Ninth Circuit BAP Rules on a Question to Be Decided Soon by the Supreme Court

Any day now, the Supreme Court will hand down a decision in MOAC to decide whether Section 363(m) of the Bankruptcy Code is jurisdictional or only a limitation on remedy. MOAC Holdings LLC v. Transform Holdco LLC, 21-1270 (Sup. Ct.) (argued Dec. 5, 2022). To read ABI’s report on oral argument, click here.

The Bankruptcy Appellate Panel for the Ninth Circuit beat the Supreme Court to the punch. In an opinion on March 22, the BAP held that the requirements in Section 303 and the companion Bankruptcy Rules are not jurisdictional with regard to the qualifications of an involuntary petitioner.

Two weeks before filing an involuntary petition, the involuntary petitioner bought a claim at discount from a creditor. The involuntary petitioner had long been litigating against the owner of the corporate debtor.

After the petitioner filed the involuntary petition, the debtor did not answer, so the bankruptcy court entered an order for relief. About three months later, the debtor filed a motion to dismiss the case, contending that the petitioner failed to file a “signed statement” attesting that the petitioner did not acquire the claim for the purpose of filing a petition.

To no avail, the petitioner argued that the shortcoming was waived when the debtor never answered the petition. The bankruptcy court sided with the debtor, saying that the lack of compliance with the rule was jurisdictional. The bankruptcy court dismissed the petition for lack of jurisdiction.

The petitioner appealed and won in a March 22 opinion from the BAP by Bankruptcy Judge Julia W. Brand.

Judge Brand said that the petitioner “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.” She went on to say that “Rule 1003(a) provides that an entity which has acquired a claim for such purpose ‘shall not be a qualified petitioner.’”

Notably with regard to MOAC, the Ninth Circuit is one of the circuits having held that Section 363(m) is not jurisdictional. Similarly, both the Ninth Circuit and the BAP “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,” Judge Brand said. “Other circuit courts and bankruptcy appellate panels which have expressly ruled on this issue are in agreement,” Judge Brand said, citing the Second and Tenth Circuits.

Citing a Supreme Court decision that the justices will likely mention when they rule on MOAC, Judge Brand mentioned Arbaugh v. Y & H Corp., 546 U.S. 500 (2006). She characterized the high court as having “instructed courts to look at the language in a statute to determine whether Congress granted them subject matter jurisdiction.”

Section 303’s lack of a reference to being jurisdictional, Judge Brand said, “suggests that Congress did not intend they be satisfied to confer subject matter jurisdiction to the bankruptcy court over an involuntary case.”

“Neither do the procedural limitations in the Bankruptcy Rules such as Rule 1003(a)” implicate subject matter jurisdiction, Judge Brand said.

It was downhill from there. Because the debtor didn’t answer the involuntary petition by pointing out the lack of compliance with Rule 1003(a), the defense was waived. Judge Brand reversed, with instructions to reinstate the case and reappoint the trustee.