Trusted Net Media Holdings, LLC v. The Morrison Agency, Inc. (In re Trusted Net Media Holdings, LLC), No. 07-13429 (11th Cir. Dec. 2008) (click here for .pdf opinion). 

The issue in this case is "whether the requirements in 11 U.S.C. § 303(b) for commencing an involuntary bankruptcy petition are elements of subject matter jurisdiction."  In a prior opinion by a panel of the the Eleventh Circuit, the Court held are not jurisdictional and can be waived.  Click here for a discussion of that April 2008 opinion.   Interestingly, the panel did not care for the outcome.  After a thorough analysis, the Eleventh Circuit  panel held that § 303(b) were jurisdictional based upon binding precedent in In re All Media Properties, Inc., 646 F.2d 193 (5th Cir. 1981), aff’g 5 B.R. 126 (Bankr. S.D. Tex. 1980), but it stated that this holding was not necessarily the most well-reasoned position –

Therefore, we conclude that we are bound by All Media’s decision that the requirements of § 303(b) must be satisfied in order for the bankruptcy court to have subject matter jurisdiction over an involuntary bankruptcy case. We recognize that the weight of authority–and, in our view, the superior reasoning–lie against that holding. Nevertheless, All Media’s holding in this regard is prior panel precedent, and therefore controls. See United States v. Steele, 147 F.3d 1316, 1317-18 (11th Cir. 1998) (en banc) (“Under our prior precedent rule, a panel cannot overrule a prior one’s holding even though convinced it is wrong.”).


Since the panel could not overrule a prior precedent in the Circuit, the case was heard by the entire Court. Not surprisingly, the Court ruled differently and held that §303 was not subject matter jurisdictional.

The facts are as follows: 

On April 20, 2002, Morrison, as a creditor, filed an involuntary bankruptcy petition against its debtor 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.” …

The debtor Trusted Net, whose assets were at that time under the control of a state-court-appointed receiver, filed no response to Morrison’s involuntary petition. Accordingly, 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. …

Shortly thereafter, and more than four years after commencement of the case, Trusted Net … 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 it filed its 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. 

The Bankruptcy Court held that § 303(b)’s requirements were not subject matter jurisdictional and any defense that the debtor may have had were waived. The District Court affirmed, finding the Bankruptcy Court’s order to be “thorough, well-reasoned, and correct in every respect.”  The Eleventh Circuit Panel reversed, as discussed above and here, leading to the en banc review.

The discussion is after the break …


To determine whether § 303(b)’s requirements are jurisdictional, we must consider “the distinction between two sometimes confused or conflated concepts: federal-court ‘subject matter’ jurisdiction over a controversy; and the essential ingredients of a federal claim for relief.”… Therefore, the Supreme Court has instructed that courts should look to whether Congress has included jurisdictional language in the statute in question, stating: If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character. ..The Supreme Court has called this a “readily administrable bright line” test…

Under this standard, we conclude that the language of § 303(b) does not evince a congressional intent to implicate the bankruptcy courts’ subject matter jurisdiction. As in Arbaugh, the statute “does not speak in jurisdictional terms.” Id. at 515, 126 S. Ct. at 1245. Section 303(b) contains no explicit reference to its requirements being jurisdictional in nature and never uses the word “jurisdiction.” Instead, it merely states that an involuntary bankruptcy case “is commenced against a person by the filing with the bankruptcy court of a petition under chapter 7 or 11” that meets certain requirements. 11 U.S.C. § 303(b). Further, this Court has interpreted similar “commencement of a case” language, found elsewhere in the Bankruptcy Code, to be non-jurisdictional. [Pugh v. Brook (In re Pugh), 158 F.3d 530 (11th Cir. 1998)]. … Thus, we concluded that statutory conditions within the Bankruptcy Code upon the “commence[ment]” of a bankruptcy action are not subject matter jurisdictional. 11 U.S.C. §§ 546(a), 549(d); Pugh, 158 F.3d at 532-33. The reasons in Pugh apply equally to § 303(b). Second, the conclusion that § 303(b) is non-jurisdictional comports with the bankruptcy-related jurisdictional grant in Title 28, as well as the basic nature of subject matter jurisdiction. See 28 U.S.C. § 157(a) (authorizing bankruptcy courts to hear and determine “any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11”).

Subject matter jurisdiction, as mentioned above, is the statutorily conferred power of the court to hear a class of cases. Kontrick, 540 U.S. at 455, 124 S. Ct. at 915. As a class of cases, involuntary bankruptcy cases unquestionably arise under Title 11 (the Bankruptcy Code) and thus fall within the congressional grant of subject matter jurisdiction to the bankruptcy courts.

Third, there is no indication from the text of § 303 that Congress intended bankruptcy courts to consider sua sponte at any point in the proceedings whether the involuntary petition filing requirements have been met. In fact, the statutory language strongly suggests the opposite. Section 303(h) provides that if an involuntary petition “is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed.” 11 U.S.C. § 303(h) (emphasis added); accord Fed. R. Bankr. P. 1013(b) (“If no pleading  or other defense to a petition is filed within the time provided . . ., the court, on the next day, or as  soon thereafter as practicable, shall enter an order for the relief requested in the petition.”). Thus, the statutory scheme contemplates that relief will be granted immediately if no timely response is filed. Section 303(h) belies any congressional intent to have courts sua sponte consider whether the § 303(b) requirements have been satisfied.

Furthermore, § 303(c) suggests that Congress did not intend the § 303(b) requirements to be necessary to the bankruptcy courts’ subject matter jurisdiction. Section 303(c) states that a creditor who has not joined an involuntary petition may be added as a petitioning creditor “before the case is dismissed or relief is ordered.” 11 U.S.C. § 303(c). The statute therefore grants the court the power to permit one or more creditors to join a petition that may otherwise be dismissed. But, it seems anomalous at best to conclude that a bankruptcy court, which lacks jurisdiction over an involuntary case because the petition was defectively filed, subsequently may create jurisdiction for itself by permitting additional creditors to join the petition.