IN RE: GEORGES MARCIANO, Debtor. GEORGES MARCIANO, Appellant, v. STEVEN CHAPNICK; JOSEPH FAHS; ELIZABETH TAGLE, Appellees, and DAVID K. GOTTLIEB, Chapter 11 Trustee, Intervenor.
No. 11-60070
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
February 27, 2013
BAP No. 11-1008
Appeal from the Ninth Circuit Bankruptcy Appellate Panel. Kirscher, Markell, and Dunn, Bankruptcy Judges, Presiding. Argued and Submitted November 7, 2012—Pasadena, California. Filed February 27, 2013.
FOR PUBLICATION
OPINION
Before: Susan P. Graber, Sandra S. Ikuta, and Andrew D. Hurwitz, Circuit Judges.
Opinion by Judge Hurwitz; Dissent by Judge Ikuta
SUMMARY*
Bankruptcy
Affirming the bankruptcy court’s summary judgment, the panel held that an involuntary bankruptcy petition met the requirements of
Following the “Drexler” rule, and declining to follow the approach of the Fourth Circuit, the panel held that an unstayed state judgment on appeal is per se a “claim against [the debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount,” and thus meets the requirements of
The panel also held that service of the summons and complaint was proper, and the bankruptcy court did not err in entering an order precluding discovery as to the petitioning creditors’ alleged bad faith in filing the involuntary petition.
Dissenting, Judge Ikuta wrote that the majority’s adoption of a per se rule for claims arising from certain state court judgments created a circuit split, was contrary to In re Vortex Fishing Sys., Inc., 277 F.3d 1057 (9th Cir. 2001), and erased a protection given to debtors under the Bankruptcy Code.
COUNSEL
Bradley E. Brook, Law Offices of Bradley E. Brook, Los Angeles, California, for Appellees/ Petitioning Creditors.
Jeremy V. Richards, Pachulski Stang Ziehl & Jones LLP, Los Angeles, California, for Chapter 11 Trustee.
OPINION
HURWITZ, Circuit Judge:
This case presents a question of first impression in this court: Under
I.
In 2007, Georges Marciano sued five of his former employees in California Superior Court, alleging theft. Three employees—Joseph Fahs, Steven Chapnick, and Elizabeth Tagle (the “Petitioning Creditors“)—cross-complained, alleging defamation and intentional infliction of emotional distress. As a sanction for a pattern of discovery abuses, the state trial court struck Marciano’s answers to the cross-claims. After a jury trial on damages, the trial court entered judgments in favor of Fahs, Chapnick, and Tagle for $55 million, $35 million, and $15.3 million, respectively.1
Marciano appealed the three judgments to the California Court of Appeal but did not post a bond to stay them during appeal. See
In addition to the Petitioning Creditors, five others had obtained judgments against Marciano totaling approximately $190 million. While the appeals of the Petitioning Creditors’ judgments were pending, various judgment creditors began collection efforts. The Petitioning Creditors then filed an involuntary petition, pursuant to
Bankruptcy Code, against Marciano in the United States Bankruptcy Court for the Central District of California.
Marciano moved to dismiss the petition for defective service of process. The bankruptcy court denied the motion. The bankruptcy court subsequently rejected Marciano’s efforts to conduct discovery as to whether the involuntary petition had been filed in bad faith and granted the Petitioning Creditors’ motion for summary judgment. In re Marciano, 446 B.R. 407 (Bankr. C.D. Cal. 2010). The United States Bankruptcy Appellate Panel for the Ninth Circuit (“BAP“) affirmed. Marciano v. Fahs (In re Marciano), 459 B.R. 27 (B.A.P. 9th Cir. 2011).
This appeal followed. We have jurisdiction pursuant to
II.
Marciano’s first argument on appeal—that the bankruptcy court erred in denying his motion to dismiss for defective service of process—need not detain us long. Bankruptcy Rule 7004(b) permits service of the summons and complaint by first class mail “to the individual’s dwelling house or usual place of abode or to the place where the individual regularly conducts a business or profession.” Fed. R. Bankr. P. 7004(b)(1). The petition and summons here were served at
a Beverly Hills address. At the time of service, Marciano had listed that address with the California Secretary of State as the place where he could be served with process as the agent for four of his businesses. Marciano’s designation of the Beverly Hills address for service of process was a certification that he either lived at or regularly conducted business there, see
III.
Marciano’s second argument, however, requires more extended discussion. He contends that, because the judgments obtained by the Petitioning Creditors were on appeal when the involuntary petition was filed, the bankruptcy court should have dismissed the petition as not meeting the requirements of
Under
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 as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent,
undisputed claims aggregate at least $14,425 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims[.]
Perhaps because the Bankruptcy Code does not define “bona fide dispute,” interpretation of
to hold that the pendency of the debtor’s appeal created a ‘bona fide dispute.‘” In re AMC Investors, 406 B.R. at 484 (quoting In re Drexler, 56 B.R. at 967).
The minority approach—the “Byrd” rule—holds that, although “it will be the unusual case in which a bona fide dispute exists in the face of claims reduced to state court judgments[,] [s]uch judgments do not guarantee the lack of a bona fide dispute.” Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 438 (4th Cir. 2004). Under the Byrd rule, the petitioning creditor makes a “prima facie” case of compliance with
With appropriate deference to our sister circuit, we conclude that the Drexler rule is correct as a matter of both statutory interpretation and federalism.
Section 303(b)(1) requires that a petitioning creditor hold a “claim” against the debtor. Under
applies are the three unstayed California judgments, not the underlying tort claims of defamation or slander. Under California law, these judgments, in the absence of a stay pending appeal, were plainly not contingent as to liability or amount. Rather, the Petitioning Creditors were entitled to immediate payment of those claims in the amounts set by the superior court judgments. See
Although conceding that the Petitioning Creditors were free under California law to collect the amounts owed under the judgments at the time the involuntary petition was filed, Marciano nonetheless claims that the bankruptcy court should have evaluated the merits of the pending appeals before determining that the claims were not in bona fide dispute. His argument relies heavily on Liberty Tool & Manufacturing v. Vortex Fishing Systems, Inc. (In re Vortex Fishing Systems, Inc.), which posed the relevant inquiry under
The argument is not persuasive. Vortex dealt with contract claims not yet reduced to judgment. Id. at 1062–63. Under those circumstances,
is “to prevent creditors from using involuntary bankruptcy to coerce a debtor to satisfy a judgment even when substantial questions may remain concerning the liability of the debtor” (internal quotation marks omitted)). But where, as here, the amount and validity of the claims of the Petitioning Creditors have been established by non-default state judgments and the debtor’s immediate liability cannot be disputed under governing state law, there can be no such concerns. Indeed, it is difficult to imagine a more “objective” measure of the validity of a claim than an unstayed judgment entered by a court of competent jurisdiction.
In these circumstances, allowing the bankruptcy court to inquire further as to the validity of the Petitioning Creditor’s claims, rather than establishing an objective basis for evaluating
or usage in the courts of such State.”
Congress could, of course, have modified the historic recognition of state sovereignty in
Where a judgment has not been paid, or has not been superseded on appeal by a bond . . . surely the judgment debtor cannot avoid the effect of levy and execution. And here the effect of the appeal . . . did not itself operate to stay execution or to stay proceedings or to make the judgment any the less an obligation absolutely owing by the bankrupt. . . . If the debt was then a fixed liability in the form of a judgment the right to file the claim existed.
Moore v. Douglas (In re Berlin Dye Works & Laundry Co.), 230 F. 399, 402 (9th Cir. 1916); see also Grafton v. Lloyd,
86 F.2d 205 (9th Cir. 1936) (per curiam) (rejecting a debtor’s contention that unstayed state judgments could not support an involuntary petition). Section 63a was replaced by
Moreover, the Drexler approach well serves a central purpose of the involuntary bankruptcy laws—to “protect the threatened depletion of assets or to prevent the unequal treatment of similarly situat[ed] creditors.” In re Manhattan Indus., Inc., 224 B.R. 195, 200 (Bankr. M.D. Fla. 1997). When a bankruptcy court prevents holders of unstayed state judgments from invoking involuntary bankruptcy, the ready alternative is precisely what the Code seeks to avoid—creditors “racing to the courthouse to dismember the debtor.” Danning v. Bozek (In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1217 (9th Cir. 1988).
We thus hold that an unstayed non-default state judgment is not subject to bona fide dispute for purposes of
Petitioning Creditors
IV.
Finally, Marciano contends that the bankruptcy court erred in entering an order precluding discovery as to the Petitioning Creditors’ alleged bad faith in filing the involuntary petition because (1) two Petitioning Creditors were the most aggressive of his creditors in their collection efforts, (2) the third Petitioning Creditor joined in the involuntary petition only after her settlement overtures were rebuffed, and (3) the Petitioning Creditors opposed Marciano’s various stay applications. We review the entry of a protective order for abuse of discretion. Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122, 1130 (9th Cir. 2003).
The Bankruptcy Code does not expressly provide for dismissal of an otherwise proper involuntary petition because of the subjective “bad faith” of the filers. But even assuming the theoretical availability of such a defense, we cannot perceive the benefit of discovery on the issue here, where each of the Petitioning Creditors held a substantial judgment against Marciano. The bankruptcy court did not abuse its discretion in concluding that further discovery would have been unlikely to produce any evidence material to the
pending summary judgment motions. See
AFFIRMED.
IKUTA, Circuit Judge, dissenting:
The initiation of an involuntary bankruptcy case can have substantial consequences for a debtor, including “loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment.” In re Reid, 773 F.2d 945, 946 (7th Cir. 1985). To avoid potential abuses, the Bankruptcy Code precludes creditors from forcing debtors into bankruptcy based on claims that are subject to a bona fide dispute,
I
A
In this case, a state court awarded some $95.3 million in damages to three of Marciano’s former employees for defamation and intentional infliction of emotional distress. See Fahs v. Marciano, No. BC
Marciano argues, as he did before the bankruptcy court and bankruptcy appellate panel, that at the time the involuntary petition was filed, the claims arising from these judgments were “the subject of a bona fide dispute as to liability or amount” for purposes of
shortcut, and decides as a matter of law that there cannot be “an objective basis for either a factual or a legal dispute as to the validity,” Vortex, 277 F.3d at 1064, of a claim based on an unstayed state court judgment, see Maj. op. at 8. This is contrary to the text of the statute and our case law.
B
Section 303(b) of the Code specifies the circumstances in which creditors can place a debtor into involuntary bankruptcy.1 Because “[t]he filing of an [i]nvoluntary [p]etition should not be lightly undertaken,” Higgins v. Vortex Fishing Sys., Inc. (Higgins), 379 F.3d 701, 707 (9th Cir. 2004) (quoting In re Advance Press & Litho, Inc., 46 B.R. 700, 702 (Bankr. D. Colo. 1984)), Congress created safeguards to “discourage inappropriate and frivolous filings.” Id. Among other things, at least three creditors must join forces to commence an involuntary case against a debtor
like Marciano, and each of them must hold a claim “that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount.”
In Vortex, we adopted “the objective test used by the other circuits” for determining whether there is a “bona fide dispute” under
The Fourth Circuit reached the same conclusion in Byrd. In considering “whether an unstayed state court judgment that is pending appeal can constitute a ‘bona fide dispute’ for purposes of the Bankruptcy Code,” 357 F.3d at 435–36, Byrd first adopted the same “objective test” for determining the existence of a bona fide dispute as we adopted in Vortex. See id. at 437. The Fourth Circuit then declined to adopt any per se rule that claims based on unstayed state court judgments can never be in “bona fide dispute.” Id. at 438. Byrd’s reasoning was straightforward: even after judgment is rendered in a state case, “substantial questions may remain about a debtor’s liability, notwithstanding judgments in a creditor’s favor.” Id. (quoting In re Prisuta, 121 B.R. 474, 476 (Bankr. W.D. Pa. 1990)). Although “it will be the unusual case in which a bona fide dispute exists in the face of claims reduced to state court judgments,” state court
judgments hardly “guarantee the lack of a bona fide dispute,” particularly in the absence of an appellate ruling or “in the face of contrary rulings by other” state trial courts. Id.
Byrd’s reasoning is clearly applicable here. Given the circumstances of the $95 million judgments against Marciano, the bankruptcy court was at least bound to consider whether there were legitimate questions regarding Marciano’s liability and the amount of damages, as well as whether the trial court’s conclusion was contrary to the rulings of other state courts. See, e.g., id. As later events showed, Marciano’s contention that the employees’ claims were subject to a bona fide dispute as to amount was well justified: the state appellate court ultimately reduced the amount of each award to $10 million. See Gottlieb v. Fahs, No. BC218087, 2012 WL 5310004, at *1 (Cal. Ct. App. Oct. 29, 2012). Under these circumstances, the bankruptcy court erred in failing to apply the Vortex test to determine whether there was an objective basis for a dispute as to the validity of the creditors’ claims.
II
Instead of adhering to our precedent and following the Fourth Circuit’s well-reasoned lead, the majority adopts a shortcut solution that skips over the safeguard of scrutinizing claims carefully before placing a debtor in involuntary bankruptcy. None of the majority’s reasons for enunciating this new per se rule withstands scrutiny.
A
First, the majority errs in concluding that an immediately enforceable judgment is equivalent to an undisputed claim. Maj. op. at 8-9. The majority’s reasoning seems to be that once a claim is reduced to judgment, the judgment is a “claim,” and because an unstayed state court judgment is immediately enforceable, there can be no objective basis for dispute as to the “claim’s” liability or amount. Id. Both parts of this analysis are wrong. First, the Code’s definition of “claim” does not include “judgment.”
Once this error is corrected, it is clear that the immediate enforceability of an unstayed judgment has no bearing on whether there is “an objective basis for either a factual or a legal dispute as to the validity of the debt.” Vortex, 277 F.3d at 1064. If a “judgment” is not a “claim,” then it is irrelevant whether the enforceability of a judgment is beyond dispute. See, e.g., In re Henry S. Miller Commercial, LLC, 418 B.R. 912, 920 (Bankr. N.D. Tex. 2009) (“[A]ll of the courts that conclude that an unstayed judgment (even if on appeal) is not a claim that is the subject of a bona fide dispute seem to conflate the concept of ‘enforceable judgment’ with the concept of there being a claim that is not subject to a bona fide dispute.“). Under California law, a creditor’s claim may
be subject to a bona fide dispute, and the debtor may ultimately prevail on appeal, even if the creditor has enforced an unstayed judgment issued by the trial court. If the debtor does ultimately prevail on appeal, a court can simply unwind the creditor’s collection efforts. See Stockton Theatres, Inc. v. Palermo, 264 P.2d 74, 78 (Cal. Dist. Ct. App. 1953); 9 Witkin, Cal. Proc. 5th, §§ 900-03 (2008). When a judgment is reversed, both the appellate court and the trial court will attempt “to place the parties in as favorable a position as they could have been in had the judgment[ ] not been enforced pending appeal.” Gunderson v. Wall, 126 Cal. Rptr. 3d 880, 883 (Cal. Ct. App. 2011) (internal quotation marks omitted);
Because an unstayed state judgment is not a “claim,” and because the immediate enforceability of a judgment is irrelevant to the
B
The majority likewise errs in ignoring the objective test we enunciated in Vortex. Although the majority claims that Vortex is distinguishable on its facts, and should be read as applying only to “contract claims not yet reduced to judgment,” Maj. op. at 9, this purported distinction is plainly wrong. We first noted in Vortex that “[t]his Circuit has not defined a ‘bona fide dispute’ . . . nor is it defined by statute.”
Vortex, 277 F.3d at 1064. We then considered the objective test enunciated by the Seventh Circuit, and noted that “all other circuit courts that have considered the question have adopted some variation” of this objective test. Id. After considering and rejecting the use of a subjective test, we stated that “[w]e join our sister circuits in adopting the objective test for dispute regarding liability or amount.” Id. Clearly, our articulation of the objective test in Vortex (expressly joining the other circuits that had adopted the test) was not dependent on the facts of that case, but rather provided the circuit’s construction of “subject to a bona fide dispute” in
Alternatively, the majority asserts that its per se rule is consistent with Vortex, because a per se rule is even more “objective” than the Vortex test. Maj. op. at 10. This makes little sense. The Vortex test does not require courts to be “objective” in some unspecified manner, but rather to “determine whether there is an objective basis for either a factual or a
C
The majority also argues that “the Byrd approach runs counter to principles of federalism,” Maj. op. at 10, by failing to give state court judgments “full faith and credit” in
accordance with the Full Faith and Credit Act, see
The Full Faith and Credit Act requires federal courts to give state court judgments the same “full faith and credit” they would receive in courts of that state. See Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 373 (1996). Generally, this means that federal courts must “apply the pertinent state’s collateral estoppel principles.” In re Cantrell, 329 F.3d 1119, 1123 (9th Cir. 2003); see also Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). In this case, for instance,
424 F.3d 864, 872 (9th Cir. 2005), since these issues were already fully adjudicated in state court.
But giving effect to the language of
D
The majority’s legislative history argument likewise fails. The majority asserts that legislative history shows that the Bankruptcy Reform Act “was designed to lighten the burden for creditors seeking to file an involuntary bankruptcy petition.” Thus, according to the majority,
Yet, as is so often the case, different portions of the same legislative history point in the other direction, and suggest that the “bona fide dispute” language was added to protect debtors from threats of involuntary bankruptcy by creditors holding claims of questionable validity. See 130 Cong. Rec. S.7,618 (daily ed. June 19, 1984) (statement of Sen. Baucus) (“I believe this amendment, although a simple one, is necessary to protect the rights of debtors and to prevent misuse of the bankruptcy system as a tool of coercion.“); 148 Cong. Rec. S.11,728 (daily ed. Nov. 20, 2002) (statement of Sen. Baucus) (“[A]n involuntary bankruptcy action should not be employed by litigants seeking to gain more leverage than they would have if they disputed contract performance in the proper judicial forum.“); see also Lawrence Ponoroff, Involuntary Bankruptcy and the Bona Fides of a Bona Fide Dispute, 65 Ind. L. J. 315, 335 (1990) (noting that these “remarks evince a revived concern about the potentially ruinous consequences which the initiation of an involuntary proceeding can have on a debtor’s business.“). At best, the evidence we have about Congress’s intentions and purposes with respect to the “bona fide dispute” language is limited and ambiguous. The majority thus falls into the dangerous trap of “allowing ambiguous legislative history to muddy
clear statutory language.” Milner v. Dep’t of the Navy, 131 S. Ct. 1259, 1266 (2011).
E
Finally, the majority turns to policy, and asserts that its per se “approach well serves a central purpose of the involuntary bankruptcy laws to ‘protect the threatened depletion of assets or to prevent the unequal treatment of similarly situated creditors.’” Maj. op. at 12 (quoting In re Manhattan Indus., Inc., 224 B.R. 195, 200 (Bankr. M.D. Fla. 1997)). But the Code does not instruct courts to pursue this goal at all costs. “The Bankruptcy Code does not require that a debtor’s assets be dissipated while frivolous or hopeless appeals wend their way through the courts, but neither does it permit debt collection by every creditor that has reduced its claims to judgment.” Byrd, 357 F.3d at 441. To the contrary, the “bona fide dispute” language in
III
Under Vortex, the majority should have examined whether there was an objective basis for Marciano’s contention. By ignoring this case-specific inquiry in favor of a per se rule, the majority has erroneously elevated judicial efficiency above Congress’s clear commands, ignored our own
We could have avoided these problems merely by following the language of the statute as interpreted by our precedent. Because we failed to do so, I respectfully dissent.
Notes
(b) 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 as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $14,425 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims
The records and judicial proceedings of any court of any such State, Territory or Possession, or copies thereof, shall be proved or admitted in other courts within the United States and its Territories and Possessions by the attestation of the clerk and seal of the court annexed, if a seal exists, together with a certificate of a judge of the court that the said attestation is in proper form.
Such Acts, records and judicial proceedings or copies thereof, so authenticated, shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken.