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In this appeal from the bankruptcy court, a litigant who filed a proof of claim and an adversary

complaint to determine the dischargeability of a debt allegedly owed to him by the debtor challenges a

judgment entered against him on a counterclaim brought by the debtor. The debtor also cross-appeals.

For the convenience of the Court and the parties, the Court instructed the parties initially to brief only

to the parties by their given names, as is customary in cases involving family members.

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two threshold issues. These issues are whether federal courts lack jurisdiction over this matter because

of the probate exception to federal jurisdiction and whether the counterclaim is a core or non-core

case and that the proceeding is a core matter. For the reasons that follow, the Court agrees that federal

courts may exercise jurisdiction over this matter, but reverses the bankruptcy court’s determination that

this is a core matter.

Howard Marshall II ("J. Howard, Sr."), who died on August 4, 1995. Vickie and J. Howard, Sr. were

married on June 27, 1994, after two and a half years of courtship. At the time of their marriage, Vickie

was 26 years old and J. Howard, Sr. was 89 years old. Vickie, also known as Anna Nicole Smith, is a

figure of some notoriety because of her career as a model. Prior to their marriage, J. Howard, Sr. had

assisted in developing her career. J. Howard, Sr. is also a figure of some notoriety in his own right, as he

was said to be either the richest or second-richest man in Texas at the time of his death. His wealth was

held in several different ways, including a living trust, and the exact amount and location of his wealth at

the time of his death appears to be disputed. It seems clear that he was worth at least $1.6 billion.

It is undisputed that J. Howard, Sr. lavished great sums of money on Vickie during their

courtship and marriage. Nonetheless, he did not explicitly provide for Vickie in his will. However,

according to Vickie, and as found by the bankruptcy court, J. Howard, Sr. promised Vickie that she

would receive substantial wealth and be taken care of. J. Howard, Sr.’s sons from two former marriages,

J. Howard Marshall III ("J. Howard, Jr.") and Appellant and Cross-Appellee E. Pierce Marshall

("Pierce"), contest whether J. Howard, Sr. ever made such promises.

The magnitude of the sums of money involved in J. Howard, Sr.’s estate has sparked intensely

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bankruptcy because, after not receiving an inheritance from J. Howard, Sr., she lacked money

and also because a default judgment had been entered against her on claims brought by her

former personal assistant or housekeeper. This claim subsequently settled.

which was the case number assigned to Pierce’s original motion to withdraw the reference of the

Pierce adversary proceeding.

Hilliard adversary proceeding had adversary number AD 98-1159 SB. After the reference was

withdrawn but while the Hilliard adversary proceeding was still before Judge Keller, the

proceeding had case number CV 98-4398 WDK. After being transferred to this Court, the

Hilliard adversary proceeding was assigned case number SA CV 99-1372 DOC. This is the

current, operative number for the Hilliard adversary proceeding.

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contested litigation on several fronts. First, some probate proceedings took place in Louisiana, but were

dismissed some time ago. Second, the estate is currently going through probate in Texas. Trial in the

probate proceedings has concluded, and the jury has returned a verdict, but apparently judgment has not

yet been entered. Third, on January 25, 1996, a few months after J. Howard, Sr.’s death, Vickie filed for

adversary proceedings with which this Court has had involvement. This Order refers to these two

adversary proceedings as the "Hilliard adversary proceeding" and the "Pierce adversary proceeding."

The Hilliard adversary proceeding began in January 1998 when Vickie filed an adversary

complaint against Finley Hilliard as trustee of the J. Howard Marshall Living Trust and as executor of

the succession of J. Howard Marshall II, et al. On July 22, 1998, the Honorable William D. Keller

issued an order withdrawing the reference to the bankruptcy court of this proceeding, which thereafter

proceeded before Judge Keller. On March 10, 1999, Judge Keller stayed the proceeding, pending the

The appeal currently before the Court concerns the Pierce adversary proceeding. This proceeding

began in 1996, a couple of years prior to the instigation of the Hilliard adversary proceeding. On May 7,

1996, Pierce filed an adversary complaint seeking a determination that Vickie owed him a debt that was

nondischargeable. Pierce alleged that Vickie had defamed him when, prior to the time she filed for

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dischargeable. 11 U.S.C. § 523(a)(6). Damages for libel or defamation are not dischargeable

F.2d 610, 615 (6th Cir. 1986).

entirety back to the bankruptcy court. Specifically, the order states without limitation, "This

Lynn Marshall, is referred back to the Bankruptcy Court."

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bankruptcy and with her complicity, some of her lawyers told members of the press that Pierce had used

proof of claim in the bankruptcy case. He made the claim by attaching a copy of the complaint from his

adversary proceeding.

Vickie responded to both the adversary complaint and the proof of claim. As to the adversary

proceeding, on June 14, 1996 she answered, in part asserting truth as a defense. She also asserted

counterclaims for fraudulent transfer, an injunction, conversion, tortious interference with inheritance,

breach of fiduciary duty, abuse of process, fraud, promissory estoppel, breach of contract (third-party

beneficiary), the imposition of a constructive trust, an accounting, and indemnity and contribution. As to

Pierce’s proof of claim, Vickie filed an objection on July 3, 1996.

On September 22, 1998, Pierce filed a motion to withdraw the reference for his adversary

proceeding. This motion was assigned to Judge Keller for determination. Judge Keller issued a ruling

on October 21, 1998, but he then vacated that order and issued a new ruling on March 10, 1999. The

March 10, 1999 ruling denied Pierce’s request to withdraw the reference. The effect of this ruling was

On November 5, 1999, the bankruptcy court granted summary judgment for Vickie on Pierce’s

claim. It found that Vickie had published no statements about Pierce, had not ratified any statements

about Pierce made by her attorneys, and was not otherwise vicariously liable for any statements her

attorneys had made about Pierce. Thus, it held that Vickie had not committed a willful or malicious act

under 11 U.S.C. § 523(a)(6).

Vickie’s counterclaims against Pierce went to trial in the bankruptcy court in the fall of 1999.

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in Koch Industries, Inc., an oil and gas corporation affiliated with the Marshall family.

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Approximately ten months later, on September 27, 2000, the bankruptcy court issued a Memorandum of

Decision Following Trial ("Original Decision"). The Original Decision held that Pierce tortiously

interfered with Vickie’s expectation of the inheritance she otherwise could have received through a

widow’s election. On October 6, 2000, the bankruptcy court issued an Amended Memorandum of

Vickie Lynn Marshall, 253 B.R. 550 (Bankr. C.D. Cal. 2000). Based on the evidence at trial and in large

part on facts found against Pierce as sanctions for his discovery abuses, the Amended Decision

concludes not that Pierce tortiously interfered with Vickie’s expectation of an inheritance, but that he

The court finds that Vickie had an expectancy to receive a

substantial portion of J. Howard’s wealth. J. Howard repeatedly told her

that she would receive half of what he owned. While J. Howard never

made a will with any provision for her, this was because his principal

assets were already in the Living Trust. J. Howard’s plan was to provide

for Vickie from the Living Trust.

In December, 1992 J. Howard instructed both Sorensen and Hunter

to arrange a gift to Vickie from the Trust. J. Howard instructed Hunter, a

tax and estate planning expert, to prepare a "catch-all trust" for Vickie. A

few days later J. Howard instructed Sorensen to prepare the documents for

a gift to Vickie of one-half of the future appreciation in J. Howard’s

instructions were ever rescinded.

Am. Decision at 7. After discussing the certainty of the gift and Pierce’s tortious conduct to prevent it,

the Amended Decision then concludes:

Pierce has tortiously deprived [Vickie] of her expectancy of a substantial

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inter vivos gift from her deceased husband J. Howard.

The court awards damages in the amount of $449,754,134, less any

amount that Vickie actually recovers in the pending Probate Court action

in Texas. In addition, Vickie is entitled to punitive damages in an amount

that remains to be determined after her actual damages are calculated.

Am. Decision at 9.

Pierce then filed a motion to withdraw the reference, assigned to this Court for determination.

Just prior to argument on that motion, the bankruptcy court issued a third order on November 21, 2000.

This decision, the Supplemental Memorandum of Decision Following Trial ("Supplemental Decision"),

does not supercede the Amended Decision, but instead supplements it by explaining that the bankruptcy

court had determined that Vickie’s counterclaims were core proceedings and by imposing punitive

damages of $25 million. It requested further briefing regarding certain forms of injunctive relief

requested by Vickie, discussed requests by the parties for revisions to its findings of fact and conclusions

of law, and set a hearing for December 6, 2000.

This Court heard oral argument on Pierce’s motion to withdraw the reference on December 11,

2000 and then took the matter under submission. It then requested further briefing regarding the

jurisdictional issue raised by Pierce in his motion.

On December 29, 2000, the bankruptcy court issued an Order on Motion for Entry of Judgment

("Order Re Judgment"). In this order, the bankruptcy court addressed Pierce’s contention that the

probate exception bars federal jurisdiction over Vickie’s counterclaim. The bankruptcy court rejected

this contention. It held that Pierce had waived any objections to jurisdiction and had consented to

jurisdiction by filing a proof of claim. Further, it held that in any event, the counterclaim did not fall

within the exception, assuming the exception applies to bankruptcy cases. The bankruptcy court also

provided further explanation as to why it had determined the matter is a core bankruptcy matter. Finally,

the bankruptcy court ruled that it was appropriate to enter final judgment. The bankruptcy court entered

a final judgment that day. This appeal followed.

Before considering the appeal, this Court denied as moot Pierce’s motion to withdraw the

reference, in addition to several motions for leave to file interlocutory appeals filed by Pierce.

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district court, on a motion to withdraw the reference, makes the determination that a proceeding

is core or non-core, the bankruptcy court’s determination "will be binding, subject only to

conventional appellate review (if permission for interlocutory review is granted under § 158(a))

461. This passage is somewhat opaque, is not supported by any citations in the treatise, and is

contradicted by the sentence immediately preceding it in the treatise, which states, "The ultimate

Id. at 460. The Court will follow the Ninth Circuit’s approach and review the core or non-core

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The Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(1), because the

bankruptcy court has entered a final judgment in this adversary proceeding.

jurisdiction and whether a proceeding is core or non-core are legal questions over which the Court

If the Court determines that this is a core matter, it will then review the rest of the bankruptcy

court’s decision for abuse of discretion. If the Court determines that this is a non-core matter, it will

matters, the bankruptcy court cannot enter final judgment, and thus if this matter is non-core, the

bankruptcy court’s decision will be treated as proposed, rather than final.

Two issues are presented on this first phase of the appeal. First, whether the probate exception to

federal subject matter jurisdiction applies to bankruptcy proceedings and if so, whether this matter falls

within that exception. Second, whether this matter constitutes a core or non-core matter.

In resolving these issues, the Court need consider only the counterclaim actually decided, tortious

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of the counterclaim it alleges interference with expectancies of "inheritance and/or gift." As

indicated, the final decision of the bankruptcy court concerned interference with Vickie’s

expectancy of a gift from J. Howard, Sr. before his death.

stated, "[I]n effect what we’re seeking is interference with an inter-vivos gift, we’re not seeking

interference with inheritance rights because there were no assets left at the time that [J. Howard,

Sr.] passed." Vickie’s Appendix at 139:2-6.

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bankruptcy court issued no ruling in favor of Vickie on any of her other counterclaims, and thus they are

Sr. placed most of his assets in a living trust prior to his death and that he intended to set up, prior to his

death, a structure whereby Vickie would be provided for out of that living trust.

Initially, the Court rejects two of Vickie’s arguments. First, Pierce has not waived his objection

to federal subject matter jurisdiction. While it may be true that it is disfavored for a party to wait until it

has lost a case and then assert a lack of subject matter jurisdiction, lack of subject matter jurisdiction is

in general a non-waivable defect. Further, while the motion Pierce attempted to bring regarding subject

matter jurisdiction was properly rejected by the bankruptcy court for being untimely filed, his answer to

Vickie’s counterclaim does attack the court’s jurisdiction. That the answer does not explicitly use the

words "probate exception" is not material, as his answer was sufficient to alert the court and the parties

to the fact that he challenged the court’s jurisdiction.

Second, the Court rejects the idea that Pierce "consented" to jurisdiction by filing a proof of

claim. The notion of jurisdiction by consent, sometimes referred to as jurisdiction "by ambush," was

Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982) seems to

contradict it. In addition, in so far as the issue is the actual subject matter jurisdiction of the federal

courts, rather than just the bankruptcy court’s power to enter a final judgment, such jurisdiction cannot

be conferred by consent.

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However, considering Pierce’s jurisdictional objection on the merits, the Court rejects his

position and concludes that federal courts, including both this Court and the bankruptcy court, may

properly exercise jurisdiction over this matter.

It is commonly understood that the "probate exception" bars federal courts from probating a will.

While at first glance this proposition may seem unremarkable, both the origin and scope of the exception

are not entirely clear. As the Seventh Circuit has noted, "The probate exception is one of the most

713 (7th Cir. 1982). In particular, the origins of the exception are rather murky. A historical

explanation, involving the exclusive jurisdiction of the ecclesiastical courts in England at the time the

66 S. Ct. 296, 298, 90 L. Ed. 256 (1946). However, there are potential problems with this explanation.

See Dragan, 679 at 713 (describing the historical explanation as "shoddy"). Further, the historical

explanation does not offer a compelling reason or rationale for why the exception should be continued

today.

Other possible explanations include the idea that probating a will is not a "case or controversy"

within the meaning of Article III, or that the Tenth Amendment reserves probate matters to the states.

1956). These rationales may be more satisfying than the historical explanation as justifications for the

probate exception today. However, the Supreme Court has never formally adopted one of these

rationales. Also, these rationales conflict with authority that states that the doctrine is "judicially

judicially created.

It is also possible that while not being constitutionally compelled, the doctrine is a result of the

principles of comity attendant to our federal system.

The lack of clarity surrounding the origin of the exception makes it difficult to resolve the

threshold issue argued by the parties, which is whether the probate exception applies only to diversity

jurisdiction or to all federal jurisdiction, including bankruptcy. As Vickie notes, nearly all of the cases

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applying or analyzing the probate exception arise under diversity jurisdiction. However, this fact alone

does not resolve the question, because there are few non-diversity actions in which the issue could even

arise. If the exception stems from a historical practice embodied in the diversity jurisdiction statute, it

perhaps would apply only to diversity jurisdiction. Similarly, if the exception is just a judicially created

doctrine recognizing that the federal interests present in diversity cases are sometimes overshadowed by

stronger state interests, it might not apply to cases in which the courts’ subject matter jurisdiction derives

from federal law, such as bankruptcy law. However, if the exception stems from Article III or the Tenth

Amendment, it presumably would apply to any proceeding in federal court, regardless of the basis of the

Ed. 664 (1918) ("[A]s the authority to make wills is derived from the states, and the requirement of

probate is but a regulation to make a will effective, matters of strict probate are not within the

jurisdiction of courts of the United States.").

Whatever the origin of the exception, the practical and structural considerations attendant to it in

the diversity context seem equally likely to arise for any action in federal court, including bankruptcy

matters. The legal certainty that is of extra importance when dealing with matters of inheritance, the

specialized nature of probate law and the corresponding expertise of probate court, the idea that normally

probate matters are of local concern only, and the judicial economy that stem from limiting litigation

over the physical property of the decedent’s estate, all are still of concern when dealing with bases of

federal jurisdiction other than diversity.

Thus, it is the Court’s opinion that the exception most likely applies to all matters in federal

court, not just those premised on diversity jurisdiction. However, the Court need not formally decide

this issue, because even assuming the probate exception applies to this case, the counterclaim decided by

the bankruptcy court does not fall within the exception.

In the leading Supreme Court case on the scope of the probate exception, the Court explained:

It is true that a federal court has no jurisdiction to probate a will or

administer an estate . . . . But it has been established by a long series of

decisions of this Court that federal courts of equity have jurisdiction to

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entertain suits in favor of creditors, legatees and heirs and other claimants

against a decedent’s estate to establish their claims so long as the federal

court does not interfere with the probate proceedings or assume general

jurisdiction of the probate or control of the property in the custody of the

state court.

that suits that can "be determined without interfering with probate or assuming general administration,

are within the jurisdiction of the federal courts").

Here, the bankruptcy court did not assert jurisdiction generally over the probate proceedings for

Texas court administering his probate proceedings. Thus, the probate exception would bar federal

jurisdiction over Vickie’s counterclaim only if such jurisdiction would "interfere" with the probate

Pierce argues that the counterclaim interferes with the Texas probate proceeding because the

issues addressed are similar or related. However, courts hold that a matter must be more than merely

related to a probate proceeding to fall within the exception and hence not be within the power of a

federal court. The Seventh Circuit has grouped federal courts’ decisions regarding the probate exception

the law of the state administering the probate, the claim could be brought only in the probate court, as

and courts do not always identify if they are applying one or the other. In substance, both tests are

frameworks for analyzing and answering the overarching question, which is whether the assumption of

federal jurisdiction will interfere with state probate proceedings. The Ninth Circuit has never explicitly

adopted either test.

gift does not fall within the exception. It is uncontested that the counterclaim does not rest on an

assertion that J. Howard, Sr.’s will is invalid. On the counterclaim, Vickie makes no assertion regarding

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Pierce’s discovery abuses. Whether or not these sanctions were warranted and whether or not the

bankruptcy court’s factual findings were correct are issues that are not before the Court on this

phase of this appeal. The Court here considers the findings of the bankruptcy court only as part

of its analysis of the nature of Vickie’s counterclaim.

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the validity of J. Howard, Sr.’s will, which left nothing to her. Whether Pierce interfered with J.

Howard, Sr.’s plans to make a gift to Vickie through a trust arrangement is a determination that can be

made completely independently from a determination of whether or not J. Howard, Sr.’s will is valid.

Also under the second test, Vickie’s counterclaim does not fall within the exception. On the

counterclaim, the bankruptcy court found that J. Howard, Sr. intended to give Vickie a gift before he

In December, 1992 J. Howard instructed both Sorensen and Hunter to

arrange a gift to Vickie from the Trust. J. Howard instructed Hunter, a tax

and estate planning expert, to prepare a "catch-all trust" for Vickie. A few

days later J. Howard instructed Sorensen to prepare the documents for a

gift to Vickie of one-half of the future appreciation in J. Howard’s interest

in the MPI stock.

Am. Decision at 7. The bankruptcy court further found that Pierce interfered with J. Howard, Sr.’s

plans:

[Pierce] fired Sorensen for the purpose of preventing him from arranging

the gift to Vickie of the increase in value of the MPI stock, and he

conspired with Hunter to prevent the preparation of the catch-all trust. . . .

[H]e caused the altering of [a document created regarding J. Howard, Sr.’s

living trust, of which Pierce and his family were the sole beneficiaries] by

substituting a new second page of the document after its apparent

execution to insert a provision that purported to make the Living Trust

irrevocable.

Am. Decision at 8.

Texas law does not require that this counterclaim be asserted in the probate court. Under the

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District Courts in Texas. Throughout this section of this order, "district court" refers to a Texas

state court of general jurisdiction, not a federal court.

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Texas Probate Code, a court exercising original probate jurisdiction has exclusive jurisdiction over

"applications, petitions and motions regarding probate and administrations." Tex. Prob. Code Ann.

§ 5(c) (Vernon 1980). Pierce makes no argument that Vickie’s counterclaim falls within this provision.

Over other matters, probate courts and Texas courts of general jurisdiction, which in Texas are called

5A(c)(2) (Vernon 1980). However, there is a further provision regarding matters, such as Vickie’s

counterclaim, that are within the concurrent jurisdiction of both the probate and district courts. "In

situations where the jurisdiction of a statutory probate court is concurrent with that of a district court,

any cause of action appertaining to estates or incident to an estate shall be brought in a statutory probate

court rather than in the district court." Tex. Prob. Code Ann. § 5A(b) (Vernon 1980). Pierce contends

that this provision means that Vickie’s counterclaim could not have been asserted in a Texas district

court because, in Pierce’s view, the counterclaim is a matter "appertaining to" or "incident to an estate."

The Texas Probate Code defines "appertaining to estates" and "incident to an estate" to include:

[T]he probate of wills, the issuance of letters testamentary and of

administration, and the determination of heirship, and also . . . all claims

by or against an estate, all actions for trial of title to land and for the

enforcement of liens thereon, all actions for trial of the right of property,

all actions to construe wills, the interpretation and administration of

testamentary trusts and the applying of constructive trusts, and generally

all matters relating to the settlement, partition, and distribution of estates

of deceased persons.

Tex. Prob. Code Ann. § 5A(b) (Vernon 1980). It is uncontested that Vickie’s counterclaim does not fall

into any of these specific categories except possibly the last, "generally all matters relating to the

settlement, partition, and distribution of estates of deceased persons." However, this is not an exclusive

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list, and thus even a matter not falling within one of the specifically enumerated categories could

nonetheless be appertaining or incident to an estate.

However, Texas case law confirms that Vickie’s counterclaim, under Texas law, is not

appertaining or incident to J. Howard, Sr.’s estate. Texas courts hold that "[a]n action is ‘incident or

appertaining’ to an estate when the outcome will have a direct bearing on the assimilation, collection,

see also Crawford v. Williams, 797 S.W.2d 184, 185 (Tex. App. 1990) ("Matters incident to an estate

includes those matters in which the controlling issue is the settlement, partition, or distribution of an

estate."). Here, Vickie’s counterclaim is asserted against Pierce individually and makes no claim against

the estate or even against the trusts existing at the time of J. Howard, Sr.’s death. In fact, Vickie’s

counterclaim is at least in part premised on the theory that she is entitled to nothing either from the living

trusts or from the estate itself. Her theory is that Pierce prevented J. Howard, Sr. from including her in

the living trusts. Thus, it is entirely possible that the trusts, as currently structured, are legally valid but

also that Pierce owes Vickie damages for preventing J. Howard, Sr. from structuring the trusts in another

way.

The Texas cases cited by Pierce are inapposite because they concern claims regarding an estate

Bailey v. Cherokee County Appraisal Dist., 862 S.W.2d 581, 585 (Tex. 1993) (holding that taxes

accruing on estate property after death are a claim against the estate and that a suit to collect them is

S.W.2d 218, 221 (Tex. 1988) (holding that the interpretation of a testamentary trust is "incident to an

action seeking an inventory, accounting, and distribution of an estate was "appertaining to an estate");

Crawford, 797 S.W.2d at 185-86 (holding that an action for turnover of estate property, an accounting, a

declaration that a will was void for undue influence, and distribution as if the decedent had died intestate

1981) (holding that a suit seeking declaratory judgment regarding the construction of a will had to be

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that a suit seeking division of an estate was "incident to an estate").

These cases nicely set forth the rule that claims for matters incident to an estate should be

brought in the probate proceeding, but they do not address the underlying question of whether Vickie’s

counterclaim constitutes a matter "incident to an estate." Pierce assumes this to be true without

providing authority or argument in support of his position.

Taylor, 640 S.W.2d 704, 706 (Tex. App. 1982), one child of a decedent sued his two siblings, also

children of the decedent, for alleged misdeeds both as co-trustees of the decedent’s trust before his death

and as co-executors after the decedent’s death. The allegations were similar to those Vickie has made

held that the suit was not "incident to an estate," and therefore could proceed independently in the

district court, rather than the probate court, because the alleged actions occurred prior to the decedent’s

death and because the damages sought were from the co-trustees and co-executors in their individual

true of Vickie’s counterclaim.

district court had jurisdiction over claims more directly related to a probate proceeding than is Vickie’s

beneficiaries who, under the will, would receive shares in certain real property owned by the decedent.

Id. at 429. Subsequent to the preparation of this will and two months before her death, the decedent

niece in district court, seeking to have the deathbed conveyance set aside on the grounds that the

decedent was incompetent at the time she made the conveyance and under the undue influence of the

executors and a specific provision of the Texas Probate Code provides for concurrent jurisdiction over

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estate." Further, the statutory provision cited by Pierce also provides for concurrent jurisdiction over

which differs from the Court’s, her claim would fall within this provision.

Pierce also argues that Texas’s "dominant jurisdiction" theory, under which the first court to

assert jurisdiction over a matter exercises that jurisdiction to the exclusion of all other courts, means that

once the Texas probate proceeding was pending, no Texas district court could have heard Vickie’s

counterclaim. However, this rule is subordinate to the test for whether an action is appertaining or

incident to an estate. Thus, if an action is appertaining or incident to an estate and a probate proceeding

is pending, under the doctrine of dominant jurisdiction no other court can exercise jurisdiction over

matters appertaining or incident to the estate. However, other courts may exercise jurisdiction over

court "was not required to abate" an action brought under concurrent probate and district court

Vickie’s counterclaim is not incident to J. Howard, Sr.’s estate, and hence the dominant jurisdiction

doctrine does not apply to it.

Finally, Pierce also notes that under Texas law, a probate court may in some settings have the

power to draw in an action pending in a district court on a transfer. Tex. Prob. Code Ann. § 5B (Vernon

1980). However, this provision is irrelevant both because such a transfer can be done only for matters

incident to an estate and because that power does not negate the fact that if, for whatever reason, the

probate court does not transfer in the action, the district court may continue to exercise jurisdiction over

it.

Because, under Texas law, Vickie’s counterclaim for tortious interference does not fall within the

exclusive jurisdiction of a probate court, it does not fall within the probate exception to federal

jurisdiction. Therefore, both the bankruptcy court and this Court have valid subject matter jurisdiction

//

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the probate exception did not bar federal courts from exercising jurisdiction over a claim for

tortious interference with the expectation of an inheritance or gift when the plaintiffs alleged that

the defendants "systemically and fraudulently acted to influence one Arthur Welch to revoke a

last will and testament in which he had named the [plaintiffs] as substantial beneficiaries and to

Cir. 1979).

bankruptcy court’s decision, which are not addressed in this order. If the bankruptcy court and

Vickie are correct, this Court will review the other aspects of the bankruptcy court’s decision for

abuse of discretion.

Court held that after a creditor files a proof of claim, a preferential transfer action asserted in

response by the debtor becomes a part of the allowance or disallowance of that claim and there

therefore is no right to a jury trial. However, the Court framed the issue in terms of the nature of

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Bankruptcy courts may exercise plenary powers only over "core" bankruptcy matters. Over

matters that are not core, bankruptcy courts may not enter final judgment, but may only issue proposed

enters final judgment. The bankruptcy court determined that Vickie’s counterclaim is a core matter.

As in the preceding discussion of jurisdiction, the Court rejects Vickie’s suggestion that merely

by filing a proof of claim, Pierce subjected himself to the bankruptcy court for all purposes. This theory

does not appear to be to the current state of the law. First, the nature of Pierce’s claim against Vickie

must be analyzed separately from Vickie’s counterclaim against Pierce. Otherwise, the body of law that

has developed for analyzing counterclaims would be superfluous. Second, whether or not a certain

proceeding is core or non-core is a legal question dependant on the issues raised and the procedural

posture of the proceeding; a proceeding cannot be transformed from being non-core to being core

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"happy" and "pleased" to litigate in the bankruptcy court. Pierce’s Appendix at 190-95. The

most logical interpretation of these statements, in the context in which they were made, is that he

was referring only to litigation of Pierce’s claim and the dischargeability determination, not to

Vickie’s counterclaim.

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in that a party may consent to the bankruptcy court issuing final judgment in a non-core matter, thereby

rendering any distinction between whether that proceeding is core or non-core meaningless. However,

such consent must be express, not implied. Fed. R. Bankr. P. 7012(b). While he failed either to admit or

deny that Vickie’s counterclaims are core in his answer, Pierce has never expressly consented to the

Initially, Pierce argues that 28 U.S.C. § 157(b), which identifies certain types of proceedings as

core, is not "jurisdictional." The word "jurisdiction," which is used in different ways in different

contexts, has three relevant meanings or applications in the bankruptcy context. First, a characteristic

that would deprive all federal courts of subject matter jurisdiction, such as the probate exception,

deprives bankruptcy courts of subject matter jurisdiction. Second, bankruptcy courts, as adjuncts to the

§ 1334. Jurisdiction in this second sense of the word is quite broad, covering all core matters and all

non-core, "related" matters, but some matters may involve the debtor or the bankruptcy proceeding so

tangentially that they are not even "related to" the bankruptcy case. Third, in so far as the word

"jurisdiction" is used to mean the bankruptcy court’s power to enter a final judgment, the bankruptcy

court does not have "jurisdiction" to enter final judgments in non-core matters. However, while a

bankruptcy court may not enter final judgment in a non-core matter, it may certainly exercise

"jurisdiction" over the matter in the sense of hearing and presiding over the matter up to the point when

it presents proposed findings of fact and conclusions of law to the district court.

Thus, Pierce’s argument that § 157(b) is not "jurisdictional" is true in a certain sense but is

somewhat beside the point. Section 157 governs the determination of whether a matter is core or noncore.

The bankruptcy court has jurisdiction over both core and non-core matters. Having determined

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that Vickie’s counterclaim does not fall within the probate exception to federal subject matter

jurisdiction, the Court has disposed of all "jurisdictional" objections to this case. This is so because, at

the least, Vickie’s counterclaim is "related to" Vickie’s bankruptcy case. "Related to" jurisdiction is

very broad, covering any matter that "conceivably" could have an impact on the estate or the

could have an impact on the estate as it could greatly increase the size of the estate.

However, for the reasons that follow, while it is a "related" matter, Vickie’s counterclaim is not a

core bankruptcy proceeding.

Any discussion of the distinction between core and non-core matters must start with the Supreme

Bankruptcy Act of 1978, the precursor to the modern bankruptcy code. A plurality of the Court held that

it was unconstitutional to vest full and final authority over any matter conceivably related to a

bankruptcy case in non-Article III judges, because under the Constitution, the "judicial power" of the

United States, if vested in lower federal courts at all, must be vested in courts with Article III safeguards.

Marathon, 458 U.S. at 84-87, 102 S. Ct. at 2878-80. Because of its Article I power to determine the

substantive components of bankruptcy law, Congress may provide that bankruptcy judges can exercise

full authority over those bankruptcy proceedings that are so closely related to substantive bankruptcy law

through statutory enactments, give Article I bankruptcy judges the power to render final judgments over

The modern bankruptcy code’s distinction between core and non-core "related" matters is a

Bankruptcy judges may hear and determine all cases under title 11 and all

core proceedings arising under title 11, or arising in a case under title 11

. . . and may enter appropriate orders and judgments, subject to [appellate]

review under section 158 of this title.

28 U.S.C. § 157(b)(1). Thus, Congress defined "core" matters as "cases under title 11" and "core

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that through this definition, Congress intended for bankruptcy judges to exercise final authority over as

many matters as constitutionally possible.

Proceedings "arising under" title 11 are those substantive claims for relief that are based on rights

provision functions analogously to 28 U.S.C. § 1331, which grants federal courts jurisdiction over

Collier on Bankruptcy ¶ 3.01[4][c][i] (15th ed. 2000). Proceedings "arising in" a case under title 11 are

procedural actions that could only happen in a bankruptcy case. The Fifth Circuit has explained:

The meaning of "arising in" proceedings is less clear, but seems to be a

cases. In other words, "arising in" proceedings are those that are not based

on any right expressly created by title 11, but nevertheless, would have no

existence outside of the bankruptcy.

"arising in" as a "residual category").

Both "arising under" and "arising in" proceedings can be distinguished from proceedings that are

only "related to" the bankruptcy case. "Related to" proceedings are substantive claims for relief based

upon non-bankruptcy law that could have been the subject of an independent lawsuit absent the filing of

cause of action is not dependant on the bankruptcy code for its existence, but could have been asserted as

Considering these general definitions of "core" and "arising under" and "arising in," Vickie’s

counterclaim appears to be non-core. Substantively, the counterclaim is based entirely on state law. If

she had not filed for bankruptcy, she could have asserted the counterclaim in an independent lawsuit

against Pierce. Her counterclaim is not based on a right granted by bankruptcy law.

The analysis cannot end here, however. Many of the claims that are litigated in a bankruptcy

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statute itself has a "catch-all" provision, and also it states that core proceedings "include" those

specifically enumerated. 28 U.S.C. § 157(b)(2).

U.S.C. § 157(b)(2)(E). However, the counterclaim ruled on by the bankruptcy court addressed

whether Pierce owes Vickie damages in an individual capacity and did not address, for example,

turnover of community property already belonging to Vickie. Therefore, the counterclaim cannot

re Kincaid, 917 F.2d 1162, 1165 (9th Cir. 1990).

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case could have been separate lawsuits if no bankruptcy petition had ever been filed. This alone does

not render the claims non-core, because such a result would eviscerate most of bankruptcy law itself. As

stated by Representative Kastenmeier in the legislative history:

State law rights arising in core bankruptcy proceedings are functionally

equivalent to congressionally created rights, because Congress has the

power to modify State law rights in bankruptcy proceedings. Unlike the

States, Congress may impair the obligations of contracts through the

bankruptcy clause. Indeed, the very purpose of bankruptcy is to modify

the rights of debtors and creditors, and the bankruptcy code authorizes the

bankruptcy court to abrogate or modify State-created obligations in many

ways.

determining whether a claim is core or non-core, courts must consider both the substantive nature of the

claim and the procedural posture whereby it is asserted. For example, the filing of a proof of claim

creates a bankruptcy core proceeding even though the underlying state law claim would not have been.

In re Bellucci, 119 B.R. 763 (Bankr. E.D. Cal. 1990).

In making this analysis of both the substantive and procedural aspects of the proceedings at issue,

courts look to 28 U.S.C. § 157(b)(2), in which Congress set forth a list of specific matters it viewed as

which states that "counterclaims by the [debtor’s] estate against persons filing claims against the

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1999) (holding that claims in a bankruptcy trustee’s adversary complaint against two persons

224 B.R. 347, 352 (S.D. Miss. 1998) (holding that claims asserted in a complaint filed by the

debtor against a creditor who had filed proofs of claim "were, in essence," counterclaims against

(holding that claims in a complaint initiated by the debtor against an entity that had not yet filed a

proof of claim in the bankruptcy proceeding, but intended to do so, were counterclaims within

the meaning of § 157(b)(2)(C)).

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"arise in" a bankruptcy case. The bankruptcy court held that because of this provision, Vickie’s

counterclaim is core.

On first impression, the bankruptcy court’s decision appears correct. First, the Court agrees with

the bankruptcy court that Vickie’s counterclaims are not rendered outside the scope of § 157(b)(2)(C)

solely because they were brought against Pierce’s adversary complaint, rather than against his actual

proof of claim. The Pierce adversary proceeding began with an adversary complaint filed by Pierce

seeking a determination of dischargeability and a proof of claim, which stated that the amount of his

damages was "unliquidated" and to which was attached a copy of his nondischargeability adversary

complaint. Vickie answered the complaint and filed counterclaims against it, and she objected to the

proof of claim. Numerous courts have found claims asserted by the debtor against a person who has

filed proofs of claims against the estate to be counterclaims within the meaning of this section, and

therefore core proceedings, even though the claims were asserted by procedures other than

752, 766-67 (E.D. Va. 2000) (holding that a creditor had "waived its right to limit or bar the bankruptcy

court from hearing counterclaims to" its proof of claim against the debtor because, "[b]y filing its proof

Second, the Court rejects Pierce’s argument that he sought only a determination of

dischargeability and did not actually make a claim against Vickie’s estate. It is true that a

nondischargeability complaint does not automatically include or subsume the underlying claim but is

1996). However, here Pierce filed a proof of claim in addition to his nondischargeability complaint. On

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that proof of claim, he stated that he had a claim for an "unliquidated" amount. He nonsuited Vickie

from his then-pending state court defamation action, and he never sought relief from the automatic stay.

As his counsel explained at a hearing in the bankruptcy court on a motion brought by Pierce to dismiss

or stay Vickie’s counterclaims, Pierce "took" his substantive defamation claim and "put" it into the form

of the nondischargeability adversary complaint:

A lawsuit for libel or slander was filed pre-petition in Dallas County. The

Debtor filed bankruptcy in January. And that matter was stayed. The trial

counsel nonsuited the Debtor. We took the claims against the Debtor that

were set forth in the . . . slander action, put them into a nondischargeability

complaint — . . . . So the allegations that formed the state court petition

for libel and slander, as they related to the Debtor, were then taken and put

into the nondischargeability complaint, which we filed here in this Court.

Now, it was filed as a nondischargeability complaint because we believe

that there’s evidence to demonstrate [that Vickie acted willfully and

maliciously]. So, under 523, it was like a dischargeability complaint and it

was filed here.

Vickie’s Appendix, Tab 7, at 4:8-14; 6:14-7:1. Later in the same hearing, Pierce’s counsel stated that he

"has assumed . . . that if the Court was going to stay the counterclaims, you would have stayed the entire

proof of claim in addition to his nondischargeability adversary complaint, and given that he never tried

to continue to pursue the substantive aspect of his defamation claim against Vickie elsewhere, Pierce

cannot now argue that he never made a claim against her estate.

Thus, Vickie’s counterclaim for tortious interference falls within the literal language of

§ 157(b)(2)(C). However, most courts agree that the plain language of § 157(b)(2)(C) cannot be the end

forth its view as to what matters fall within the constitutional parameters, but in interpreting the statute,

courts must consider not just the literal language of the statute, but the constitutional concerns behind it.

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bankruptcy code was enacted. In this passage, it also states that "well-settled law" holds "that a

Castlerock, 781 F.2d at 162. However, the law it cites in support of this proposition is all pre-

practice of jurisdiction by consent. As indicated, this does not appear to be the law post-

Marathon. However, the policy reason for the rule could still be the animating force behind

§ 157(b)(2)(C).

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In re Castlerock Properties, 781 F.2d 159, 162 (9th Cir. 1986). Specifically as to § 157(b)(2)(c),

any and all counterclaims are core and therefore can be finally determined by a bankruptcy judge.

Marathon, 458 U.S. at 79 n.31, 102 S. Ct. at 2876 n.31.

Thus, on the one hand, calling any counterclaim that falls within the literal language of the statute

could have been asserted as an independent lawsuit non-core seems to render § 157(b)(2)(c) itself

nugatory, because any counterclaim could have been asserted as a separate lawsuit absent the filing of

It appears that the justification for core treatment for counterclaims is a combination of judicial

economy and efficiency for the litigants, in addition to recognition of the fact that practically,

adjudication of a counterclaim that is closely related to a claim will almost merge into allowance or

courts have developed various doctrines for limiting the reach of § 157(b)(2)(C). For example, courts

are loath to call counterclaims core when they are filed against a proof of claim that was filed

"defensively" by a creditor who has already tried to have its claim determined by a court other than the

Pierce filed his proof of claim offensively.

In addition, counterclaims that are permissive, rather than compulsory, do not receive core

treatment. A compulsory counterclaim is one that arises out of the same factual transaction as the claim

against which it is asserted. Fed. R. Civ. P. 13(a). The bankruptcy court held that Vickie’s counterclaim

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counterclaim is not compulsory because otherwise-compulsory counterclaims need not be stated

if they are the subject of another pending action, and Vickie’s counterclaim originally was at

issue in the Texas probate proceeding. However, while the party asserting a counterclaim may

decline to do so if the counterclaim is the subject of another proceeding, the party is not required

1998) ("If defendant elects to interpose the pending claim as a counterclaim, however, he should

be allowed to do so, and the counterclaim will be treated as if it were compulsory.").

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arises out of the same transaction as Pierce’s defamation claim. Pierce alleged that Vickie had acted

willfully and maliciously by defaming him when her attorneys, at her direction, told members of the

press that Pierce used forgery, fraud, and overreaching to gain control of J. Howard, Sr.’s estate. Libel

and defamation claims are nondischargeable under § 523(a)(6) when the statements were made with

in addition to whether Vickie was responsible for the statements of her attorneys, is whether she knew

the statements to be true or false. The bankruptcy court held that proving the truth or falsity of the

Albright v. Gates, 362 F.2d 928, 929 (9th Cir. 1966) (holding that a counterclaim for recovery of the

price paid for oil rights was a compulsory counterclaim to a claim for slander consisting of stating the oil

rights were worthless).

However, this nexus between the transactions out of which the claim and counterclaim arise at

to the time when his claim against Vickie was ruled on by the bankruptcy court. The main issue

presented by Pierce’s claim is Vickie’s responsibility for the statements of her attorneys, not the

statements’ truth or falsity. Thus, the primary facts at issue on Pierce’s claim were the relationship

Durso Supermarkets, Inc., 170 B.R. 211, 214 (S.D.N.Y. 1994) (holding that when a proof of claim is

filed based on a state court judgment, the judgment itself is a different factual transaction from the fact

underlying it and thus a counterclaim arising out of the same facts as the underlying action was not core,

thereby suggesting that the factual transaction test need not be applied reflexively in all circumstances).

Thus, it is not certain that Vickie’s counterclaim arises from the same transaction as Pierce’s

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debtor should not have to split a cause of action into two forums, the Court notes that Vickie in

fact voluntarily pursued similar or substantially similar claims in the Texas probate proceeding

until after the bankruptcy court entered its final judgment.

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proof of claim. Further, considering both the general rule behind the core classification, which stems

the Court concludes that the counterclaim is not core.

As indicated, absent Pierce’s filing of a proof of claim regarding the alleged defamation, the

counterclaim clearly would be only a non-core, related matter. In this case, the reasons for why

counterclaims arising out of the same transaction should usually be considered core do not apply.

Counterclaims can be core in essence because of judicial economy and what, as a practical matter, makes

good sense for the litigants. The purpose of the rule is to prevent a debtor or trustee from having to split

a cause of action by defending against a proof of claim in the bankruptcy proceeding but being unable to

assert counterclaims there, instead being forced to pursue counterclaims in a different proceeding or

advance these policies in this case.

Here, Vickie’s counterclaim dwarfs Pierce’s defamation in all respects, both in terms of the time

and effort spent litigating it and the size of the potential judgment. On Vickie’s motion, the bankruptcy

court granted summary judgment to Vickie on Pierce’s adversary complaint, holding that Vickie was not

responsible for any statements made by her attorneys. The counterclaim proceeded to trial and has been

pending for over two years since then on its own. The bankruptcy court confirmed Vickie’s plan of

reorganization on March 8, 1999, over six months before the counterclaim went to trial. While arguably

the defamation and tortious interference claims arise out of the same factual transaction, this connection

is attenuated. Further, the counterclaim raises issues of law entirely different from those raise on the

held that counterclaims asserted by the debtor against a creditor that had filed a proof of claim were not

core, notwithstanding the fact that they arose from the same transaction as the proof of claim. The

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another entity involved in power production. After the debtor filed for bankruptcy, the other entity filed

proofs of claim and then the debtor counterclaimed, asserting in part state common law contract claims.

Discussing many of the same arguments advanced by Pierce and Vickie in this case, the court held that

the counterclaim did not fall within § 157(b)(2)(C) and was not core because the filing of the proof of

aspect of it is the same: Vickie’s counterclaim was not "created" by Pierce’s claim. Her dispute with

Pierce runs much deeper and broader than his defamation claim and would exist even in the absence of

his defamation claim.

In addition, while it does not give it much weight as the issue was not being directly argued, the

Court notes that at a hearing in bankruptcy court on July 24, 1996, counsel for Vickie in fact stated that

"we believe the counterclaims are related." Pierce’s Appendix at 193:22.

Good arguments exist on both sides of this issue, and the Court acknowledges that reasonable

jurists might differ in how they would decide it. Formally, Vickie’s counterclaim falls within the

language of § 157(b)(2)(C) and, barely, it falls within the "same transaction" rule courts have used when

applying § 157(b)(2)(C). However, neither of those rules are ends in and of themselves. They serve

raise constitutional problems. The apparent broad reading that can be given to § 157(b)(2) should be

at 968 ("A claim is not core simply because it falls within the wording of § 157(b)(2); the claim must

against which it is asserted, and when the unique characteristics and context of the counterclaim place it

outside of the normal type of set-off or other counterclaims that customarily arise, thus rendering the

efficiency concerns not at issue, the counterclaim should not be characterized as core.

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Texas probate court.

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The bankruptcy court’s assertion of federal subject matter jurisdiction over Vickie’s counterclaim

for tortious interference is AFFIRMED. However, the bankruptcy court’s determination that the

counterclaim is a core proceeding is REVERSED. Because the counterclaim is a non-core proceeding,

the bankruptcy court’s judgment is VACATED.

The Court’s decision means only that final judgment in this non-core proceeding must be entered

by this Court rather than the bankruptcy court. By this order, the Court rules that the bankruptcy court’s

judgment is proposed rather than final, and therefore neither party has prevailed at the present time.

This Court will now engage in a comprehensive, complete, and independent review of the bankruptcy

court’s record and may, if warranted, hear additional testimony from the parties and witnesses. This

review will enable this Court to decide whether J. Howard, Sr. promised a gift to Vickie, whether Pierce

interfered with that gift, and also whether Pierce has destroyed and failed to produce relevant evidence in

a way that justifies the imposition of sanctions.

As a consequence of this ruling, the current arrangements regarding security for a stay on

execution of the judgment pending appeal are VACATED.

The Court sets a status conference in this matter for June 4, 2001 at 8:30 a.m. in Santa Ana.

Prior to this conference, attorneys for the parties should meet and confer, in person, regarding the effect

of this ruling on all matters pending between these and related parties. They shall file a joint status

report regarding such issues no later than May 31, 2001 at 4:00 p.m.

IT IS SO ORDERED.

DATED: May 24, 2001

_______________________________

DAVID O. CARTER

United States District Judge