In re Trusted Net Media Holdings, LLC.

Citation550 F.3d 1035
Decision Date02 December 2008
Docket NumberNo. 07-13429.,07-13429.
PartiesIn re: TRUSTED NET MEDIA HOLDINGS, LLC, Debtor. Trusted Net Media Holdings, LLC, Plaintiff-Appellant, v. The Morrison Agency, Inc., Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Michael James King, Greenberg Traurig, Atlanta, GA, for Defendant-Appellee.

John S. Koppel, William Kanter, U.S. Dept. of Justice, Civ. App. Div., Washington, DC, for Amicus Curiae.

Appeal from the United States District Court for the Northern District of Georgia.

Before EDMONDSON, Chief Judge, and TJOFLAT, ANDERSON, BIRCH, DUBINA, BLACK, CARNES, BARKETT, HULL, MARCUS, WILSON and PRYOR, Circuit Judges.

HULL, Circuit Judge:

This appeal presents the question of whether the requirements in 11 U.S.C. § 303(b) for commencing an involuntary bankruptcy petition are elements of subject matter jurisdiction. We granted rehearing en banc to reexamine the issue. After review and en banc briefing, we conclude that § 303(b)'s requirements are not subject matter jurisdictional in nature and therefore can be waived.

I. BACKGROUND
A. Trusted Net's 2002 Bankruptcy

In this bankruptcy case, appellant Trusted Net Media Holdings, LLC ("Trusted Net") is the debtor and appellee The Morrison Agency, Inc. ("Morrison") is one of Trusted Net's creditors. On April 20, 2002, Morrison filed an involuntary bankruptcy petition against Trusted Net, requesting liquidation of Trusted Net's assets pursuant to Chapter 7 of the Bankruptcy Code. Morrison's petition listed Morrison as the only petitioning creditor of Trusted Net, and described Morrison's claim against Trusted Net as "Trade Debt/Judgment" in an amount "[n]ot less than [$]534,000.00."

Morrison's involuntary petition stated that Morrison was "eligible to file this petition pursuant to 11 U.S.C. § 303(b)." As detailed below, § 303(b) permits the commencement of an involuntary bankruptcy case against a debtor (1) by three or more creditors holding non-contingent, undisputed claims against that debtor, or (2) by a single holder of a non-contingent, undisputed claim if there are fewer than twelve such creditors of the debtor. 11 U.S.C. § 303(b). At the time Morrison filed its involuntary petition against Trusted Net, § 303(b) also required that the petitioning creditors' non-contingent, undisputed claims against the debtor aggregate at least $11,625. See 11 U.S.C. § 303(b) (2001).1

Trusted Net, whose assets were at that time under the control of a state-court-appointed receiver, filed no response to the involuntary petition. Thus, the bankruptcy court entered an Order for Relief on May 15, 2002 and appointed a Chapter 7 trustee. The trustee marshaled Trusted Net's assets in preparation for liquidation. The bankruptcy case proceeded through administration for two years.

B. Trusted Net's 2006 Motion to Dismiss

In April 2004, David W. Huffman, an officer and controlling member of Trusted Net, filed a motion to dismiss the bankruptcy case, arguing that the involuntary petition failed to satisfy § 303(b) and that failure divested the bankruptcy court of subject matter jurisdiction. Huffman was a creditor of Trusted Net as to his deferred salary. Huffman's motion to dismiss argued, among other things, that Morrison's 2002 petition violated § 303(b) in two ways: (1) Morrison's claim against Trusted Net was subject to a bona fide dispute, and therefore Morrison did not hold a non-contingent, undisputed claim against the debtor; and (2) Morrison's single-creditor petition was insufficient because Trusted Net had twelve or more creditors holding non-contingent, undisputed claims. The Chapter 7 trustee opposed the motion. After a hearing, the bankruptcy court denied Huffman's motion to dismiss on May 13, 2004. No appeal was taken from the bankruptcy court's denial of Huffman's motion to dismiss.

Another two years later, in April 2006, five of Trusted Net's creditors, including Morrison (but not including Huffman), settled with the trustee as to the amount of their respective claims. Huffman objected to the settlement of the claims of three of the creditors, including Morrison. On July 14, 2006, the bankruptcy court overruled Huffman's objections and approved the settlements.

Shortly thereafter, and more than four years after commencement of the bankruptcy case, Trusted Net (through counsel retained at Huffman's behest) filed a motion to dismiss the entire bankruptcy case for lack of subject matter jurisdiction. Similar to Huffman's motion two years earlier, Trusted Net argued that § 303(b)'s requirements must be met for the bankruptcy court to have subject matter jurisdiction, and that Morrison's petition violated § 303(b) because: (1) at the time of the involuntary petition, Morrison was not the holder of a non-contingent, undisputed claim, and (2) Morrison's involuntary Chapter 7 petition was not joined by three holders of non-contingent, undisputed claims.

On October 10, 2006, the bankruptcy court denied Trusted Net's motion to dismiss. As to Trusted Net's jurisdiction argument, the bankruptcy court concluded that § 303(b) of the Bankruptcy Code was not jurisdictional and that "any argument by the Debtor that the petitioning creditor's claims are the subject of a bona fide dispute or that more than one petitioning creditor was required to put this Debtor into bankruptcy has been waived."

C. Trusted Net's Appeal

Trusted Net appealed the bankruptcy court's ruling to the district court. The district court affirmed, finding the bankruptcy court's order to be "thorough, well-reasoned, and correct in every respect." Trusted Net appealed to this Court.2

II. DISCUSSION

In this appeal, Trusted Net does not contest the bankruptcy court's finding that Trusted Net, through its four-year delay, waived its § 303(b) arguments that Morrison's claims are subject to bona fide dispute and that three or more petitioning creditors were required, assuming the requirements are nonjurisdictional. Rather, Trusted Net raises a single jurisdictional issue: whether § 303(b)'s requirements for involuntary bankruptcy petitions must be met to give the bankruptcy court subject matter jurisdiction. We first set forth the statutory framework for bankruptcy court jurisdiction and the commencement of involuntary bankruptcy cases. Next, we discuss the circuit split on the issue. We then explain why § 303(b)'s requirements are not subject matter jurisdictional.

A. Statutory Scheme
1. Title 28

Congress established the jurisdiction of the bankruptcy courts in Title 28. Kontrick v. Ryan, 540 U.S. 443, 453, 124 S.Ct. 906, 914, 157 L.Ed.2d 867 (2004). Section 1334 of Title 28 provides that "the district courts shall have original and exclusive jurisdiction of all cases under title 11 [the Bankruptcy Code]," and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(a)-(b).

Section 151 of Title 28 provides that the bankruptcy courts are "a unit of the district court." Id. § 151. Pursuant to 28 U.S.C. § 157(a), "[e]ach district court may provide that any or all cases under title 11 [the Bankruptcy Code] and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." Id. § 157(a). Section 157(b)(1) then provides that bankruptcy courts "may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to [appellate] review" by the district court. Id. § 157(b)(1).3 Thus, bankruptcy court jurisdiction exists, by reference from the district courts, "in three categories of proceedings: those that `arise under title 11,' those that `arise in cases under title 11,' and those `related to cases under title 11.'" Cont'l Nat'l Bank of Miami v. Sanchez (In re Toledo), 170 F.3d 1340, 1344 (11th Cir. 1999) (citation omitted); see also Eastman Kodak Co. v. Atlanta Retail, Inc. (In re Atlanta Retail, Inc.), 456 F.3d 1277, 1287 (11th Cir.), cert. denied, ___ U.S. ___, 127 S.Ct. 836, 166 L.Ed.2d 676 (2006).

2. Title 11

In turn, Title 11, the Bankruptcy Code, contains nine chapters. Chapter 7 governs liquidation and is the substantive chapter operative in this case. Chapter 3, entitled "Case Administration," contains § 303(b), the procedural statute at issue.4 Chapter 3 has four subchapters, including Subchapter I, entitled "Commencement of a Case." See 11 U.S.C. §§ 301-308. Sections 301 and 302 of Subchapter I concern the commencement of, respectively, voluntary bankruptcy cases and joint cases filed by a debtor and his or her spouse. See id. §§ 301-302. Section 303 of Subchapter I, at issue here, addresses the commencement of involuntary cases. See id. § 303.

Although bankruptcy cases often are commenced on the debtor's own initiative, "Section 303 of the Bankruptcy Code allows creditors in some instances to hale a debtor into bankruptcy court by filing an involuntary petition." 2 William L. Norton, Jr. & William L. Norton III, Norton Bankruptcy Law & Practice § 22:1 (3d ed.2008). Section 303(a) provides that "[a]n involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person . . . that may be a debtor under the chapter under which such case is commenced." 11 U.S.C. § 303(a). Section 303(b), the subsection with which we are primarily concerned, sets forth the prerequisites for commencing an involuntary petition, specifically who is qualified to do so, as follows:

An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—

(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to...

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