Bankruptcy versus Probate

Cite this Article
Keith Sharfman, Bankruptcy versus Probate, Truth on the Market (February 28, 2006),

I suppose that I ought to say something about the Anna Nicole Smith case that was argued today in the Supreme Court, given that I participated in the case (together with 14 other bankruptcy scholars) by filing an amicus brief on Anna Nicole’s side. For all the talk about how arcane the case is (see, e.g., Lyle Denniston’s fine account of today’s argument at, the issue is really quite straightforward: did the bankruptcy court have jurisdiction over a tort claim by Smith’s bankruptcy estate against Pierce Marshall (Smith’s late husband’s son)? The answer is plainly yes, and here’s why.

Title 28 confers federal bankruptcy jurisdiction over any claim that is “related to” a bankruptcy case–that is, any claim that will have an impact on the disposition of the bankruptcy estate. The Smith estate’s claim clearly meets this description, because any assets this claim recovers will directly benefit her bankruptcy estate. The claim is thus “related to” the bankruptcy case. To be sure, a bankruptcy court could always abstain from hearing a claim like this one. But the statute makes clear that abstention in this context is permissive, not mandatory. “Because the statute says so” is thus the short answer to why there’s federal jurisdiction here.

Here’s the complication. Marshall’s lawyers argue that notwithstanding the plain language of Title 28, there is a judicially-crafted “probate exception” to federal jurisdiction that applies not only in diversity cases but also in bankruptcy. But that is not so. The only Supreme Court decision ever holding that there is no bankruptcy jurisdiction over assets in probate is Harris v. Zion Savings Bank, 317 U.S. 447 (1943), a case decided under the old Bankruptcy Act that is readily distinguishable.

The reason for the result in Harris is that there the debtor and the decedent were one and the same person. Once the debtor dies, there is no longer any need for bankruptcy jurisdiction. That is why Congress in 1978 explicitly made decedents ineligible to file for bankruptcy. Here, however, we are dealing with a bankruptcy debtor who is not dead. Anna Nicole Smith is very much alive. And unlike the assets at issue in Harris, the assets comprising Smith’s bankruptcy estate are not coextensive with those of the probate estate. The creditors in Harris had standing to assert claims against the estate in probate. But Smith’s creditors did not have standing to assert claims in the Marshall probate proceeding. All they could do was assert their claims in the bankruptcy forum. The possibility of bankruptcy jurisdiction is therefore necessary to protect creditor interests that are not legally cognizable in probate.

It is nonsense to suppose that bankruptcy jurisdiction over claims like the one asserted by Smith’s estate improperly “interferes” with state probate proceedings. For one thing, the Smith estate’s claim is only against an heir, not against the probate estate. Moreover, the fact is that probate estates are hardly strangers to bankruptcy. No one, not even Marshall, suggests that a probate estate can’t be a creditor in a bankruptcy case, or that a bankruptcy estate couldn’t recover a preferential or fraudulent transfer from a probate estate. Such litigation is not an “interference” with probate; it is simply a way of sorting out some of a probate estate’s assets and liabilities. A probate court’s jurisdiction need not be exclusive. And if any state’s law so provides, federal bankruptcy law trumps it. Granted, a bankruptcy court might be well-advised to abstain with respect to issues concerning which the probate court has relatively greater expertise and competence (e.g., interpreting a will, perhaps). But the statute makes such abstention only permissive, not mandatory.

It will be interesting to see the Court’s opinion in this case. I will be very surprised if Anna Nicole Smith does not win.