Enron and Anna Nicole Smith

The Baxter Estate argued for an application of the probate exception to the Employee Committee's action, asserting that an adjudication of the matter by the Enron bankruptcy court would improperly interfere with the jurisdiction and function of the Texas probate court administering the probate estate. The Baxter Estate reasoned that under the case law interpreting and applying the probate exception, federal courts are prohibited from probating a will, administering a probate estate or entertaining an action that would interfere with a pending state court probate proceeding. While conceding that the exception would not prohibit the bankruptcy court from adjudicating liability and liquidating the Employee Committee's claim, the Baxter Estate argued that because the Employee Committee was seeking to both avoid and recover the transfer made to Baxter before his death, a judgment in favor of the Employee Committee would necessarily exceed jurisdictional boundaries by usurping the central administrative function of the state probate court.

Marshall v. Marshall

The Baxter Estate relied heavily on the decision in Marshall v. Marshall, 392 F.3d 1118 (9th Cir. 2004), where the United States Court of Appeals for the Ninth Circuit vacated a district court judgment in favor of Vickie Lynn Marshall (a.k.a Anna Nicole Smith), the surviving spouse of J. Howard Marshall II, against E. Pierce Marshall, the decedent's surviving son, for intentional interference with an inter vivos gift she expected to receive from the decedent. The Ninth Circuit framed its application of the probate exception as a two-party inquiry, with the first inquiry focusing on whether the matter is purely probate in nature, such that the federal court is being asked directly to probate a will or administer an estate. The second and more complex inquiry focuses on whether the matter is probate related, such that by exercising jurisdiction over the matter, the federal court would be either interfering with the probate proceedings, assuming general jurisdiction of the probate, or assuming control over property in custody of the state court. The Ninth Circuit explained that if the answer to either of these inquiries is yes, then the probate exception applies.

The Ninth Circuit reasoned that although Ms. Marshall's tortious interference claim was aimed directly at her deceased husband's surviving son and did not seek recovery from the probate estate, it was 'in substance nothing more than a thinly veiled will contest' because the practical effect of the lawsuit would be similar to that of a successful will contest: the terms of the allegedly invalid testamentary instruments would essentially be bypassed, while Ms. Marshall would receive, as damages, the assets that the surviving son would have been entitled to if the instrument was deemed valid. The Ninth Circuit held that the probate exception was applicable and directed that all district and bankruptcy court judgments awarded to Ms. Marshall be vacated. See Marshall v. Marshall, 392 F.3d 1118, 1135 (9th Cir. 2004).

The Employee Committee filed a cross-motion for summary judgment against the Baxter Estate, contending that the probate exception to federal jurisdiction was inapplicable since the relief sought from the Enron bankruptcy court would not interfere with the administration of the Baxter probate estate. The Committee reasoned that the only relief being sought from the Enron bankruptcy court was the entry of an order establishing the Baxter Estate's liability for the deferred compensation payments made to Baxter. That judgment, the Employee Committee argued, would serve no purpose other than to allow Enron to take its place in line with all other claims subject to the probate proceedings.

Supreme Court Ruling

While the Baxter Estate and the Employee Committee traded dispositive motions and supporting memoranda of law, the United States Supreme Court granted Ms. Marshall's petition for writ of certiorari to resolve the apparent confusion concerning the scope of the probate exception. On May 1, 2006, the Supreme Court issued its decision holding the probate exception inapplicable to Ms. Marshall's federal action and reversing the Ninth Circuit's judgment. See Marshall v. Marshall, 547 U.S. 293 (2006). In so holding, the Supreme Court explained that while the probate exception precludes federal courts from interfering with or disposing of property in the custody of a state probate court, it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction. The Supreme Court rejected the Ninth Circuit's characterization of Ms. Marshall's tortious interference claim as a disguised attempt to contest her deceased husband's will, reasoning that the claim sought an in personam judgment against the surviving son and not the probate or annulment of a will.

On Sept.15, 2006, the Enron bankruptcy court issued a published decision denying the Baxter Estate's motion for summary judgment and granting the Employee Committee's cross motion for summary judgment. Enron Corp. v. Whalen (In re Enron Corp., et al.), 351 B.R. 305 (Bankr. S.D.N.Y. 2006). Noting that '[t]he recent Supreme Court decision in Marshall v. Marshall is wholly dispositive on this issue,' the bankruptcy court explained that while an order effecting the disposition of Baxter's probate estate would represent an impermissible exercise of jurisdiction over property under the existing jurisdiction of the Texas probate court, the Employee Committee's complaint sought no such result. Id. at 309. The Enron bankruptcy court reasoned that the Employee Committee sought no more than an adjudication of its rights concerning the deferred compensation payments made to Baxter. Thus, while the enforcement of such judgment would fall within the jurisdiction of the probate court, the adjudication of the claim itself ' a 'core' bankruptcy proceeding pursuant to 28 U.S.C.
' 157(b)(2)(F) ' fell squarely within the bankruptcy court's jurisdiction.

Conclusion

Although neither decision provides a complete demarcation of the boundaries of the probate exception, the Supreme Court's Marshall decision and the Enron bankruptcy court's decision in the Baxter case have brought clarity to an arcane and traditionally misunderstood common law exception to federal jurisdiction. In the bankruptcy litigation context, litigants should now think twice before seeking to invoke the exception where the relief sought is limited to the adjudication of liability and liquidation of claim amount.

Ronald R. Sussman is a partner and Seth Van Aalten is an associate at Cooley Godward Kronish LLP in New York. Mr. Sussman and Mr. Van Aalten focus their practice on both litigation and transactional work, including the representation of debtors and creditor committees in Chapter 11 cases. The firm acted as counsel to the Official Employment-Related Issues Committee in the Enron bankruptcy cases.

On May 1, 2008, Cooley Godward Kronish LLP's bankruptcy litigation team, acting as counsel to the Official Employment-Related Issues Committee of Enron Corp. (the 'Employee Committee'), obtained a court-approved settlement of $850,000 from the Estate of John Cliff Baxter (the 'Baxter Estate'), a former 'Top Hat' executive of Enron who elected to accelerate approximately $1.3 million in deferred compensation benefits on the eve of the bankruptcy filing and committed suicide shortly thereafter. That and other similar transfers were challenged by the Employee Committee in a complaint filed against Baxter and other former executives alleging causes of action in preference and fraudulent transfer.

Although a number of the transferees challenged (unsuccessfully) the personal jurisdiction of the Enron bankruptcy court, only the Baxter Estate challenged its jurisdiction over the subject matter of the litigation. In a motion for summary judgment filed in December 2005, the Baxter Estate asserted that the Enron bankruptcy court lacked jurisdiction to entertain the Employee Committee's action under the so-called 'probate exception' to federal jurisdiction. The probate exception is a judicially crafted exception to otherwise proper federal jurisdiction that reserves to state probate courts such exclusive powers as the annulment of a will, the administration of a decedent's estate, and the disposal of property in their custody. At its core, the probate exception reiterates the general principle that where one court is exercising jurisdiction over property, a second court should not assume jurisdiction over the same property.

Application of the Probate Exception

The Baxter Estate argued for an application of the probate exception to the Employee Committee's action, asserting that an adjudication of the matter by the Enron bankruptcy court would improperly interfere with the jurisdiction and function of the Texas probate court administering the probate estate. The Baxter Estate reasoned that under the case law interpreting and applying the probate exception, federal courts are prohibited from probating a will, administering a probate estate or entertaining an action that would interfere with a pending state court probate proceeding. While conceding that the exception would not prohibit the bankruptcy court from adjudicating liability and liquidating the Employee Committee's claim, the Baxter Estate argued that because the Employee Committee was seeking to both avoid and recover the transfer made to Baxter before his death, a judgment in favor of the Employee Committee would necessarily exceed jurisdictional boundaries by usurping the central administrative function of the state probate court.

Marshall v. Marshall

The Baxter Estate relied heavily on the decision in Marshall v. Marshall , 392 F.3d 1118 (9th Cir. 2004), where the United States Court of Appeals for the Ninth Circuit vacated a district court judgment in favor of Vickie Lynn Marshall (a.k.a Anna Nicole Smith), the surviving spouse of J. Howard Marshall II, against E. Pierce Marshall, the decedent's surviving son, for intentional interference with an inter vivos gift she expected to receive from the decedent. The Ninth Circuit framed its application of the probate exception as a two-party inquiry, with the first inquiry focusing on whether the matter is purely probate in nature, such that the federal court is being asked directly to probate a will or administer an estate. The second and more complex inquiry focuses on whether the matter is probate related, such that by exercising jurisdiction over the matter, the federal court would be either interfering with the probate proceedings, assuming general jurisdiction of the probate, or assuming control over property in custody of the state court. The Ninth Circuit explained that if the answer to either of these inquiries is yes, then the probate exception applies.

The Ninth Circuit reasoned that although Ms. Marshall's tortious interference claim was aimed directly at her deceased husband's surviving son and did not seek recovery from the probate estate, it was 'in substance nothing more than a thinly veiled will contest' because the practical effect of the lawsuit would be similar to that of a successful will contest: the terms of the allegedly invalid testamentary instruments would essentially be bypassed, while Ms. Marshall would receive, as damages, the assets that the surviving son would have been entitled to if the instrument was deemed valid. The Ninth Circuit held that the probate exception was applicable and directed that all district and bankruptcy court judgments awarded to Ms. Marshall be vacated. See Marshall v. Marshall , 392 F.3d 1118, 1135 (9th Cir. 2004).

The Employee Committee filed a cross-motion for summary judgment against the Baxter Estate, contending that the probate exception to federal jurisdiction was inapplicable since the relief sought from the Enron bankruptcy court would not interfere with the administration of the Baxter probate estate. The Committee reasoned that the only relief being sought from the Enron bankruptcy court was the entry of an order establishing the Baxter Estate's liability for the deferred compensation payments made to Baxter. That judgment, the Employee Committee argued, would serve no purpose other than to allow Enron to take its place in line with all other claims subject to the probate proceedings.

Supreme Court Ruling

While the Baxter Estate and the Employee Committee traded dispositive motions and supporting memoranda of law, the United States Supreme Court granted Ms. Marshall's petition for writ of certiorari to resolve the apparent confusion concerning the scope of the probate exception. On May 1, 2006, the Supreme Court issued its decision holding the probate exception inapplicable to Ms. Marshall's federal action and reversing the Ninth Circuit's judgment. See Marshall v. Marshall , 547 U.S. 293 (2006). In so holding, the Supreme Court explained that while the probate exception precludes federal courts from interfering with or disposing of property in the custody of a state probate court, it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction. The Supreme Court rejected the Ninth Circuit's characterization of Ms. Marshall's tortious interference claim as a disguised attempt to contest her deceased husband's will, reasoning that the claim sought an in personam judgment against the surviving son and not the probate or annulment of a will.

On Sept.15, 2006, the Enron bankruptcy court issued a published decision denying the Baxter Estate's motion for summary judgment and granting the Employee Committee's cross motion for summary judgment. Enron Corp. v. Whalen (In re Enron Corp., et al.), 351 B.R. 305 (Bankr. S.D.N.Y. 2006). Noting that '[t]he recent Supreme Court decision in Marshall v. Marshall is wholly dispositive on this issue,' the bankruptcy court explained that while an order effecting the disposition of Baxter's probate estate would represent an impermissible exercise of jurisdiction over property under the existing jurisdiction of the Texas probate court, the Employee Committee's complaint sought no such result. Id. at 309. The Enron bankruptcy court reasoned that the Employee Committee sought no more than an adjudication of its rights concerning the deferred compensation payments made to Baxter. Thus, while the enforcement of such judgment would fall within the jurisdiction of the probate court, the adjudication of the claim itself ' a 'core' bankruptcy proceeding pursuant to 28 U.S.C.
' 157(b)(2)(F) ' fell squarely within the bankruptcy court's jurisdiction.

Conclusion

Although neither decision provides a complete demarcation of the boundaries of the probate exception, the Supreme Court's Marshall decision and the Enron bankruptcy court's decision in the Baxter case have brought clarity to an arcane and traditionally misunderstood common law exception to federal jurisdiction. In the bankruptcy litigation context, litigants should now think twice before seeking to invoke the exception where the relief sought is limited to the adjudication of liability and liquidation of claim amount.

Ronald R. Sussman is a partner and Seth Van Aalten is an associate at Cooley Godward Kronish LLP in New York. Mr. Sussman and Mr. Van Aalten focus their practice on both litigation and transactional work, including the representation of debtors and creditor committees in Chapter 11 cases. The firm acted as counsel to the Official Employment-Related Issues Committee in the Enron bankruptcy cases.