In re: Sunra Coffee, LLC

FILED AUG 21 2012 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 1 OF THE NINTH CIRCUIT

2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. HI-11-1635-PaJuH ) 6 SUNRA COFFEE, LLC, ) Bankr. No. 09-01909 ) 7 Debtor. ) Adv. Proc. 10-90009 ___________________________________) 8 ) MICHAEL NEKOBA, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) HAWAII NATIONAL BANCSHARES, INC., ) 12 dba HAWAII NATIONAL BANK, ) ) 13 Appellee. ) ___________________________________) 14 Submitted Without Oral Argument 15 on July 20, 20122 16 Filed - August 21, 2012 17 Appeal from the United States Bankruptcy Court for the District of Hawaii 18 Honorable Robert J. Faris, Chief Bankruptcy Judge, Presiding 19 Appearances: Jerrold K. Guben and Jeffery Steven Flores of 20 O’Connor Playdon & Guben LLP on brief for Appellant; Keith Y. Yamada and Theodore D. C. Young 21 of Cades Schutte LLP on brief for Appellee. 22 Before: PAPPAS, JURY and HOLLOWELL, Bankruptcy Judges. 23 24 1 This disposition is not appropriate for publication. 25 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th 26 Cir. BAP Rule 8013-1. 27 2 Pursuant to Rule 8012, in an order entered on May 14, 2012, a motions panel unanimously determined after examination of 28 the briefs and record that oral argument was not needed.

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1 Appellant Michael Nekoba (“Nekoba”) appeals a final judgment 2 and subsequent charging order entered by the bankruptcy court in 3 favor of Appellee Hawaii National Bank (“HNB”) and against him. 4 We AFFIRM. 5 I. FACTS 6 The facts in this case are undisputed. 7 Debtor Sunra Coffee, LLC (“Sunra”) owns and operates coffee 8 farms and engages in the production of coffee products in Hawaii. 9 Nekoba is a certified public accountant and member of Sunra. 10 Among Sunra’s properties was a 214-acre development known as the 11 Royal Hualalai Gardens (the “Property”). Sunra obtained several 12 loans from HNB secured by mortgages against the Property. Nekoba 13 signed commercial guarantees of Sunra’s obligations to HNB on the 14 loans secured by the Property. ER at 34-36. 15 HNB filed a complaint in Hawaii state court on December 3, 16 2008, alleging that Sunra defaulted on its obligations to HNB 17 under the notes and mortgages. ER at 1. Hawaii Nat’l Bank v. 18 Sunra Coffee, civ. no. 08-1-00377 (Third Circuit, State of Hawaii) 19 (the “State Court Action”). Nekoba was named as a defendant in 20 the State Court Action, and was served with a summons and 21 complaint. ER at 32, EER at 10. Nekoba concedes that he did not 22 file a counterclaim against HNB, nor a cross-claim against Sunra 23 for indemnification or contribution, in the State Court Action. 24 Nekoba Op. Br. at 3. Indeed, Nekoba made no appearance at all in 25 the State Court Action. ER at 34. On August 3, 2009, the state 26 court entered a default judgment against Sunra and Nekoba for 27 $9,249,245.89, plus interest from February 20, 2009, of $4,233.90 28 per diem. ER at 33, 36.

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1 Sunra filed a petition for relief under chapter 11 on 2 August 21, 2009. An official committee of unsecured creditors was 3 appointed on September 2, 2009 (the “Committee”). Bankr. dkt. 4 no. 28. 5 HNB filed a motion for relief from the automatic stay on 6 December 1, 2009, seeking an order allowing it to proceed to 7 foreclose on the Property. Without opposition, the bankruptcy 8 court granted the motion on January 26, 2010. ER at 41. The 9 order granting relief from stay explicitly stated that the stay 10 did not apply to Nekoba. ER at 44. 11 On January 19, 2010, the Committee filed a motion for 12 appointment of a chapter 11 trustee. Bankr. dkt. no. 166. The 13 bankruptcy court granted the motion on February 18, 2010. Bankr. 14 dkt. no. 185. David Farmer (“Farmer”) was appointed to serve as 15 chapter 11 trustee on February 22, 2010. Bankr. dkt. nos. 189, 16 194. 17 Farmer immediately removed the State Court Action to the 18 bankruptcy court on February 24, 2010. See Rule 9027(a)(2)(B). 19 ER at 48. In the removal notice, Farmer consented to the entry of 20 final orders and a judgment by the bankruptcy court. ER at 51. 21 The removal notice was served on Nekoba. EER at 28. Nekoba did 22 not oppose the removal. 23 The Property was auctioned at a foreclosure sale on March 30, 24 2010. ER at 71. HNB submitted the only bid for $9.5 million and 25 purchased the Property. Id. The bankruptcy court approved the 26 sale of the Property to HNB on April 30, 2010, as part of the 27 removed action. ER at 78. Although Nekoba had received notice of 28 the hearing concerning approval of the sale, he did not appear

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1 either in person or by counsel. ER at 254. The bankruptcy court 2 issued a Writ of Possession on June 15, 2010, allowing HNB to take 3 Possession of the Property. ER at 307. 4 HNB then sought the entry of a deficiency judgment against 5 Sunra and Nekoba for $2,405,247.82, the difference between the 6 total amount of the judgment debt, including interest and 7 attorney’s fees of $11,905,247.82, and the credit bid it made at 8 the foreclosure sale of $9,500,000. ER at 339. No opposition to 9 this request was filed by either Sunray or Nekoba, nor did they 10 appear at the hearing on HNB’s motion for the deficiency judgment 11 held on September 17, 2010. ER at 417. The bankruptcy court 12 granted the unopposed motion on September 23, 2010; the Order and 13 Final Judgment Re: HNB’s Motion for Deficiency Judgment and 14 Attorneys’ Fees and Costs provided, in part, that the court: 15 Approves HNB’s request for a deficiency judgment, and this document shall constitute entry of judgment in 16 favor of Plaintiff HNB and against each of the named defendants, to wit: Defendants Sunra Coffee, LLC, ADI 17 LLC, and Michael Nekoba, aka Michael H. Nekoba, in the amount of $2,405,247.82. This order shall constitute a 18 final judgment[.] 19 Judgment, September 23, 2010 at 2-3, ER at 417-18 (the 20 “Judgment”). The Judgment was not appealed, nor was collection of 21 the Judgment stayed. ER at 418. No party, including Nekoba, has 22 ever sought review or reconsideration of the Judgment. 23 Although a named defendant in the adversary proceeding who 24 was served with all papers and pleadings filed in the proceeding, 25 Nekoba never participated, personally or through counsel, until he 26 was compelled to attend his oral examination in January 2011. At 27 the examination, Nekoba disclosed his assets, including several 28 properties he purportedly held in tenancy by the entireties with

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1 his spouse. Nekoba suggested that those properties, including 2 those owned by Tropic Land, LLC, were exempt from execution 3 because he and his wife were not jointly obligated on his debt to 4 HNB. ER at 440. 5 On March 7, 2011, HNB filed a motion for entry of a charging 6 Order against Nekoba’s membership interest in Tropic Land, LLC, 7 for satisfaction of the Judgment debt. A hearing on the motion 8 was scheduled for April 19, 2011. ER at 421. Meanwhile, on 9 March 14, 2011, the bankruptcy court granted HNB’s ex parte motion 10 for a Writ of Execution After Judgment directed at Nekoba’s 11 personal and real property. ER at 430. 12 On April 4, 2011, Nekoba filed an Opposition to the issuance 13 of the Writ of Execution and requested an evidentiary hearing. 14 Nekoba argued that property held by tenancy by the entireties must 15 be excluded from satisfaction of HNB’s judgment against him alone. 16 ER at 441. Nekoba requested that the bankruptcy court delay 17 execution of the Writ pending an evidentiary hearing where it 18 could “determine which of the claimed tenancy by the entireties 19 personal properties holding[s] are excluded from execution by the 20 judgment creditors[.]” ER at 444. On April 19, 2011, the court 21 granted Nekoba’s request for an evidentiary hearing to be held 22 July 5, 2011. Adv. dkt. nos. 114, 115. 23 On June 23, 2011, the United States Supreme Court decided 24 Stern v. Marshall, 121 S.Ct. 2594 (2011). 25 HNB and Nekoba submitted briefs to the bankruptcy court. HNB 26 argued that, as to Tropic Land, LLC, Nekoba had owned his member 27 interest in that company for five years as an individual before 28 transferring it to him and his wife on September 30, 2010, seven

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1 days after entry of the Judgment against him on September 23, 2 2010. ER at 450. Nekoba’s position was that the funds used to 3 purchase the Tropic Land, LLC, interests came from other tenancy 4 by the entireties interests. ER at 462. 5 At the evidentiary hearing on July 5, 2011, Nekoba for the 6 first time challenged the subject matter jurisdiction and 7 Constitutional authority of the bankruptcy court to enter the 8 Judgment against him based upon Stern v. Marshall. Hr’g Tr. 4:10- 9 23, July 5, 2011, ER at 474. Following Nekoba’s testimony 10 regarding his various assets, the court invited the parties to 11 submit written closing arguments. Hr’g Tr. 100:23, ER at 570. 12 HNB submitted its closing arguments on July 22, 2011, 13 presenting its arguments why Nekoba’s assets were subject to 14 seizure by execution. HNB’s brief made no reference to Nekoba’s 15 Stern v. Marshall argument. ER at 590. In contrast, Nekoba’s 16 closing argument concentrated solely on the Stern v. Marshall 17 issue. ER at 599. 18 The bankruptcy court entered detailed Findings of Fact and 19 Conclusions of Law on October 18, 2011. ER at 740. In addition 20 to ruling against Nekoba on the merits, the court decided that 21 Neboka could not challenge the court’s jurisdiction or authority 22 to enter a judgment once it has become final: 23 A party cannot challenge the court's subject matter jurisdiction after the judgment has become final. 24 Travelers Indem. Co. v. Bailey, [557 U.S. 137, 152-53 (2009)]; Ins. Corp. Of Ireland v. Compagnie des Bauxite 25 de Guinee, 456 U.S.694, 702 n.9 (1982); Chicot County Drainage Dist. V. Baxter State Bank, 308 U.S. 371, 375 26 (1940). Mr. Nekoba did not appeal the [Judgment] and it is now final. Mr. Nekoba can no longer question the 27 court's subject matter jurisdiction. 28 Conclusion of Law 3b, October 18, 2011, ER at 748.

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1 As to the constitutional authority of a bankruptcy judge to 2 enter a final judgment in these proceedings, the court ruled: 3 Stern v. Marshall does not limit the bankruptcy court’s subject matter jurisdiction. . . . Stern v. Marshall 4 deals with the power of the bankruptcy court to enter a final judgment. . . . [E]ven under Stern v. Marshall, 5 the bankruptcy court can enter judgment against a consenting party. 6 7 Conclusion of Law 3a, October 18, 2011. ER at 747-48. The court 8 went on to observe that the adversary proceeding itself was 9 clearly a core proceeding, because it primarily dealt with HNB’s 10 claim against the debtor. Then the court ruled that, even if the 11 proceeding was non-core as to Nekoba, he had impliedly consented 12 by his conduct. Conclusion of Law 9b, October 18, 2011. 13 On November 11, 2011, the bankruptcy court entered its Order 14 Granting Plaintiff’s Motion for Charging Order and Order 15 Sustaining in Part and Overruling in Part Defendant Michael 16 Nekoba’s Opposition to Plaintiff’s Ex Parte Motion for Writ of 17 Execution After Judgment (the “Charging Order”). ER at 789. The 18 court ruled that HNB was entitled to avoidance of the transfer of 19 Nekoba’s interest in Tropic Land, LLC, and that the interests of 20 Nekoba “shall be used to satisfy the Judgment in the amount of 21 $2,405, 247.82.” ER at 791. 22 Nekoba filed a timely appeal of the order on November 9, 23 2011. 24 II. JURISDICTION 25 As discussed below, Nekoba challenges the subject matter 26 jurisdiction of the bankruptcy court and Constitutional power to 27 enter the Judgment in this adversary proceeding. Nekoba has not 28 challenged the Panel’s jurisdiction to decide this appeal under

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1 28 U.S.C. § 158. 2 III. ISSUE 3 Whether the bankruptcy court erred in holding that Nekoba 4 could not challenge the court’s subject matter jurisdiction to 5 enter the Judgment after it became final. 6 IV. STANDARD OF REVIEW 7 We review de novo questions involving the subject matter 8 jurisdiction of the bankruptcy court. Cal. Franchise Tax Bd. v. 9 Wilshire Courtyard (In re Wilshire Courtyard), 459 B.R. 416, 423 10 (9th Cir. BAP 2011). 11 V. DISCUSSION 12 In this appeal, Nekoba asserts that, under Stern v. Marshall, 13 a bankruptcy judge, as an Article I judge, does not have subject 14 matter jurisdiction to adjudicate state law “private right” 15 disputes between two nondebtor parties, and therefore, the 16 bankruptcy court erred when it entered the order in this case 17 granting HNB a money judgment against Neboka.3 However, we need 18 3 19 In his Opening Brief, Nekoba invokes various statements in Stern to support his attack that an Article I judge cannot enter a 20 final judgment in a non-core adversary proceeding in which he did not consent to entry of a final judgment. The attack, in the 21 opening brief, appears to fall into two areas. First, Nekoba suggests that the bankruptcy court did not have any subject matter 22 jurisdiction, because the court did not have “related to” jurisdiction and, if it did, he did not consent. Second, applying 23 Stern, an Article I judge cannot enter final judgment under the facts of this case. In short, Nekoba’s Constitutional argument in 24 the Opening Brief is unfocused, simply that Stern does not allow entry of final judgment in a non-core case where the parties do 25 not consent to entry of that judgment. Such an overbroad interpretation is not supported in Stern. 26 Nekoba goes into a more precise Constitutional challenge in his Reply Brief, where he shifts his attention from the final 27 judgment to the Writ of Execution, arguing in more specific detail how entry of an order in a “supplementary proceeding” runs afoul 28 (continued...)

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1 not endorse nor reject Neboka’s contention, because we agree with 2 the bankruptcy court that it is simply too late for Neboka to 3 collaterally attack the bankruptcy court’s subject matter 4 jurisdiction, because the Judgment is clearly final. 5 First, Nekoba’s assertion that the Supreme Court decision in 6 Stern was somehow a wide-ranging limitation on the authority of 7 Article I courts to adjudicate private rights disputes overstates 8 the Court’s holdings in that limited decision. In Stern, the 9 Supreme Court held that a bankruptcy court "lacked the 10 constitutional authority to enter a final judgment on a state law 11 counterclaim that is not resolved in the process of ruling on a 12 creditor's proof of claim" in a bankruptcy case. Stern, 131 S.Ct. 13 at 2620. The Court instructed that, though 28 U.S.C. 14 § 157(b)(2)(C) expressly authorized the bankruptcy court to decide 15 the merits of the bankruptcy estate's counterclaim against a 16 creditor, such an exercise of judicial power by an Article I 17 bankruptcy judge violated the Constitution, because "Congress may 18 not bypass Article III simply because a proceeding may have some 19 bearing on a bankruptcy case; the question is whether the action 20 at issue stems from the bankruptcy itself or would necessarily be 21 resolved in the claims allowance process." Id. at 2618. 22 However, in Stern, the Court emphasized that its holding was 23 a "narrow one," id. at 2620, that the constitutional infirmity in 24 the bankruptcy court's reliance upon 28 U.S.C. § 157(b)(2)(C) was 25 26 3 (...continued) of Stern. But as we discuss below, his argument is too little, 27 too late, and we will not examine arguments that were neither raised in the bankruptcy court nor in the appellant’s opening 28 brief.

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1 limited to "one isolated respect," id., that the Court doubted its 2 decision would generate significant practical consequences, and 3 that the Court "[did] not think that removal of counterclaims such 4 as [the debtor's] from core bankruptcy jurisdiction meaningfully 5 changes the division of labor in the current statute . . . ." Id. 6 And more importantly for our purposes in this appeal, Stern also 7 makes clear that 28 U.S.C. § 157, the statute considered by the 8 Court, merely "allocates the authority to enter final judgment 9 between the bankruptcy court and the district court," and contrary 10 to Nekoba’s position here, "[t]hat allocation does not implicate 11 questions of subject matter jurisdiction." Id. at 2607. 12 Nekoba’s arguments invoking Stern are all premised on an 13 assumption that a Constitutional challenge to the bankruptcy 14 court’s subject matter jurisdiction may be advanced at any stage 15 of the proceedings, including an appeal from an order entered long 16 after the judgment in question became final. Nekoba’s Op. Br. at 17 14. Nekoba provides unconvincing authority for this assumption,4 18 however, and it would appear to directly contradict a well- 19 20 4 Nekoba, in the Opening Br. at 14, argues that under Civil Rule 60(b)(4), “a party may challenge the subject matter 21 jurisdiction of the Court at any time.” Nekoba badly misconstrues this provision. It does not give the litigant an unfettered right 22 to challenge jurisdiction “at any time.” It simply provides the proper (and only) way of challenging subject matter jurisdiction 23 after entry of final judgment. United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367, 1370 (2010) (quoting Traveler’s Indem. 24 Co., 129 S.Ct at 2198, for its holding that final unappealed judgments “stand in the way of challenging enforceability,” but 25 observing that Rule 60(b)(4) allows a party to seek relief from a final judgment that may be void for jurisdictional error). 26 Indeed, the bankruptcy court in this appeal ruled that Neboka could not challenge subject matter jurisdiction long after entry 27 of an unappealed final judgment except through a Civil Rule 60(b)(4) motion, which Nekoba never brought. Conclusions of Law 28 ¶¶ 2 and 3b. We agree with the bankruptcy court’s ruling.

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1 established rule. 2 There is no timeless right to challenge the subject matter 3 jurisdiction of the trial court that entered a final judgment 4 against the challenger. Indeed, the Supreme Court has squarely 5 held that, subject to narrow exceptions not applicable here, a 6 bankruptcy court's final orders are not subject to a later, 7 collateral attack based upon a challenge to its subject matter 8 jurisdiction. Traveler's Indem. Co. v. Bailey, 557 U.S. 137, 147 9 (2009). As long as a party to an action is given a fair chance to 10 challenge the bankruptcy court's subject matter jurisdiction 11 during the proceedings, it cannot attack it later by resisting the 12 enforceability of its orders. Id. at 2206, citing Ins. Corp. of 13 Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 n.9 14 (1982) ("A party that has had an opportunity to litigate the 15 question of subject matter jurisdiction may not . . . reopen that 16 question in a collateral attack upon an adverse judgment."); 17 Chicot County Drainage Dist. V. Baxter State Bank, 308 U.S. 371, 18 375 (1940). The Ninth Circuit has amplified this rule in several 19 of its decisions. See, e.g., City of S. Pasadena v. Mineta, 20 284 F.3d 1154, 1157 (9th Cir. 2002) (“Even objections to subject 21 matter jurisdiction, which may be raised at any time, even on 22 appeal, . . . may not be raised for the first time by way of 23 collateral challenge[.]”); Trulis v. Barton, 107 F.3d 685, 691 24 (9th Cir. 1995) (“Since the plaintiffs never appealed the 25 bankruptcy court’s confirmation order, the order is a final 26 judgment and plaintiffs cannot challenge the bankruptcy court’s 27 jurisdiction over the subject matter.”). 28 Put another way, Nekoba’s subject matter jurisdiction

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1 challenge in this appeal comes too late. As the Supreme Court has 2 noted, Constitutional challenges to judgments must be timely: "'No 3 procedural principle is more familiar to this Court than that a 4 constitutional right,' or a right of any other sort, 'may be 5 forfeited . . . by the failure to make timely assertion of the 6 right before a tribunal having jurisdiction to determine it.'" 7 Stern, 131 S.Ct. at 2608, quoting United States v. Olano, 507 U.S. 8 725, 731 (1993). 9 In this case, it is unquestioned that Nekoba had ample 10 opportunity to appear in the adversary proceeding and assert a 11 challenge to the bankruptcy court’s exercise of subject matter 12 jurisdiction over HNB’s claims against him. He did not oppose 13 removal of the state court action to the bankruptcy court. 14 Likewise, though he was give notice of the requests for entry of 15 both the original and deficiency judgment against him, he did not 16 object. When entered, he did not appeal those judgments. 17 Instead, his first appearance in the bankruptcy court was six 18 months later when he sought an evidentiary hearing, not to 19 challenge any judgment, but to seek a ruling that certain 20 properties he owned with his wife were not subject to the Writ of 21 Execution issued in favor of HNB. It was not until the July 5, 22 2011 hearing, and the Supreme Court’s decision in Stern, that he 23 finally altered his position addressing the merits of the 24 proceedings and attacked the bankruptcy court’s subject matter 25 jurisdiction. 26 Nekoba seemingly recognizes that his attack on the bankruptcy 27 court’s jurisdiction to enter the judgments is time-barred. 28 Apparently to counter this, on appeal, he now tardily advances an

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1 argument that the bankruptcy court lacked jurisdiction to enter 2 the post-judgment order: 3 While the September 23, 2010 Final Judgment in Adv. No. 10-9009 was rendered before Stern v. Marshall, and might 4 not be subject to challenge even if an Article I judge entered judgment against Mr. Nekoba, that is not the 5 case with the enforcement of the judgment, which began on December 30, 2010, when HNB initiated its Rule 69 6 supplemental proceedings. 7 Appellant’s Reply Br. at 11. This is the first time in the 8 bankruptcy court or on appeal, that Nekoba suggests that the 9 proceedings relating to the Writ of Execution are somehow separate 10 from those resulting in entry of the Judgment. Up to that point 11 in this action, Nekoba has addressed the Writ of Execution as a 12 legal consequence of the Judgment, not as a separate proceeding 13 requiring Stern analysis. In the Reply Brief, Nekoba offers an 14 extended discussion of how supplementary proceedings to aid in 15 collection of a judgment fall within the prohibited zone of Stern: 16 “The Rule 69 supplemental proceeding raises the issue of whether 17 during the enforcement phase of an adversary proceeding judgment, 18 does the Stern v. Marshall decision entitle Mr. Nekoba to an 19 Article III judge to enforce the writ of execution.” Appellant’s 20 Reply Brief at 15. 21 Of course, as can be seen from Nekoba’s own words, this is a 22 new issue raised for the first time only in his Reply Brief. This 23 argument was not made to the bankruptcy court, nor does it appear 24 in his Opening Brief in this appeal. An appellant may not raise 25 arguments on appeal that were not raised and adequately argued in 26 the bankruptcy court. Conn. Gen. Life Ins. Co. v. New Images of 27 Beverly Hills, 321 F.3d 878, 882 (9th Cir. 2003) (“These arguments 28 are raised for the first time on appeal, and because they were

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1 never argued before the district court, we deem them waived.”); 2 Concrete Equip. Co. v. Virgil Bros. Constr., Inc. (In re Virgil 3 Bros. Constr., Inc.), 193 B.R. 513, 520 (9th Cir. BAP 1996) ("The 4 rule is well established that an issue not raised by a party in 5 the court below will not be considered on appeal, absent 6 exceptional circumstances."). Moreover, by waiting to make his 7 argument in a reply, without mentioning it in his Opening Brief, 8 he impermissibly prejudices HNB’s ability to respond to it. 9 Friends of Yosemite Valley v. Kempthorne, 520 F.3d 1024, 1033 (9th 10 Cir. 2008) (deeming waived issues not raised in the opening 11 brief). 12 In sum, we decline to consider Neboka’s Stern argument, in 13 this appeal. 14 VI. CONCLUSION 15 Nekoba could not wait until long after the Judgment was final 16 to collaterally attack the subject matter jurisdiction, or 17 Constitutional power, of the bankruptcy court to enter that 18 Judgment. Since this is the sole basis Neboka offers to reverse 19 the bankruptcy court’s order, we AFFIRM. 20 21 22 23 24 25 26 27 28

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