Marciano v. Chapnick (In re Marciano)

708 F.3d 1123

In re Georges MARCIANO, Debtor.Georges Marciano, Appellant,

v. Steven Chapnick; Joseph Fahs; Elizabeth Tagle, Appellees,andDavid K. Gottlieb, Chapter 11 Trustee, Intervenor.

No. 11–60070.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 7, 2012.

Filed Feb. 27, 2013.

Daniel J. McCarthy, Hill, Farrer & Burrill, LLP, Los Angeles, CA; Richard C. Macias and Sanford L. Frey, Creim Macias Koenig & Frey LLP, Los Angeles, CA, for Appellant/Chapter 11 Debtor.

Bradley E. Brook, Law Offices of Bradley E. Brook, Los Angeles, CA, for Appellees/Petitioning Creditors.

Jeremy V. Richards, Pachulski Stang Ziehl & Jones LLP, Los Angeles, CA, for Chapter 11 Trustee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel Kirscher, Markell, and Dunn, Bankruptcy Judges, Presiding. BAP No. 11–1008.

Before: SUSAN P. GRABER, SANDRA S. IKUTA, and ANDREW D. HURWITZ, Circuit Judges.

OPINION

HURWITZ, Circuit Judge:

This case presents a question of first impression in this court: Under § 303(b)(1) of the Bankruptcy Code, 11 U.S.C. § 303(b)(1), is an unstayed state judgment on appeal 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?” Our answer to that question is “yes.”

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. SeeCal.Civ.Proc.Code § 917.1(1) (“Unless an undertaking is given, the perfecting of an appeal shall not stay enforcement of the judgment or order in the trial court if the judgment or order is for ... [m]oney or the payment of money ...”). The Superior Court and Court of Appeal denied Marciano's stay requests, and the California Supreme Court denied his petition for review.

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 § 303(b)(1) of the 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 (9th Cir. BAP 2011).

This appeal followed. We have jurisdiction pursuant to 28 U.S.C. § 1291 and 28 U.S.C. § 158.²

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, seeCal. Corp.Code § 1502(b), and the bankruptcy court therefore did not err in denying the motion to dismiss.

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 § 303(b)(1) of the Bankruptcy Code.

Under § 303(b)(1), an involuntary bankruptcy may be commenced against a debtor by the filing of a petition

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[.]

11 U.S.C. § 303(b)(1) (footnote omitted). The bankruptcy court and the BAP successively held that an unstayed non-default state judgment is a claim not in bona fide dispute as to liability or amount under § 303(b)(1). In re Marciano, 446 B.R. at 422;In re Marciano, 459 B.R. at 54–55. Because the issue turns on interpretation of the Bankruptcy Code, we review those holdings de novo. Temecula v. LPM Corp. (In re LPM Corp.), 300 F.3d 1134, 1136 (9th Cir.2002).

Perhaps because the Bankruptcy Code does not define “bona fide dispute,” interpretation of § 303(b)(1) has divided courts. The majority view—the “Drexler ” rule—is that unstayed non-default state judgments on appeal are not subject to bona fide dispute for purposes of § 303(b)(1). ³In re Drexler, 56 B.R. 960, 967 (Bankr.S.D.N.Y.1986); accord In re AMC Investors, LLC, 406 B.R. 478, 487 (Bankr.D.Del.2009); Norris v. Johnson (In re Norris), 1997 WL 256808, at *5, 114 F.3d 1182 (5th Cir.1997); In re Euro–Am. Lodging Corp., 357 B.R. 700, 712 (Bankr.S.D.N.Y.2007) (per curiam) (unpublished); In re Amanat, 321 B.R. 30, 37 (Bankr.S.D.N.Y.2005); In re Raymark Indus., Inc., 99 B.R. 298, 300 (Bankr.E.D.Pa.1989); In re Caucus Distribs., Inc., 83 B.R. 921, 929 (Bankr.E.D.Va.1988). Cases following this approach reason that it would be “contrary to the basic principles respecting, and would effect a radical alteration of, the long-standing enforceability of unstayed final judgments 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 § 303(b)(1) by presenting an unstayed state judgment, but the debtor is given the opportunity nonetheless to demonstrate the existence of a bona fide dispute as to liability or the amount of the debt. Id. at 439;accord In re Henry S. Miller Commercial, LLC, 418 B.R. 912, 920–21 (Bankr.N.D.Tex.2009); In re Graber, 319 B.R. 374, 377–78 (Bankr.E.D.Pa.2004); In re Prisuta, 121 B.R. 474, 476 (Bankr.W.D.Pa.1990); In re Tucker, No. 5:09–bk–914, 2010 WL 4823917, at *3 (Bankr.N.D.W.Va. Nov. 22, 2010); In re Briggs, Nos. 07–34534, 07–34533, 2008 WL 190463, at *2 (Bankr.N.D.Tex. Jan. 18, 2008).

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 § 101(5)(A) of the Bankruptcy Code, a “claim” is a “right to payment, whether or not such right is reduced to judgment.” 11 U.S.C. § 101(5)(A). Thus, a right to payment includes a “judgment.” Accordingly, the “claims” of the three Petitioning Creditors to which the “not in bona fide dispute” screen of § 303(b)(1) 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. SeeCal.Civ.Proc.Code § 917.1(a)(1). The Petitioning Creditors thus had fully vested property interests in these claims under California law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (noting that property interests in bankruptcy proceedings are typically defined by state law).

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 § 303(b)(1) as “whether there is an objective basis for either a factual or legal dispute as to the validity of the debt.” 277 F.3d 1057, 1064 (9th Cir.2001) (internal quotation marks omitted).

The argument is not persuasive. Vortex dealt with contract claims not yet reduced to judgment. Id....