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Sunday, Nov. 05, 2000

This is Part Two of a two-part series in which Professor Grossman analyzes the Anna Nicole Smith case. Part One discussed the rights Smith and other surviving spouses may have. It is archived on the site along with Professor Grossman's other pieces — including her piece on Darva Conger's annulment. — Ed.

The Houston Case

This case pits J. Howard's surviving spouse, Smith, and his older son, J. Howard III ("Junior"), against his younger son, Pierce. J. Howard disinherited Anna Nicole and Junior, while leaving Pierce the bulk of his estate through the combination of his last will and a trust.

Both Junior and Anna Nicole contend that J. Howard promised to leave them a sizable share of his fortune, and that Pierce prevented those promises from being fulfilled. The probate case in which they are raising these claims has been waging since September.

The Bankruptcy Case versus the Houston Case

The Houston case–and Smith's decision to drop it–is complicated somewhat by the ruling of a federal bankruptcy court in California, in favor of Smith, issued preliminarily last September and finalized last week.

Last year, Smith filed for personal bankruptcy, spurred largely by an $850,000 default judgment against her in a sexual harassment suit filed by her former nanny, a suit that subsequently settled. (Yes, you read that right — Smith was the defendant; the harassment alleged was same-sex). In evaluating Smith's assets and liabilities, the bankruptcy court analyzed and ruled on her claim against Pierce for his alleged tortious interference with her expected inheritance or gift for J. Howard — the same claim that she has been litigating in the Houston suit.

In bankruptcy court, Smith prevailed on this claim. Finding that Pierce had indeed wrongfully prevented J. Howard from giving Smith the share of his assets he promised, the Court awarded her $450 million in damages and reserved the right to award punitive damages as well. To ensure she wouldn't recover the same amount twice, however, the bankruptcy court made clear that any damages she is awarded in the Texas case will be deducted from this award.

That means that even if Smith drops her case (or continues it and loses), she keeps the $475 million — unless that judgment is separately overturned on appeal. Or put another way, even if Pierce is successful in Texas, he must still win his appeal of the bankruptcy court's ruling in order to walk away with everything. He needs to win both cases; she needs to win only one.

The Legal Oddities of the Bankruptcy Court's Ruling

In ruling for Anna Nicole Smith, the bankruptcy court initially relied on the concept of a widow's election — an estate planning device sometimes used in community property states, like Texas. But that was incorrect. (And the bankruptcy court, accordingly, replaced its original opinion with an amended one that omits this concept).

You'll recall (from Part One) that in a community property state, each spouse has the right to pass by will only his or her share of the community property. Remembering that, consider what happens when the decedent spouse has executed a so-called "widow's election" will — in which he purports to dispose of the entire quantum of community property rather than just the one-half to which he is entitled.

Such a will puts the widow to what is called an "election" — a legally binding choice between two alternatives. If the will leaves her something (typically, the right to income for life from all the community property) she can honor the will and take it, waiving the extent to which the will was illegal. Why would a widow do this? Because what she is given under the will (life income from all the property) is greater than what she is entitled to by law — her half of the community property. A young widow, in particular, might find the life income very attractive.

The problem with the original approach of the bankruptcy judge, though, is that this doctrine only applies if the widow is left something in the will — so that she can "elect" between that and her legal share of community property. Smith was not left anything in the will, and thus had no true election to make. Put another way, the choice Smith would have had to make would have been between something and nothing — a no-brainer.

The bankruptcy court also made particular findings of fact (ones that may or may not have been supported by the evidence before the court) as a penalty for Pierce's conduct such as missing deadlines and destroying documents requested by the other side during the discovery process. Although courts are vested with immense discretion to fashion appropriate sanctions for such conduct, the bankruptcy court clearly pushed, if not exceeded, the limits of that discretion. In its final ruling, the Court also added an additional $25 million dollars to the final judgment for Smith to further punish Pierce for his misconduct in litigation.

These oddities of the bankruptcy court's ruling significantly increase the probability that Pierce will win his appeal of the bankruptcy court judgment, making Smith's decision to drop her case in Houston a questionable move.

Why Smith Couldn't Win On A Simple Contract Claim

Returning to the Houston case, could Anna Nicole simply have sued to enforce J. Howard's alleged promise to leave her half of his estate in return for her promise to marry him? One might think she could: litigants successfully enforce oral contracts all the time. Contrary to popular wisdom, most oral promises are enforceable as long as they are supported by sufficient consideration — something given in exchange for the promise. But certain classes of promises — including those made in consideration of marriage — must be in writing pursuant to the Statute of Frauds. This also provides the rule that prenuptial agreements must be in writing. Thus, Anna Nicole cannot sue to enforce the promise itself, since it's not in writing. What she could have done, however, is sue Pierce for allegedly interfering with J. Howard's ability to fulfill that promise.

There is one theory that might have worked for Smith at trial. Texas, like many other states, recognizes a cause of action based on a third party's wrongful interference with an expected inheritance or gift.

To prevail on this claim, Anna Nicole would have to prove that Pierce, using fraud, duress, or other wrongful conduct, intentionally prevented her from receiving the inheritance or gift that J. Howard promised her. Proof of that would entitle her not only to compensatory damages (in the amount of the thwarted inheritance), but possibly to punitive damages as well.

One way for Anna Nicole to succeed on this claim is to prove that Pierce forced or defrauded his father into making the trust irrevocable. The parties agree that in the early 1980's, long before he met Anna Nicole, J. Howard had set up a living trust to hold the bulk of his assets. They also agree that in 1994, after he married Anna Nicole, it was converted from a revocable to an irrevocable trust.

If the trust had remained revocable, J. Howard would have had control over the assets in it. To provide for Smith, he could have amended the trust to add her as a beneficiary, or terminated the trust and used some or all of the assets to make a lifetime gift, to create a separate trust, or to make a bequest in his will in the amount he allegedly promised her. Once the trust became irrevocable, however, J. Howard lost control over the assets and thus the ability to fulfill any promise he had made to Anna Nicole, even if he had wanted to do so.

Anna Nicole alleges (and the bankruptcy court found) that Pierce, in conjunction with his father's lawyers and advisers, engineered the amendment of the trust to make it irrevocable. She appears to contend either that J. Howard's signature on the document making the trust irrevocable was forged, or that J. Howard signed without any knowledge of the document's contents. If she was able to prove either of those contentions and could also prove that J. Howard in fact promised to leave her half his estate (all of which Pierce hotly contests), she might have been able to prevail on this claim.

Another way for her to prove the same claim would be to show that Pierce wrongfully prevented the execution of new documents giving her a substantial portion of his estate in trust. The bankruptcy court found (as a sanction) that Pierce fired one of his father's lawyers and conspired with another to prevent compliance with J. Howard's request to draft documents granting Anna Nicole an interest in some of his property.

A Harder Theory to Win On: Wrongful Loss of Community Property

Anna Nicole's second possible claim, although it is fraught with hurdles, is that Pierce's alleged efforts to convert the trust wrongfully deprived her of her rightful share of community property.

What Will the Final Outcome Be?

If one were to place a bet, the best money would still be on settlement. That is how these cases usually end, particularly when there is enough money in the kitty to make every interested party wealthy beyond imagination. For example, that is how the infamous battle over the estate of Seward Johnson (the heir to the Band-Aid fortune) ended, despite extraordinary acrimony between his young wife and his children from a prior marriage.

In this type of case, the anger and desire for revenge that typically motivate the parties usually are, at some point, outweighed by the high costs of litigation–only the lawyers profit by continuing the fight. Although Smith is relying on the bankruptcy court victory to make her the ultimate winner, she is on shaky ground. She would be well-served either to continue the fight in Houston or to try to settle with Pierce for something less than she has been awarded (in exchange for his foregoing an appeal). And Pierce, who has not only the right to appeal the bankruptcy court ruling but also some compelling arguments for overturning it, may be forced to settle without exercising that right. To appeal a case, courts generally require the losing party to post a bond sufficient to cover the judgment–in this case half a billion dollars. He will be hard pressed to come up with that kind of money.

Joanna Grossman, a FindLaw columnist, is an associate professor of law at Hofstra University, where she teaches Trusts and Estates, among other subjects. Her previous column discussed the legal basis for the rights Anna Nicole Smith, and other surviving spouses, have in their deceased spouses' estates.

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