Summary
stating that a petition that "does not comply with [the § 303(b)] requirements may be waived pursuant to § 303(h)"
Summary of this case from Viola v. KirschOpinion
01 Civ. 5066 (HB)
January 16, 2002
OPINION ORDER
Appellant United Marine, L.L.C., ("United Marine") appeals the decision of the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") (Hon. Cecelia G. Morris) to deny its motion made pursuant to Federal Rules of Civil Procedure ("FRCP") 60(b) to vacate the Order of Relief entered on March 29, 2001. The Bankruptcy Court entered the relief after United Marine failed to answer or otherwise contest appellee Just For Windows, Inc.'s ("JFW's") involuntary petition pursuant to 11 U.S.C. § 303 for relief under Chapter 7 of the Bankruptcy Code. For the reasons discussed below, the decision of the Bankruptcy Court is affirmed.
Background
On November 15, 1999, United Marine purchased 5 properties in Hudson and Garrison New York (the "property") with a $750,000 loan from Golden Age Mortgage Corp. ("GAMC") secured by a single mortgage on the property. United Marine defaulted on its mortgage, and GAMC commenced a foreclosure action which resulted in the entry of a Foreclosure of Sale on February 20, 2001. Concerned that United Marine had fraudulently obtained its loan and was absconding with assets of the properties, JEW, a creditor of United Marine, filed a petition pursuant to 11 U.S.C. § 303 ("petition") to force United Marine into bankruptcy. The petition, which was not joined by any other creditors, stated JFW's claim in the amount of $2,678 for "Goods and services provided" and was served via first class mail addressed to Erik R. Risher ("Risher"), the President of United Marine, at United Marine's last known business address, United Marine, LLC, 621-701 Warren Street, Hudson, New York 12534.
The bankruptcy laws protect creditors by limiting the ability of the bankrupt to transfer its assets or take other actions adverse to creditors.
United Marine did not answer the petition, and in December 2000 the Bankruptcy Court entered the Order for Relief by default and appointed a Chapter 7 trustee. On March 13, 2001 United Marine moved by order to show cause to vacate the Order of Relief and for attorneys' fees, damages and sanctions pursuant to FRCP 60(b). At the show cause hearing, the Bankruptcy Court found that service upon United Marine had been effective and that United Marine had waived any objection to the petition by failing to controvert it within the time provided by Rule 1011 of the Federal Rules of Bankruptcy Procedure ("FRBP"). In reaching the latter decision, the Bankruptcy Court admitted into evidence a letter from the court-appointed receiver, Arlene Levinson ("Levinson letter"), to Thomas R Borkek, the Director of GAMC, to the effect that Risher retained possession of the properties and was causing problems with the receivership. There was no written decision.
FRBP 1011(b): "Defenses and objections to the petition shall be presented in the manner prescribed by Rule 12 F.R.Civ.P. and shall be filed and served within 20 days after service of the summons, except that if service is made by publication on a party or partner not residing or found within the state in which the court sits, the court shall prescribe the time for filing and serving the response"
United Marine appeals the Bankruptcy Court's denial of its FRCP 60(b) motion on the grounds that: (1) the petition was facially deficient because it was submitted by one petitioner (when at least 3 are needed) and stated an unsecured claim of less than $10,775, the minimum amount required by 11 U.S.C. § 303 (b) ("§ 303(b)") for petitions for involuntary bankruptcy; and (2) the Levinson letter was hearsay and should not have been admitted.
Discussion
A. Standard of Review
FRBP 8013 provides that: "On an appeal [from the bankruptcy court,] the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. The standard of review for appeals of FRCP 60(b) motions is abuse of discretion. Transaero, Inc. v. La Fuerza Aerea Boliviana, 162 F.3d 724, 729 (2d. Cir. 1998). "A district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law." Id. The Court may affirm on any ground that finds support in the record, and need not limit its review to the bases raised or relied upon in the decisions below. See In re HBLS, L.P., 2001 WL 1490696, *1 (S.D.N.Y. 2001).
A. 3 Creditor $10,775 Requirements
The present appeal presents a putatively straightforward question: Can a debtor waive its objection to an involuntary petition for failure to comply with the requirements for filing such a petition as set forth in 11 U.S.C. § 303 (b)? Or, are the statutory requirements — that there be at least 3 creditors and aggregated unsecured claims not less than $10,775 — jurisdictional in nature such that any Order of Relief issued upon receipt of an involuntary petition that is deficient with respect thereto is void and must be vacated?
This Opinion Order hazards no decision as to whether a petition submitted by one creditor that states unsecured claims of $10,775 or more complies with the requirements of 11 U.S.C. § 303 (b). In re Allen-Main Associates Ltd. Partnership, 223 B.R. 59, 61 (2d. Cir. BAP 1998) ("[f]urthermore, an undersecured recourse creditor may file as a sole petitioner provided it is unsecured to the extent of $10,000 above the value of its lien").
11 U.S.C. § 303 (b) provides in relevant part: "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 liability or the subject of a bona fide dispute, or an indenture trustee representing such a holder, if such claims aggregate at least $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims."
Unfortunately, while the foregoing question may be simply stated, it is less easily answered. The Bankruptcy Court denied United Marine's motion in reliance upon 11 U.S.C. § 303 (h), which provides that "[i]f the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case," and upon FRBP Rule 1013, which directs the court to enter the requested relief if no responsive pleading is filed within the time allowed by Rule 1011. Although the Bankruptcy Court did not explicitly address the relationship between 11 U.S.C. § 303 (b) and § 303(h), by virtue of its holding it must have concluded that the 3 creditors language and the unsecured claims of at least $10,775 language are not jurisdictional. It was uncontroverted that JFW's petition stated only 1 claim and an unsecured indebtedness of only $2,678.
FRBP 1013 states: "If 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."
The weight of the authority clearly supports the holding that the § 303(b) requirements are not jurisdictional and that the affirmative defense that a petition does not comply with such requirements may be waived pursuant to § 303(h). See 1 Norton Bankr. L. Prac.2d § 21:1 ("Although some courts have labeled various requirements of § 303 as `jurisdictional,' the requirements are not jurisdictional in the sense of subject matter jurisdiction"); In re Shapiro, 128 B.R. 328 (Bankr. E.D.N.Y. 1991) (§ 303 requirements are not jurisdictional); In re Key, 209 B.R. 737 (Bankr. 10th Cir. 1997) (the Bankruptcy Court was required by § 303(h) to enter an order of relief when the debtor failed to timely answer the involuntary petition); In re Everett, 178 B.R. 132 (Bankr. N.D. OH. 1994) ("[t]he statutory elements set forth in § 303 are not jurisdictional in the technical sense of subject matter jurisdiction, but are instead substantive matters which must be proved or waived for petitioning creditors to prevail in involuntary proceedings") (internal citation omitted); In re Mason, 20 B.R. 650 (9th Cir. 1983) (failure to list 3 creditors did not constitute a jurisdictional defect such that the order of relief should be vacated, but was instead an affirmative defense that the debtor waived by failing to object to the petition).
See also COLLIER ON BANKRUPTCY § 303.04[8] ("[t]he better argument, in light of subsections (c) and (d) of section 303, is that the counting requirement can be waived, which suggests that it is not a jurisdictional requirement"); 2 Bankr. Service L.Ed. § 13:92 (2001) ("rather than speak of a debtor's right to demand proof of required number of petitioning creditors as jurisdictional, it is more accurate to liken such a challenge to [an] affirmative defense that must be timely raised or else is waived").
There is no reason for a contrary rule. Issues of notice and fundamental fairness do not arise since waiver is effective only if service has been duly made. Further, a rule that excuses debtors from the obligation to answer petitions that do not meet the 11 U.S.C. § 303 (b) requirements and protects them from the automatic entry of relief would create a perverse incentive for debtors to sit on their hands, secure in the knowledge that the petition can later be overturned and that any voidable transfers made before the petitioner filed anew could not be invalidated by the second petition.
B. Service of Process on United Marine
United Marine argues that the foregoing is relevant only if it was properly served, and further argues that the Bankruptcy Court's reliance upon the Levison letter in making that determination was in error. The letter written by the court-appointed receiver to the Director of GAMC indicated that Eric Risher (President of United Marine) retained possession of the property subject to the involuntary bankruptcy and was causing problems with the receivership. JEW introduced it to show that United Marine was still doing business at the address where the petition had been served and that therefore it must have known about the petition and chosen to default. United Marine argued to the Bankruptcy Court, and does so again now, that the Levinson letter was inadmissible hearsay (Levinson did not testify), and suggests that without the Levinson Letter there is insufficient evidence of service. United Marine also argues that the evidence should have been excluded because the letter was a copy and Levinson' s signature could not be authenticated.
JEW concedes that the letter was hearsay, but argues that the Bankruptcy Court properly admitted the letter under the business records exception to the hearsay rule, Federal Rules of Evidence ("FRE") 803.6, since the letter was (1) made by a person with knowledge (2) at or near the time of the events described in the letter (3) pursuant to her regular duties, (4) it was the practice of GAMC to keep such receiver letters, and (5) Borkek (Director of GAMC), the proper custodian, introduced the letter at the hearing through live testimony. Also, JEW states that facsimiles are admissible to the same extent as originals under FRE 1003.
I see no error in the Bankruptcy Court's decision to admit the letter. Moreover, it is not clear that a contrary ruling would have changed the result since there may have been other sufficient evidence that United Marine knew of and ignored the petition.
Conclusion
For the reasons discussed above, the Bankruptcy Court's decision to deny United Marine's FRCP 60(b) motion is affirmed, and the Clerk of the Court is directed to remove this case from my docket.