In Frank Capra’s classic 1946 movie, It’s a Wonderful Life, the straight-arrow president of a struggling small-town building and loan company played by Jimmy Stewart realizes his bumbling Uncle Billy has lost $8,000 of the company’s cash on Christmas Eve afternoon, just as a bank examiner is arriving for an audit. “Do you realize what this means?” shouts a panicked Stewart. “It means bankruptcy and scandal and prison.”
That kind of anguish over irresponsible financial behavior seems almost quaint today. If Jimmy Stewart and Uncle Billy were running a mega bank or Wall Street trading house or even a Big 3 auto company today and had lost billions instead of thousands, Jimmy Stewart’s comments to Uncle Billy might go something like this:
“Do you realize what this means? It means billions of dollars in government bailout money. Heck, we can even give ourselves bonuses.” The stain once associated with bankruptcy has all but vanished for individuals and businesses. The Wall Street Journal reported in July that personal bankruptcy filings are surging with 30,000 Americans a week declaring bankruptcy and the total headed toward 1.4 million for the year.
Federal bankruptcy laws were tightened in 2005 making it more difficult for people with the means to pay their debts to take the easy way out through bankruptcy. So most people filing today are legitimate victims of the bad economy living in a post-Stewart ethical world. There are still old-fashioned deadbeats gaming the bankruptcy system, but their conniving is nothing compared to the large-scale abuse of the system reflected in the sordid Anna Nicole Smith case, which should finally wrap up soon with a ruling from the 9th U.S. Circuit Court of Appeals based in San Francisco.
That case is abuse on a multi-million dollar level that has clogged the court system for nearly 15 years. The case, legally known as Marshall v. Marshall, has traveled from a Texas probate court all the way to the U.S. Supreme Court and will hopefully be put to rest shortly with a 9th Circuit ruling. For those who have forgotten, Marshall v. Marshall is virtually made for the tabloid press and celebrity television. The case began in 1994 when 26-year-old stripper and Playboy model Anna Nicole Smith married 89-year-old Texan J. Howard Marshall. He died 14 months later and his meticulously prepared will did not leave Smith a share of his estate. Smith sued, claiming Marshall had made a verbal promise that she would share in his estate. After a thorough 95-day trial in a Texas probate court, the jurors denied her claim. But seeing a defeat coming, Smith engaged in what is known as “forum shopping.” Her legal team filed a case in federal bankruptcy court in California. The fact that Smith even had access to the California bankruptcy court is incomprehensible.
Court records show that Marshall’s lavish gifts to Smith during their brief marriage totaled $6.6 million. They included two homes, jewelry assessed at $2.8 million, and $493,000 in cash. To claim that she should be exempt from meeting her debts was not only an abuse of the system, it was an insult to people in genuine financial distress who turn to bankruptcy as a last resort.
It is an open question as to whether Smith’s bankruptcy filing would be accepted today after the 2005 tightening of the bankruptcy laws. Logic would say “no,” but logic has often been a victim of this adventure in litigation tourism, as have the legitimate heirs to Marshall’s estate who still wait for their inheritance more than 14 years after his death. After only five days of hearings, the bankruptcy judge decided Smith was entitled to $475 million of the Marshall estate. The case was predictably appealed and the award lowered a mere $88 million. The 9th Circuit then correctly threw the case out, ruling that the federal courts lacked jurisdiction to interfere with a state probate case. Undeterred, lawyers for Smith’s estate (she died of a suspicious prescription drug overdose in 2007 at age 39) appealed to the Supreme Court.
While the Supreme Court did not challenge the legitimacy of Marshall’s will, it sent the case back to the 9th Circuit to consider the jurisdictional question of whether a decision on the inheritance issue was officially issued first by the Texas probate court or the California bankruptcy court. Oral arguments were heard in June and the evidence seems clear that the Texas court ruled first. Fairness dictates that the original Texas decision be determinant. This dispute was always a state probate matter, not a phony bankruptcy case. The courts should not encourage gaming of the bankruptcy system through forum shopping and lawsuit abuse.
The 9th Circuit’s decision should end this legal circus, but it will not preclude others. Forum shopping continues to be a problem. Congress and state legislatures must tighten rules to prevent this cynical practice to go on as long as there is money for lawyers to pursue.
LAWRENCE J. MCQUILLAN, PhD, is director of Business and Economic Studies at the California-based Pacific Research Institute and co-author of the legal studies U.S. Tort Liability Index and Tort Law Tally. He can be reached at LMcQuillan@pacificresearch.org.