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Sphere Acquisition LLC v. Bella Hospitality Group, LLC et al.

by | May 22, 2023 | Firm News

In Sphere Acquisition LLC v. Bella Hospitality Group, LLC et al. (In re Bella Hospitality Group, LLC), BAP No. NV-22-1144-BGC (March 22, 2023), the United States Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) held that the bankruptcy court erred in determining that an omitted Federal Rule of Bankruptcy Procedure (“Rule”) 1003(a) statement was a subject matter jurisdictional issue that could be raised as a defense at any time.

The appellee (“Sphere”) purchased a $45,000 claim against appellant (“Bella”) in January 2022. On February 9, 2022, Sphere filed an involuntary bankruptcy case against Bella, but neglected to include a signed statement that the claim was not purchased for the purpose of commencing the involuntary bankruptcy case, as required under Rule 1003(a). Bella did not file an answer nor respond to the motion within 21 days after service of the summons, the allotted timeframe under Rule 1011(b). Therefore, on the 22nd day after Bella was served, the bankruptcy court entered the order for relief. 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, citing Federal Rule of Civil Procedure 12(b)(1) and Rule 7012. Bella argued that Sphere intentionally neglected to include the signed statement, because Sphere did purchase the claim with the intention of commencing the bankruptcy case. Bella further asserted that the Rule 1003(a) issue was jurisdictional, and thus the case could be dismissed at any time on such grounds. Sphere countered that Bella failed to respond within the prescribed 21-day period set forth in Rule 1011(b), and submitted a signed statement to cure the defect. The bankruptcy court found for Bella and dismissed the case for lack of subject matter jurisdiction. Sphere appealed.

The BAP did not agree with the bankruptcy court’s decision, and instead found that Sphere’s failure to include a Rule 1003(a) signed statement fell within the category of a filing requirement under Section 303(b), which the Ninth Circuit Court of Appeals and the BAP have both ruled are substantive requirements that can be waived by alleged debtors if not timely raised. In support of its decision, the BAP cited to an extensive list of caselaw in the Ninth Circuit; each case held that Section 303(b) requirements were not jurisdictional and can be waived.

The BAP concluded by reiterating that failure to satisfy the requirements in Section 303(b) is grounds for dismissal, but the BAP emphasized that such an objection must be timely raised, or it is waived.