In re: Bella Hospitality Group, LLC

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: March 22, 2023
• Docket: NV-22-1144-BGC
• Status: Published

Opinion

FILED MAR 22 2023 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. NV-22-1144-BGC BELLA HOSPITALITY GROUP, LLC, Debtor. Bk. No. 2:22-bk-10452-abl

SPHERE ACQUISITION, LLC, Appellant, v. OPINION BELLA HOSPITALITY GROUP, LLC; TROY STEPHENS FOX, Chapter 7 Trustee, Appellees.

Argued and Submitted February 24, 2023 at Las Vegas, Nevada

Appeal from the United States Bankruptcy Court for the District of Nevada August B. Landis, Chief Bankruptcy Judge, Presiding

Before: BRAND, GAN, and CORBIT, Bankruptcy Judges.

APPEARANCES: Brett A. Axelrod of Fox Rothschild LLP argued for appellant; Theresa Mains argued for appellee, Bella Hospitality Group, LLC

BRAND, Bankruptcy Judge:

INTRODUCTION

Appellant Sphere Acquisition, LLC ("Sphere") appeals an order

1 dismissing the involuntary chapter 7 1 case Sphere filed against Bella

Hospitality Group, LLC ("Bella"). Prior to filing the petition against Bella,

Sphere purchased a claim from one of Bella's creditors. After Sphere filed

the petition, Bella did not oppose entry of the order for relief. Months later,

Bella moved to dismiss the case, arguing that the bankruptcy court lacked

subject matter jurisdiction because Sphere was an unqualified petitioning

creditor under § 303(b). Specifically, Sphere had not filed with the petition

the required Rule 1003(a) statement, that a claim was not transferred to

Sphere for the purpose of commencing the chapter 7 case. The bankruptcy

court agreed that the defect of the omitted statement was jurisdictional,

and it dismissed the case based on Sphere's lack of standing.

The bankruptcy court erred in determining that the omitted Rule

1003(a) statement was subject matter jurisdictional. The Ninth Circuit has

held that the requirements of § 303(b) are not subject matter jurisdictional,

but rather substantive, and are waivable. Bella waived this defense by

failing to respond to the petition. Accordingly, we REVERSE and

REMAND.

FACTS

Bella is a single-asset Nevada LLC. Ms. Amy Hsiao holds an 85%

interest in Bella. In 2019, Bella entered into an agreement with the City of

1Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all "Rule" references are to the Federal Rules of Bankruptcy Procedure, and all "Civil Rule" references are to the Federal Rules of Civil Procedure. 2 Henderson, Nevada to purchase three parcels of land for $1,155,211 for the

purpose of a joint development project in downtown Henderson. Problems

with the project ensued.

In 2021, Bella sued the City of Henderson, Ed Vance & Associates

Architects ("EVA"), and others in Nevada state court for various contract

and tort claims. During the litigation, EVA recorded a notice of lien against

two of Bella's three parcels for $45,000 ("EVA Claim").

Sphere is a single-member Nevada LLC formed on December 27,

2021. The managing member of Sphere is R&T Ventures, a California LLC

solely owned by Mr. Rainer Schwarz. Schwarz and Hsiao and their various

California entities have been in litigation in California since December

2020. Bella is not a party to the California litigation.

In or around January 2022, Schwarz negotiated a sale of the EVA

Claim to Sphere for $36,000. The parties executed an agreement for the

EVA Claim on January 24, 2022.

On February 9, 2022, Sphere filed an involuntary chapter 7

bankruptcy case against Bella. On the Official Form 205  Involuntary

Petition Against a Non-Individual  Sphere alleged that it was an eligible

petitioner under § 303(b), that Bella was an eligible debtor under § 303(a),

and that Bella was generally not paying its debts as they became due.

Sphere disclosed in question 12 that it had purchased the EVA Claim prior

to the filing. Pursuant to question 12 and Rule 1003(a), Sphere attached a

copy of the agreement evidencing the transfer of the EVA Claim to Sphere,

3 but Sphere failed to attach the required signed statement that the EVA

Claim had not been transferred for the purpose of commencing the case. A

summons was served on Bella by mail.2

Bella did not file an answer or responsive motion within the required

21 days following service of the summons under Rule 1011(b), and

thereafter, Sphere requested entry of an order for relief under § 303(h). The

bankruptcy court entered the order the next day. Troy Fox ("Trustee") was

appointed as the chapter 7 trustee.

On May 11, 2022, 89 days after service of the summons and 68 days

after entry of the order for relief, Bella moved to dismiss the involuntary

chapter 7 case under Civil Rule 12(b)(1) and Rule 7012. Bella argued that

Sphere lacked standing to file the case, and so the bankruptcy court had to

dismiss it for lack of jurisdiction. Specifically, Bella argued that Sphere was

not a qualified petitioner because it "intentionally" and "surreptitiously"

omitted the required signed statement in Rule 1003(a). Bella argued that

Sphere purchased the EVA Claim to commence the case and use it as a tool

for the California litigation.

Sphere opposed the motion to dismiss, arguing that the bankruptcy

court was precluded from considering Bella's belated objection concerning

sufficiency of the petition.3 Under Rule 1011(b), Bella had to contest the

2 Bella asserted that it was not served with the summons. The bankruptcy court found to the contrary. Bella has not cross-appealed this issue. 3 Trustee also opposed dismissal. He agreed with Sphere that Bella's argument

about any purported defect in the petition was untimely. He also argued that it was in 4 petition within 21 days after service of the summons. Because Bella did not

do so, argued Sphere, any defenses or objections were waived. Sphere also

attached the previously-omitted Rule 1003(a) statement in an attempt to

cure the defect. In reply, Bella argued that despite its failure to contest the

petition and entry of the order for relief, subject matter jurisdiction could

be raised at any time.

The bankruptcy court granted the motion to dismiss, concluding that

it lacked subject matter jurisdiction. This timely appeal followed.

JURISDICTION

As explained below, the bankruptcy court had jurisdiction under 28

U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court err in dismissing Bella's involuntary

chapter 7 case for lack of subject matter jurisdiction?

STANDARDS OF REVIEW

We review the bankruptcy court's interpretation of the Bankruptcy

Code and its conclusions of law de novo. Mendez v. Salven (In re Mendez),

367 B.R. 109, 113 (9th Cir. BAP 2007). We review a dismissal based on lack

of subject matter jurisdiction and lack of standing de novo. Warren v. Fox

Fam. Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003).

the best interest of creditors and the debtor to continue with the chapter 7 case. He had negotiated a sale of Bella's property for $2.5 million, which would pay all secured creditors and net the estate just over $1.4 million. The scheduled hearing for Trustee's sale motion did not go forward due to the dismissal of the case. 5 DISCUSSION

An involuntary case was commenced against Bella by Sphere's filing

of the chapter 7 petition. See § 303(a), (b). Once an involuntary petition is

filed, Rule 1011(b) provides that "[d]efenses and objections to the petition

shall be presented in a manner prescribed by [Civil Rule 12] and shall be

filed and served within 21 days after service of the summons[.]" Section

303(h) provides that "[i]f the petition is not timely controverted, the court

shall order relief against the debtor[.]" Rule 1013(b) also provides that "[i]f

no pleading or other defense to a petition is filed within the time provided

by Rule 1011, the court, on the next day, or as soon thereafter as

practicable, shall enter an order for the relief requested in the petition."

As transferee of the EVA Claim, Sphere was required under Rule

1003(a) to include with the petition any documents evidencing the transfer

and a signed statement that the claim was not transferred for the purpose

of commencing the chapter 7 case. Rule 1003(a) provides that an entity

which has acquired a claim for such purpose "shall not be a qualified

petitioner."

The bankruptcy court found that Bella had not timely raised any

defenses or objections to the petition as required by Rule 1011(b), and that

the order for relief was properly entered under § 303(h). These facts are

undisputed. The bankruptcy court also found that it initially had subject

matter jurisdiction over the case under 28 U.S.C. §§ 157(a) and 1334(a), but

it agreed with Bella that the question of its subject matter jurisdiction could

6 be raised at any time.

The bankruptcy court determined that Sphere was not a qualified

petitioner, and therefore lacked standing to file the involuntary petition,

because it purchased the EVA Claim for the purpose of commencing the

case and failed to include the signed statement referenced in question 12 of

the petition and Rule 1003(a) stating otherwise. The bankruptcy court

concluded that Sphere's lack of standing and the absence of a joining

qualified petitioning creditor were fatal to its subject matter jurisdiction.

Consequently, it had to dismiss the case.

Sphere argues that the bankruptcy court erred in dismissing the case

for lack of subject matter jurisdiction. Precisely, Sphere argues that the

requirement of filing a signed Rule 1003(a) statement is not jurisdictional; it

is a substantive requirement for a petitioning creditor in § 303(b), and Bella

waived it by not timely filing an answer or responsive motion objecting to

it. We agree.

Sphere's failure to include with the petition the signed statement

referenced in question 12 and Rule 1003(a) goes to the filing requirements

for a petitioning creditor in § 303(b). See Kelly v. Herrell, 602 F. App'x 642,

646 (7th Cir. 2015). The Ninth Circuit Court of Appeals, and this Panel

before it, have ruled that § 303(b)'s requirements are not subject matter

jurisdictional but rather substantive matters necessary to sustain the

involuntary proceeding, and they can be waived by the alleged debtor if

not timely raised. See Rubin v. Belo Broad. Corp. (In re Rubin), 769 F.2d 611,

7 614 n.3, 615 (9th Cir. 1985) (holding that the undisputed claims and three-

petitioning-creditor requirements of § 303(b) are not subject matter

jurisdictional and can be waived; they are only elements that must be

established to sustain the involuntary proceeding); Mason v. Integrity Ins.

Co. (In re Mason), 20 B.R. 650, 651 (9th Cir. BAP 1982) (holding that § 303(b)

defects in the petition do not deprive the bankruptcy court of subject

matter jurisdiction and are waived when the alleged debtor fails to

answer), aff'd, 709 F.2d 1313, 1318-19 (9th Cir. 1983) (affirming denial of

debtor's Civil Rule 60(b) motion to vacate order for relief, because debtor

waived his § 303(b) defense of an insufficient number of petitioning

creditors by failing to raise it in an answer to the petition). See also In re

Kidwell, 158 B.R. 203, 208-09 (Bankr. E.D. Cal. 1993) ("Failure to comply

with the three-petitioner requirement is a substantive, not a jurisdictional,

defense. . . . As a substantive defense, a defect in the three-petitioner

requirement is waived if not timely raised.").

Other circuit courts and bankruptcy appellate panels which have

expressly ruled on this issue are in agreement. See Kelly, 602 F. App'x at

646-47 (compliance with Rule 1003(a) is a filing requirement for § 303(b)

and § 303(b)'s filing requirements are not subject matter jurisdictional);

Mitchell v. Weinman (In re Mitchell), 554 F. App'x 756, 760 (10th Cir. 2014)

(affirming the BAP's ruling that § 303(b) is not jurisdictional and noting the

BAP's analysis that the language in § 303(c), (h), and (j) further suggest that

§ 303(b)'s requirements are not necessary to the bankruptcy court's subject

8 matter jurisdiction); Adams v. Zarnel (In re Zarnel), 619 F.3d 156, 169 (2d Cir.

2010) (concluding that "the restrictions of § 303 fall decisively on the

nonjurisdictional side" of the U.S. Supreme Court's "bright line" test as

articulated in Arbaugh v. Y & H Corp., 546 U.S. 500 (2006)); Trusted Net

Media Holdings, LLC v. Morrison Agency, Inc. (In re Trusted Net Media

Holdings, LLC), 550 F.3d 1035, 1043-44 (11th Cir. 2008) (en banc) (holding

that "§ 303(b)'s requirements are not subject matter jurisdictional" based on

the statutory language and Arbaugh and can be waived); In re Zenga, 562

B.R. 341, 347 (6th Cir. BAP 2017) (discussing Arbaugh and holding that the

creditor threshold requirement in § 303(b)(1) is not jurisdictional).4

Although the rule regarding the nonjurisdictional nature of the filing

requirements in § 303(b) has governed our circuit for 40 years, several of

the courts above relied on the 2006 Supreme Court's ruling in Arbaugh to

reach the same conclusion. Arbaugh instructed courts to look at the

language in a statute to determine whether Congress granted them subject

matter jurisdiction. If Congress has not ranked "a statutory limitation on

coverage as jurisdictional, courts should treat the restriction as

nonjurisdictional in character." Arbaugh, 546 U.S. at 516. That § 303(b)

makes no reference to its requirements being jurisdictional in nature

4 See also Marlar v. Williams (In re Marlar), 432 F.3d 813, 814-15 (8th Cir. 2005), and McCloy v. Silverthorne (In re McCloy), 296 F.3d 370, 375 (5th Cir. 2002), pre-Arbaugh cases holding that § 303(a), which excludes involuntary petitions against farmers, is not subject matter jurisdictional and the argument that the debtor is a farmer is a waivable affirmative defense. 9 suggests that Congress did not intend they be satisfied to confer subject

matter jurisdiction to the bankruptcy court over an involuntary case.

Therefore, while failure to satisfy the statutory requirements in

§ 303(b) is grounds for dismissal if timely raised, these requirements do not

implicate subject matter jurisdiction. Neither do the procedural limitations

in the Bankruptcy Rules such as Rule 1003(a). Kelly, 602 F. App'x at 647

(citing United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 271-72 (2010);

Kontrick v. Ryan, 540 U.S. 443, 453-54, 456 (2004)).

The bankruptcy court was under the mistaken view that the defect in

Sphere's petition of the omitted Rule 1003(a) statement was subject matter

jurisdictional. It was not. And when Bella failed to contest it in an answer

or responsive motion within 21 days of service of the summons, it waived

that affirmative defense. Thus, the bankruptcy court erred when it

considered Bella's untimely and waived arguments to find that Sphere

purchased the EVA Claim for the purpose of commencing the case and

lacked standing as a qualified petitioner, and that it resultantly lacked

subject matter jurisdiction.

The bankruptcy court should never have reached this and other

issues regarding the petition's merits or Sphere's eligibility as a petitioning

creditor when Bella failed to timely contest them. See Saxena v. Nabilsi (In re

Nabilsi), BAP No. CC-09-1207-MkJaD, 2010 WL 6259980, at *10 (9th Cir.

BAP Nov. 16, 2010) (reversing the bankruptcy court for dismissing the

involuntary case and not entering the order for relief when the alleged

10 debtor failed to file a timely answer or responsive motion contesting the

sufficiency of the petition). While Sphere's motivation for commencing the

case was clearly something the bankruptcy court could have considered in

an evidentiary hearing if Bella had timely raised it, it was not proper for

the court to consider it in light of Bella's waiver.

The cases the bankruptcy court relied upon for its decision are

inapposite. See In re Banner Res. LLC, No. 21-60016-RLJ7, 2021 WL 2189085,

at *2 (Bankr. N.D. Tex. May 28, 2021); In re Clignett, 567 B.R. 583, 586-87

(Bankr. C.D. Cal. 2017), abrogated on other grounds by Mont. Dep't of Revenue

v. Blixeth, 942 F.3d 1179 (9th Cir. 2019); In re Oberle, No. 06-41515, 2006 WL

3949174, at *1 (Bankr. N.D. Cal. Dec. 21, 2006). In each case, the alleged

debtor timely filed an answer or responsive motion contesting the

petitioning creditor's eligibility for failing to comply with Rule 1003(a).

And the cases Bella cites and argues support the proposition that subject

matter jurisdiction can be raised at any time are not on point. While it is

true that a court's subject matter jurisdiction can be raised at any time, even

on appeal, the defect in Sphere's petition was not a jurisdictional issue.

CONCLUSION

For the reasons stated above, we REVERSE the order dismissing

Bella's involuntary chapter 7 case and REMAND with instruction for the

bankruptcy court to reinstate the case and reappoint Trustee.