Divestiture Doctrine Meets Core Proceedings: Eleventh Circuit Holds that Pending Appeals Do Not Halt Claim-Allowance Litigation

Introduction

Alice Guan, homeowner and erstwhile litigant against her Homeowners’ Association, found herself embroiled in a multi-forum struggle once the Ellingsworth Residential Community Association, Inc. (the HOA) filed for Sub-chapter V reorganization under Chapter 11. Guan filed two sizeable proofs of claim in the bankruptcy case: one for attorney’s fees awarded (but not yet liquidated) in prior state-court litigation; the other for more than US $1.6 million in damages flowing from assorted state-law counterclaims. When the bankruptcy court (i) partially allowed the first claim and (ii) disallowed the bulk of the second, Guan appealed. Meanwhile, three other interlocutory orders from the same bankruptcy case were already on appeal.

The United States Court of Appeals for the Eleventh Circuit was therefore confronted with three interlocking questions:

1. Does an interlocutory appeal divest a bankruptcy court of jurisdiction to decide another core proceeding (the allowance or disallowance of claims)?
2. May a bankruptcy judge constitutionally and statutorily enter final judgment on state-law claims embedded within a creditor’s proof of claim without the creditor’s express consent?
3. Did the bankruptcy court commit procedural or evidentiary error in the conduct of the February 2021 claim-allowance trial?

Answering each question in the debtor’s favor, the Eleventh Circuit affirmed. In doing so, it articulated an important refinement of the divestiture doctrine in the bankruptcy context and clarified the reach of Stern v. Marshall where creditors voluntarily file claims.

Summary of the Judgment

The appellate court held:

• No Divestiture: Guan’s separate interlocutory appeals (stay-relief, abstention, case-management) did not strip the bankruptcy court of authority to move forward with the discrete, core matter of claim-allowance. Lacking a stay, the bankruptcy court properly continued its docket.
• Constitutional & Statutory Authority Upheld: By filing proofs of claim, Guan invoked the bankruptcy court’s equitable jurisdiction. Under 28 U.S.C. §157(b)(2)(B) the claim-allowance process is a core proceeding, and Stern’s narrow limit did not apply because the state-law issues were “necessarily resolved” in determining claim validity. Consequently, neither Article III nor the Seventh Amendment barred adjudication without a jury.
• Procedural Challenges Rejected: Objections to Guan’s claims were timely; the February 25, 2021 trial was properly noticed; and Guan’s generalized complaints about evidentiary rulings were deemed abandoned or meritless.

Analysis

Precedents Cited and Their Influence

• In re Walker, 515 F.3d 1204 (11th Cir. 2008) – Expresses the traditional divestiture rule: a notice of appeal transfers control of “those aspects of the case involved in the appeal.” The panel distinguished Walker because the claim-allowance issue was separate from the matters on appeal.
• Mahone v. Ray, 326 F.3d 1176 (11th Cir. 2003) – Allows the trial court to act on issues “collateral to” the appeal. Quoted to support the bankruptcy court’s ability to proceed.
• Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. 35 (2020) – Describes the fragmented nature of bankruptcy cases and approves immediate appeals of discrete bankruptcy orders. The Eleventh Circuit invoked Ritzen to reinforce that a bankruptcy case can continue on other tracks.
• Mavity v. Associates Discount Corp., 320 F.2d 133 (5th Cir. 1963) – Former Fifth Circuit precedent (binding) that bankruptcy proceedings should not “halt merely because interlocutory orders are appealed.”
• Stern v. Marshall, 564 U.S. 462 (2011)
• Wellness International Network, Ltd. v. Sharif, 575 U.S. 665 (2015)
• In re Toledo, 170 F.3d 1340 (11th Cir. 1999)
• In re Gateway Radiology Consultants, P.A., 983 F.3d 1239 (11th Cir. 2020)
• In re Fisher Island Investments, Inc., 778 F.3d 1172 (11th Cir. 2015)
• Sapuppo v. Allstate Floridian Ins. Co., 739 F.3d 678 (11th Cir. 2014) – Used to find Guan’s undeveloped arguments abandoned.

Legal Reasoning

1. Core vs. Non-Core Classification
   • 28 U.S.C. §157(b)(2)(B) explicitly designates “allowance or disallowance of claims” as core.
   • Guan’s state-law counterclaims were embedded in her proof of claim; resolution was “necessary” to fix the claim’s amount. Hence, Stern’s exception for non-core, stand-alone state-law claims did not apply.
   • By voluntarily filing a claim, Guan gave implied consent to bankruptcy jurisdiction (affirmed under Sharif).
2. Divestiture Doctrine Tailored
   • An appealed order only divests jurisdiction over the particular issues on appeal.
   • The orders pending in district court (stay-relief, abstention, case-management) were “collateral” to claim-allowance.
   • Without an appellate stay, bankruptcy courts remain free to advance the case (consistent with Mavity and Georgia Jewelers).
3. Seventh-Amendment Jury Right Waived
   • Jury entitlement yields to the equitable claims-allowance process once a creditor files a proof of claim (Katchen v. Landy rationale, though not cited, underlies the holding). The appellate court again relied on its earlier panel decision (In re Ellingsworth, 125 F.4th).
4. Procedural/Evidentiary Matters
   • Timeliness of objections judged by Rule 3007(a)(1); the September 14 notice set the February trial, making the September 18 objections timely.
   • Guan’s failure to articulate or brief specific evidentiary errors triggered abandonment under Sapuppo.

Impact of the Decision

The Eleventh Circuit’s opinion advances several practical consequences:

• Predictability for Bankruptcy Administration: Debtors and trustees can proceed with core matters, particularly claim-allowance, even when interlocutory appeals are in flight—unless the appellant secures a stay.
• Strategic Implications for Creditors: Creditors who file proofs of claim should expect their embedded state-law causes to be finally resolved within the bankruptcy forum, absent explicit reservation of those claims.
• Narrowing of Tactical Appeals: Litigants may be dissuaded from filing serial interlocutory appeals merely to stall progression of the bankruptcy case; the decision clarifies such tactics will not freeze core proceedings.
• Further Crystallisation of Stern’s Reach: The court reinforced that the Stern limitation is narrow and does not curtail bankruptcy judges from deciding disputes intertwined with the claims process, even when they sound entirely in state law.
• Guidance on Sub-chapter V Cases: Although not central to the holding, the opinion is among the first circuit-level pronouncements referencing Sub-chapter V’s streamlined environment, hinting that expedition is a statutory objective incompatible with serial stays.

Complex Concepts Simplified

Sub-chapter V Bankruptcy

A 2019 addition to Chapter 11 designed for small businesses (and some non-profits) offering cheaper, faster reorganization procedures and a standing trustee.

Proof of Claim

A written statement filed by a creditor setting out the amount owed by the debtor. If uncontested, it is “deemed allowed.” If objected to, the bankruptcy court must liquidate and allow/disallow it.

Core Proceeding

An issue that arises under the Bankruptcy Code or is integral to administering the estate (e.g., claim-allowance, avoidance actions, confirmation of plans). Bankruptcy judges may enter final orders on core proceedings.

Divestiture Doctrine

The principle that once a notice of appeal is filed, the lower court loses jurisdiction over the matters on appeal. In bankruptcy, the doctrine is cabined; the court can still act on other disputes within the case.

Stern v. Marshall Problem

Named after a Supreme Court decision limiting bankruptcy judges’ power to enter final judgments on certain state-law claims. The “problem” arises only when the state-law claim is not part of the claim-allowance process and the parties have not consented.

Seventh Amendment Jury Right

The constitutional right to trial by jury in suits at common law. It does not attach to equitable bankruptcy processes such as the adjudication of claims filed in a bankruptcy estate.

Interlocutory Appeal

An appeal of a non-final order. In bankruptcy, certain interlocutory orders are statutorily made final for appeal, but they do not automatically halt the rest of the case.

Conclusion

Alice Guan v. Ellingsworth Residential Community Association furnishes a robust restatement of two intertwined bankruptcy propositions. First, once a creditor files proofs of claim, the bankruptcy court gains comprehensive authority—constitutionally and statutorily—to decide even purely state-law disputes necessary to fix claim amounts, without a jury and without express consent. Second, interlocutory appeals do not paralyze the bankruptcy court’s core functions unless the appellant obtains a stay or the appealed issue is inseparable from the matter still pending below.

For practitioners, the case counsels vigilance: secure a stay if you wish to pause the bankruptcy court; reserve state-law claims outside the proof-of-claim process if a jury trial is desired; and craft appellate strategy mindful that piecemeal review will not necessarily forestall the inevitable reckoning of the claims-allowance process. The Eleventh Circuit’s opinion thus fortifies efficient administration of Sub-chapter V estates and curtails procedural gamesmanship, while staying well within the doctrinal boundaries drawn by Stern, Article III, and the Seventh Amendment.