In re: Bella Hospitality Group, LLC

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
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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.
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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,
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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
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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.
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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
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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,
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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
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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.
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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
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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.
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