503 B.R. 206
Bankr. D. Mass.2013Background
- Three creditors (Patriot, Patton Drive, Mayer) filed an involuntary Chapter 7 petition against Steven C. Fustolo; Patriot and Mayer held large, undisputed state-court judgments against him and Patton Drive held a judgment that Fustolo contested in part.
- Patriot holds an uncontested, unsecured judgment of about $20.4 million; Mayer holds an uncontested judgment for $150,000 (with waiver of appeal rights).
- Patton Drive obtained a Suffolk Superior Court judgment against Fustolo that included multiple components: amounts arising from TPD promissory notes (which Fustolo guaranteed) and an approximately $4 million component allegedly attributable to guaranty of RBH notes that Fustolo did not sign.
- Fustolo appealed the Patton Drive judgment and filed (then withdrew) a stay motion; he also argued the Patton Drive judgment overstated his liability due to the phantom RBH guaranty and alleged usurious interest rates.
- Petitioning creditors moved for summary judgment to obtain an order for relief; Fustolo cross-moved to dismiss the involuntary petition arguing (a) Patton Drive’s claim is disputed in whole and (b) there are more than 12 creditors so the petition fails § 303(b)(1) requirements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an unstayed, non-default state-court judgment on appeal is per se not a "bona fide dispute" under 11 U.S.C. § 303(b)(1) | Petitioning creditors: an unstayed final judgment is entitled to deference and is not a bona fide dispute (Drexler approach). | Fustolo: a judgment on appeal can still be subject to bona fide dispute; debtor should be allowed to show dispute (Byrd approach). | Court applied the Byrd burden-shifting approach here (debtor may rebut presumption from judgment). |
| Whether the Patton Drive judgment is stayed during appeal and thus subject to dispute | Petitioning creditors: judgment final for purposes of § 303(b)(1) despite appeal; execution issues do not negate finality. | Fustolo: appeal and stay rules (Mass. R. Civ. P. 62(d), Mass. Gen. Laws ch. 235 § 16) indicate limits on enforcement and create grounds to treat parts as disputed. | Court treated judgment as final for most components but recognized narrowly that some amounts could be disputed despite appeal. |
| Whether a bona fide dispute as to part of a creditor’s judgment disqualifies that creditor entirely as a petitioning creditor under § 303(b)(1) | Petitioning creditors: any bona fide dispute as to amount should disqualify the creditor in whole (all-or-nothing). | Fustolo: where only part of a judgment is disputed, the undisputed portion should count toward the statutory claim total. | Court rejected the all-or-nothing approach; allowed dividing the judgment into disputed and undisputed components and counted undisputed portion. |
| Whether, on the summary judgment record, Fustolo established a bona fide dispute sufficient to defeat entry of an order for relief | Petitioning creditors: Fustolo cannot show a bona fide dispute as to liability or amount for the judgment components that matter. | Fustolo: conceded he owes on TPD notes but disputes the ~ $4M attributable to an alleged RBH guaranty and raised usury/interest issues. | Court found Fustolo rebutted the presumption as to the ~$4M phantom guaranty component; remaining judgment components are undisputed and sufficient to permit order for relief. |
Key Cases Cited
- In re Drexler, 56 B.R. 960 (Bankr. S.D.N.Y. 1986) (unstayed state judgments on appeal are not bona fide disputes)
- Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433 (4th Cir. 2004) (prima facie case from judgment but debtor may rebut to show bona fide dispute)
- Marciano v. Chapnick (In re Marciano), 708 F.3d 1123 (9th Cir. 2013) (adopts Drexler; unstayed judgments on appeal are per se not in bona fide dispute)
- In re Kelley, 498 B.R. 392 (1st Cir. B.A.P. 2013) (summary judgment standards in bankruptcy)