General Objection to Entry of Final Orders Won’t Preserve a ‘Stern’ Objection, BAP Says

In an otherwise predictable opinion slapping down a vexatious litigant, the Ninth Circuit Bankruptcy Appellate Panel made two notable rulings:

(1)   In bankruptcy court, a party must actually allege that a particular claim is noncore before preserving the right to de novo review in district court. It’s not enough to lodge a general objection that the bankruptcy court may not enter a final order on a noncore claim; and

(2)   Proceeding with an appeal in a BAP waives a right to de novo review by an Article III judge.

The facts were complex, but let’s assume that the debtor was in chapter 7, attempting to unwind multiple orders from state courts giving possession and ownership of her former home to her former husband.

Also assume that the former husband was pursuing an adversary proceeding in bankruptcy court to gain possession of the property. The debtor-former wife filed an answer and counterclaim raising claims like fraudulent transfer and breach of fiduciary duty, all aimed at taking the home away from her former husband contrary to state court orders.

In her counterclaim, the debtor stated that her claims were all “core,” but she included a statement saying that she did not consent to the entry of final orders by the bankruptcy court on any claims that were noncore. The statement purported to preserve the debtor’s right to pursue noncore claims in district court.

Assume that the husband filed a motion to dismiss the debtor’s counterclaims under California’s anti-SLAPP statute. In his December 11 opinion for the BAP, Bankruptcy Judge Scott H. Gan quoted BAP precedent to describe the statute as providing “for the early dismissal of meritless suits aimed at chilling the valid exercise of the constitutional rights of freedom of speech and petition for the redress of grievances.”

Bankruptcy Judge Scott C. Clarkson granted the husband’s motion to dismiss and awarded the husband attorneys’ fees under the California statute. The debtor appealed, challenging the bankruptcy court’s authority to enter final orders because she allegedly did not consent. The BAP conducted de novo review regarding the authority to issue final orders.

Quoting Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 34 (2014), Judge Gan said for the BAP that there “is one statutory exception” to the general rule that bankruptcy courts may not enter final orders in noncore matters: “If all parties consent, the statute permits the bankruptcy judge to hear and determine and to enter appropriate orders and judgments as if the proceeding were core.” He went on to mention how Bankruptcy Rule 7008 aims to prevent sandbagging by requiring “litigants to state at the initial pleading stage whether they consent.”

Addressing the debtor’s contention that the bankruptcy court entered final orders on noncore claims, Judge Gan said that “the bankruptcy court never determined the claims were non-core, and it had no basis to do so because the issue was never in dispute.” The debtor, he said, “never argued the claims were non-core, and instead, maintained throughout the case that her claims were core.”

“In other words,” Judge Gan said, the “Debtor’s non-consent was contingent on a court determination that the claims were non-core — a contingency which never occurred because the parties were content to have the bankruptcy court treat the claims as core. Based on the parties’ consent,” he therefore held that “the bankruptcy court properly treated the claims as core and entered a final order pursuant to 28 U.S.C. § 157(c)(2).”

To the extent the bankruptcy court might have committed error by issuing final orders on noncore claims, Judge Gan said that a district judge could have cured the defect on appeal by reviewing the rulings de novo. However, the debtor acquiesced in an appeal to the BAP.

Citing Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665, 678 (2015), Judge Gan said that review by an Article III court is a personal right subject to waiver. Even were the BAP to “assume the bankruptcy court determined the claims were non-core and Debtor clearly withheld consent, she likely waived her right to district court review by electing to have the appeal heard by the BAP.”

Saying that the debtor “knowingly and voluntarily elected review by this Panel instead of the district court,” Judge Gan upheld the bankruptcy court’s authority to issue final orders. He also upheld dismissal and imposition of attorneys’ fees under the state anti-SLAPP statute.