June 2nd, 2013

Anna Nicole Smith Changed The Bankruptcy System. Yes, You Read That Right!

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Anna Nicole Smith, her photographer boyfriend Larry Birkhead, their daughter Dannielynn Birkhead, her live-in lawyer Howard K. Stern, and her deceased husband J. Howard Smith have turned bankruptcy law on its ear. You may have read recently that a federal court could order Anna Nicole’s late husband’s estate to pay sanctions of $49 million to her daughter Dannielynn because his lawyers intentionally hid evidence to keep it out of the hands of Anna Nicole’s own lawyers.

Let me recap Anna Nicole’s drama a bit because the underlying case is difficult for even Arizona bankruptcy lawyers to understand. You may recall that Anna Nicole married J. Howard Smith (who was 60 years her senior) in 1994, about a year before his death. Although he showered her with money and gifts during their marriage, she was not included in his will.  Anna Nicole believed that her deceased husband’s son, Pierce Marshall, had fraudulently taken steps to prevent her from inheriting any of her husband’s money. Anna Nicole sued him in a Texas. Before the Texas court decided her case, she filed Chapter 11 bankruptcy in California. While her bankruptcy case was pending, the Texas court ruled that Anna Nicole was not entitled to anything. Nevertheless, the bankruptcy court believed it had jurisdiction over Anna Nicole’s lawsuit. As such, the bankruptcy court ignored the Texas court’s decision and awarded Anna Nicole $400 million in compensatory damages and $25 million in punitive damages against her deceased husband’s estate.

Pierce Marshall appealed the award based on the premise that the bankruptcy court didn’t have jurisdiction to rule on this type of claim because it had nothing to do with the subject matter that bankruptcy courts are permitted to rule on (such as resolving creditor claims and requiring debtors to turn over non-exempt property they are not allowed to keep). Pierce Marshall died in 2006. Anna Nicole Smith died a year later. The legal proceedings continued nevertheless.

In 2011, the United States Supreme Court issued a ruling entitled Stern v. Marshall. The Court said that it was unconstitutional for the bankruptcy court to have asserted jurisdiction to decide Anna Nicole’s claim. The Court held that Anna Nicole’s claims were “private claims” that involved State law, not bankruptcy law. As such, the Court said that the Texas court’s ruling against Anna Nicole should stand as the final decision on the matter. Anna Nicole got nothing.

In the Court’s opinion, Chief Justice John Roberts quoted from Charles Dickens:

“This suit has, in course of time, become so complicated that no two lawyers can talk about it for five minutes, without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause: innumerable young people have married into it; and sadly the original parties ‘have died out of it.”  Those words were not written about this case (see C. Dickens, Bleak House in 1 Works of Charles Dickens), but they should have been.

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We’ll have to wait to see if Dannielynn gets her millions anyway if the federal court finds that lawyers for J. Howard Smith and his son Pierce Marshall intentionally withheld evidence that was favorable to Anna Nicole’s Texas case. Regardless as to the outcome for Dannielynn, I’m certain of two things:  (1) Arizona bankruptcy lawyers have learned a lot from Anna Nicole’s bankruptcy case; and (2) no matter how complicated her bankruptcy case was, it was much more entertaining than Anna Nicole’s reality show on the E! network a few years back.

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