In re: Bella Hospitality Group, LLC

Citation: Not availableDocket: NV-22-1144-BGC

Court: United States Bankruptcy Appellate Panel for the Ninth Circuit; March 22, 2023; Us Bankruptcy; United States Bankruptcy Court

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Sphere Acquisition, LLC (Sphere) appeals the dismissal of its involuntary Chapter 7 bankruptcy case against Bella Hospitality Group, LLC (Bella). Sphere acquired a claim from one of Bella's creditors before filing the petition. Although Bella did not oppose the initial order for relief, it later moved to dismiss the case, asserting that Sphere lacked standing as it failed to file a required Rule 1003(a) statement, which states that the claim was not transferred to Sphere for the purpose of initiating the case. The bankruptcy court agreed with Bella, citing the omission as jurisdictional, and dismissed the case.

However, the court's determination was incorrect. The Ninth Circuit has established that the requirements of 11 U.S.C. § 303(b) are substantive, not jurisdictional, and can be waived. Bella waived any defense regarding Sphere's eligibility by not responding to the petition. Therefore, the appellate court reversed the bankruptcy court's decision and remanded the case for further proceedings.

Bella is a single-asset Nevada LLC, primarily owned by Amy Hsiao, which entered into a land purchase agreement with the City of Henderson in 2019 that led to subsequent litigation. Sphere, a single-member Nevada LLC formed in December 2021, purchased a lien claim from EVA for $36,000 and filed the involuntary bankruptcy petition against Bella on February 9, 2022, asserting that it met the criteria for an eligible petitioner under § 303(b). Despite disclosing the claim's purchase, Sphere failed to attach the necessary Rule 1003(a) statement. A summons was served on Bella, which did not respond, leading to the entry of an order for relief and the appointment of a Chapter 7 trustee.

On May 11, 2022, Bella moved to dismiss an involuntary Chapter 7 bankruptcy case initiated by Sphere, arguing that Sphere lacked standing due to the omission of a required signed statement under Rule 1003(a). Bella contended that Sphere was not a qualified petitioner because it had purchased the EVA Claim specifically to file the case, thereby using it as a strategy in ongoing California litigation. Sphere opposed the dismissal, asserting that Bella had waived any objections by not contesting the petition within the 21-day period mandated by Rule 1011(b) and attached the omitted statement to remedy the oversight. Bella countered that subject matter jurisdiction could be challenged at any time, regardless of the waiver. 

The bankruptcy court ultimately granted Bella's motion, concluding it lacked subject matter jurisdiction because Sphere was not a qualified petitioner due to the improper acquisition of the EVA Claim and the missing signed statement. The court acknowledged its initial jurisdiction under 28 U.S.C. 1334 and 157(b)(2)(A) but found that Sphere's lack of standing, compounded by the absence of another qualified petitioning creditor, required dismissal of the case. Bella subsequently appealed the dismissal. 

The key legal issues included whether the bankruptcy court erred in dismissing the case based on jurisdictional grounds and the applicable standards for reviewing such jurisdictional determinations. The court's findings were that defenses must be raised promptly as per Rule 1011(b) and that Sphere’s actions did not meet the qualifications for petitioners under Rule 1003(a).

Sphere contends that the bankruptcy court improperly dismissed the case due to a lack of subject matter jurisdiction. Sphere asserts that the requirement for a signed Rule 1003(a) statement is not jurisdictional but rather a substantive requirement for a petitioning creditor under 11 U.S.C. § 303(b), which Bella waived by failing to timely file an objection. The court concurs, noting that the omission of the signed statement pertains to filing requirements rather than jurisdictional matters. Case law, including Kelly v. Herrell and Rubin v. Belo Broadcasting Corp., supports that the requirements of § 303(b) are not jurisdictional and can be waived if not timely raised by the alleged debtor. Additional cases, such as In re Mason and In re Kidwell, reinforce that defects related to the petitioning creditor's requirements do not impair the bankruptcy court's jurisdiction. The consensus among various circuit courts and bankruptcy appellate panels affirms that the filing requirements of § 303(b) are substantive and can be waived, with the Supreme Court's ruling in Arbaugh v. Y. H. Corp. providing a foundational basis for this interpretation.

Arbaugh mandates that courts analyze statutory language to determine if Congress intended a limitation to be jurisdictional. Since 303(b) does not specify its requirements as jurisdictional, it suggests that compliance is not necessary for the bankruptcy court's subject matter jurisdiction in involuntary cases. Although failing to meet 303(b)'s requirements can lead to dismissal if timely raised, these do not affect subject matter jurisdiction, nor do procedural limitations in the Bankruptcy Rules like Rule 1003(a). The bankruptcy court incorrectly viewed the omission of a Rule 1003(a) statement in Sphere's petition as a jurisdictional defect. Bella failed to contest this omission within 21 days, thus waiving the defense. Consequently, the bankruptcy court erred in considering Bella's delayed arguments regarding Sphere's standing and the petition's merits. The court should not have assessed these issues or Sphere's eligibility as a petitioning creditor, as Bella did not timely raise them. The cases cited by the bankruptcy court were irrelevant since they involved timely responses contesting eligibility. Although subject matter jurisdiction can be challenged at any time, the defect in Sphere's petition was not jurisdictional. The order dismissing Bella's involuntary chapter 7 case is reversed, and the case is remanded for reinstatement and reappointment of a Trustee.