Marshall, Vickie v. Marshall, E. Pierce (05/01/2006)

Questions presented: (1) What is the scope of the probate exception to federal jurisdiction? (2) Did Congress intend the probate exception to apply where a federal court is not asked to probate a will, administer an estate, or otherwise assume control of property in the custody of a state probate court? (3) Did Congress intend the probate exception to apply to cases arising under the Constitution, laws or treaties of the United States (28 U.S.C. sec. 1331), including the Bankruptcy Code (28 U.S.C. sec. 1334), or is it limited to cases in which jurisdiction is based on diversity of citizenship? (4) Did Congress intend the probate exception to apply to cases arising out ofs, or is it limited to cases involving wills?

BY SUEVON LEE & YUXING ZHENG, MEDILL NEWS SERVICE

J. Howard Marshall II, oil tycoon and Texas billionaire, first met Vickie Lynn Hogan in October 1991 during an afternoon excursion to Gigi's, a strip club in Houston, where Hogan was employed as a dancer. The 86-year-old became instantly smitten with the 24-year-old single mom from Mexia, Texas, so much so that he would slip the financially-strapped dancer thousands of dollars of cash in envelopes during their subsequent meetings.

Over the next few years, J. Howard gave Hogan gifts ranging from a new Mercedes Benz to a ranch in Texas to over $2 million worth of jewelry. Promising financial security, J. Howard proposed repeated times, only to be turned down by the high school dropout, once married at 17. During this period, Hogan posed for Playboy, became Playmate of the Year in 1993 and was chosen as spokesmodel for Guess Jeans, as she careened into the public spotlight and morphed into Anna Nicole Smith, worldwide sex symbol.

When J. Howard proposed again in spring 1994, promising Smith half of everything he had, she accepted. On June 27, 1994, Smith, 26, and J. Howard, 89, were wed at a Houston wedding chapel in a ceremony attended by only a handful of J. Howard's confidantes.

"She cherished the protection and security that he afforded her and the lavish gifts that he gave to her in order to win her affection," wrote David O. Carter, a judge in U.S. District Court in California. "J. Howard used his money to get Vickie to fall in love with him, and in her own way, Vickie loved J. Howard."

When J. Howard died of heart failure August 4, 1995, only fourteen months into his new marriage, a legal battle over J. Howard's between E. Pierce Marshall, J. Howard's son and business associate, and Smith was already brewing.

Now, after a decade of litigation in both federal and state courts, the weight of a nearly half-billion dollar fortune rests on one tiny federal clause: the probate exception.

Once described by a 7th Circuit Court of Appeals judge as "one of the most mysterious and esoteric branches of the law of federal jurisdiction," the probate exception allows federal courts to hear claims brought by heirs to a decedent's estate so long as the federal court doesn't interfere with probate proceedings or take control of the property in custody of the state court. The exception was articulated in the 1946 Supreme Court opinion in Markham v. Allen.

In 1982, J. Howard had begun the process of transferring most of his property to a living, the terms of which were finalized July 1994, only a couple of weeks following his marriage to Smith. In addition to not being named a beneficiary in that, Smith was also excluded from the several wills J. Howard left behind.

In April 1995, Smith sued E. Pierce in Texas probate court for "tortiously interfering" with her right to support from her husband, claiming J. Howard had intended to give her a "multi-million dollar gift." She also questioned the validity of J. Howard's living, accusing E. Pierce of "fraud" and having "undue influence" over his father by tampering with the terms of the.

Smith's appellate lawyer, Kent Richland of the Los Angeles firm Greines, Martin, Stein & Richland, says J. Howard always intended to provide Smith with some sort of gift.

"Long before J. Howard Marshall died, and quite apart from what he said in his will, he wanted to set up a with Vickie," Richland said. "E. Pierce owes damages to her for interfering with that."

E. Pierce filed a counterclaim seeking a declaration that his father's last will and testament, in addition to his 1982, were indeed "legally valid instruments."

After Texas probate court proceedings commenced, Smith filed for Chapter 11 bankruptcy in January 1996 in U.S. District Court in California, where she resided. E. Pierce filed a counterclaim to that suit, accusing Smith of defaming him. Smith, in turn, filed a counterclaim against E. Pierce, for "tortiously interfering with her expectancy of a gift or bequest from J. Howard Marshall II."

State probate courts oversee matters of will and estates, while bankruptcy courts fall under the federal court system.

"When Pierce Marshall came into the district court [of California] and filed his complaint against Vicky Marshall, that was the triggering point," said Philip Boesch, Jr., Smith's trial lawyer.

On Sept. 27, 2000, the bankruptcy court in California awarded Smith $475 million, ruling that E. Pierce was guilty of "firing one attorney and conspiring with another" to prevent property transfer from the and that he had "devised a secret plan" to make his father's "irrevocable."

Once the bankruptcy court ruled $475 million in Smith's favor, Smith withdrew her previous claims in Texas probate court. However, she remained a defendant in E. Pierce's declaratory judgment action in that court seeking to establish that his father's 1982, and last will and testament were valid.

On Feb. 9, 2001, E. Pierce filed an amended counterclaim against Smith.

In a trial lasting more than five months, a jury returned a verdict, finding that the last will, testament and were valid and not forged and that Smith did not have any entitlement to property or distribution from J. Howard's estate.

Meanwhile, E. Pierce appealed the bankruptcy court findings to the district court, invoking the probate exception to federal jurisdiction. Although the district court ruled that federal jurisdiction was proper, it threw out the bankruptcy court's findings, concluding that Smith's claim was not a "core" bankruptcy claim. It conducted its own de novo review.

In a decision announced March 7, 2002, the district court ruled that J. Howard did indeed plan to bequeath Smith a gift in the form of a newly created and confirmed the bankruptcy court's findings that E. Pierce had tampered with his father's 1982. It also lowered Smith's award to $88.5 million.

E. Pierce appealed to the 9th Circuit Court of Appeals.

Ruling that the federal courts had interfered with Texas probate court proceedings and overstepped jurisdictional bounds, the 9th Circuit, on Dec. 30, 2004, vacated the lower court's findings.

"If we were to uphold the decision of the district court we would essentially be allowing Vickie Lynn Marshall a second chance to litigate her claim against the estate of J. Howard Marshall II," wrote Judge Robert Beezer for a unanimous panel.

Smith had argued she wasn't entitled to anything from the 1982 or estate, but was promised an amount her ex-husband intended to give her, in the form of a "catch-all," that was improperly interfered with by E. Pierce.

The 9th Circuit disagreed, concluding that Smith's claim was "in substance nothing more than a thinly veiled will contest."

The barrage of court documents that had engaged three separate courts across two states prompted the 9th Circuit to refer to the 440 pages of appellate briefs produced in Marshall v. Marshall as "the most exhaustive records ever produced in the Central District of California."

George Eric Brunstad, Jr., E. Pierce's appellate lawyer from the Connecticut firm Bingham McCutchen, said state courts, and they alone, have always had jurisdiction over probate matters.

"We really need to have one court decide those issues," he said.

Smith appealed to the U.S. Supreme Court, which accepted the case on Sept. 27, 2005 for review.

Ralph Brubaker, bankruptcy scholar and professor at the University of Illinois College of Law, said the core issue before the Supreme Court is defining the power distribution between state and federal courts.

"The Rehnquist court in particular has been very active in trying to chart out the relative spheres of power as between the federal government and the states, and a big concern has been the reach of the federal courts," he said. "My guess would be that [Chief Justice] Roberts will be very much the same mind…and more inclined to limit the power of the federal court."

The jurisdictional issues the Supreme Court is being asked to consider is a narrow one, relating to the probate exception. Whether J. Howard, oil mogul, ever intended to give Smith a piece of his estate is a dispute that continues to be left wide open.

"J. Howard gave Vickie over $6 million worth of gifts and property. She got it," Brunstad said. "She wants more, but J. Howard intended to give her nothing more."

During the Court's oral arguments on Feb. 28, 2006, the justices were asked to consider whether a federal bankruptcy court could tamper with the findings of a state probate court to reach assets within an estate.

Kent Richland, Smith's attorney, argued for a more narrow reading of the so-called ‘federal probate exception,' limiting federal jurisdiction over probate matters. Doing so would allow a California district court to award Smith the portion of Marshall's estate at issue even though the Texas probate court had found Smith was entitled to nothing beyond the gifts she received while Marshall was living.

"(T)he 9th Circuit .. has come to the extraordinary conclusion that the federal bankruptcy court has no jurisdiction over the chief assets of the bankruptcy estate," Richland argued.

Richland also argued that according to U.S. statutes, bankruptcy courts have exclusive jurisdiction over the bankruptcy estate.

"So even if property is in the custody of another court in the probate proceeding and the bankruptcy proceeding comes later, the bankruptcy proceeding would sweep whatever assets are before the probate court into the bankruptcy?" Justice Ruth Bader Ginsburg asked.

As Richland answered yes, Justice Antonin Scalia drew laughter by asking the attorney, "Do you want to stand on this position, Mr. Richland, or do you have a lesser position that might cause you to win?"

Justice Stephen Breyer suggested that the federal court may not have been the place to address the interference tort. Smith claims such a tort deprived her of her rightful share of Marshall's estate.

According to Texas law, a tort of interference with a living must be brought at the time of the probate proceedings, Breyer said. "And for that reason, it is bound up with probate, and for that reason, they [the federal courts] didn't have jurisdiction," Breyer said.

Deanne E. Maynard, arguing on behalf of the U.S. government in support of Smith, said that "the probate exception to federal jurisdiction is a will-specific rule and it does not apply beyond the context of wills to other types of will substitutes," such as livings.

Later, several justices questioned the assertion by Brunstad, E. Pierce's attorney, that a state probate court could bar other courts from considering matters such as the interference alleged by Smith.

"You are suggesting an extraordinary setup with a state court being able to preclude other courts from dealing with related, not identical matters, and that's just not the way our system works," Justice Ginsburg said. "You can bring duplicative proceedings in different courts. One will finish first and that will bind the others. But I never heard of a state court being able to say, because we are a probate court, that you couldn't bring a tort case somewhere else."

The justices also challenged Brunstad's assertion that J. Howard's will and living acted together to constitute an estate plan, that J. Howard's living did two things that a will does: provide for the succession of his property upon death and provide for the payment of his last debts.

"You're stretching the probate concept from determining whether the will is valid or invalid and who inherits under the will to also determining what goes in the probate estate, that is, the insurance policies, the and so forth," Justice Scalia said. "That to me is something quite different from probating a will."

The justices only touched on the district court's finding that E. Pierce had interfered with Smith's catch-all by forging several pages of J. Howard's will.

"Among other things that went on were they hired private detectives to go after Vickie [Smith] from the bed," Justice Breyer said. "I mean, you've read that opinion and there are about 30 things in there. And I grant you that one of those things is the fact that three pages of the living, according to the judge, were created after the event of that and slipped in without his [J. Howard's] knowledge. I mean, it's quite a story."

And on May 1, 2006, the Court added to the story by siding with Smith, concluding that the widowed actress's claim for tortious interference could be heard in federal court because it doesn't involve the administration of an estate, the probate of a will, or any other purely probate matter.

Justice Ruth Bader Ginsburg wrote the Court's lead opinion. All the justice signed on, with Justice John Paul Stevens adding a concurring opinion.

Nine months later, on On Feb. 8, 2007, Smith was found unresponsive in a hotel room in Hollywood, Florida, and was pronounced dead at a nearby hospital.