to Protect Housing Market



Federal officials took two steps yesterday to attempt to reduce the likelihood of a second financial crisis caused in large part by large declines in the housing market, the Washington Post reported today. First, the Federal Housing Finance Agency, which oversees the massive mortgage finance companies Fannie Mae and Freddie Mac, said that it would consider a new approach to how home loans are managed by banks. The second step would try to curtail reckless mortgage lending by more tightly regulating what firms can do with the loans they make. Currently, banks can pool mortgage loans together into an investment and sell that to investors around the globe, passing on all the risk associated with the loans. However, a report released by the Treasury Department, as required by the Dodd-Frank law overhauling financial regulation, endorsed the law's prescription that banks be forced to hold on to a portion of the investment, making it difficult for a bank to ignore the risks associated with lending. Read more.



WaMu Eyes March Bankruptcy Exit



Washington Mutual Inc. could be out of bankruptcy in March after reworking its recently rejected plan of reorganization, Reuters reported yesterday. Once the company's reorganization plan is approved and goes into effect, it will begin distributing more than $7 billion to creditors. Those creditors range from hedge funds that hold the company's securities including Centerbridge Partners LP to vendors such as phone companies and software providers. Bankruptcy Judge Mary Walrath rejected Washington Mutual's reorganization plan on Jan. 7, but she did approve a legal settlement it had proposed, giving the company a major victory. The company's settlement plan divided about $10 billion in disputed assets between Washington Mutual, the Federal Deposit Insurance Corp. and JPMorgan Chase & Co. Read more.



Capital One Bank Will Refund More Than $2 Million Improperly Collected from Consumers in Bankruptcy


Bank of America Corp. yesterday said that the rate at which it wrote off credit card debt as uncollectible fell in December to its lowest point for 2010, Bloomberg News reported today. Charlotte, N.C.-based Bank of America wrote off 9.31 percent of credit card balances in December at an annualized rate, down from 9.92 percent in November. In November, total revolving debt held by U.S. consumers - which is mostly credit cards - fell to $796.5 billion. That's about 18.5 percent below the peak reached in the third quarter of 2008, and it is the lowest point since September 2004. Industry wide, the charge-off rate peaked in the second quarter of 2010 at 10.37 percent of balances, annualized, according to the latest Fed data. In the two years prior to the recession, it averaged 3.82 percent, Fed records show.


http://www.bloomberg.com/news/print/2011-01-18/bank-of-america-december-card-charge-offs-fall.html