Georges Marciano v. Steven Chapnick
708 F. 3d 1123, 2013 WL 703157, 69 Collier Bankr. Cas. 2d 506 (2013)
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Rule of Law:
Under § 303(b)(1) of the Bankruptcy Code, a claim based on an unstayed, non-default state court judgment that is pending appeal is not subject to a 'bona fide dispute' as to liability or amount and can be used to support an involuntary bankruptcy petition.
Facts:
- Georges Marciano sued five of his former employees, including Joseph Fahs, Steven Chapnick, and Elizabeth Tagle, in California state court for theft.
- Fahs, Chapnick, and Tagle filed cross-complaints against Marciano, alleging defamation and intentional infliction of emotional distress.
- As a sanction for Marciano's pattern of discovery abuses, the state trial court struck his answers to the cross-claims.
- After a trial on damages, the court entered judgments against Marciano for $55 million, $35 million, and $15.3 million in favor of Fahs, Chapnick, and Tagle, respectively.
- Marciano appealed these judgments but did not post a bond, which meant the judgments were not stayed and remained enforceable during the appeal.
- Marciano's requests for a stay were denied by the California Superior Court, Court of Appeal, and Supreme Court.
- While Marciano's appeals were pending, Fahs, Chapnick, and Tagle, along with other judgment creditors, began collection efforts against him.
Procedural Posture:
- Joseph Fahs, Steven Chapnick, and Elizabeth Tagle (the 'Petitioning Creditors') filed an involuntary bankruptcy petition against Georges Marciano in the U.S. Bankruptcy Court for the Central District of California.
- Marciano filed a motion to dismiss the petition, which the bankruptcy court denied.
- The bankruptcy court granted summary judgment in favor of the Petitioning Creditors, finding their claims were not subject to a bona fide dispute.
- Marciano appealed the bankruptcy court's decision to the United States Bankruptcy Appellate Panel for the Ninth Circuit (BAP).
- The BAP, as the intermediate appellate court, affirmed the bankruptcy court's order.
- Marciano, as the appellant, then appealed the BAP's decision to the U.S. Court of Appeals for the Ninth Circuit, with the Petitioning Creditors as the appellees.
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Issue:
Under § 303(b)(1) of the Bankruptcy Code, is a claim based on an unstayed state court judgment that is pending appeal subject to a 'bona fide dispute' as to liability or amount, thereby precluding it from being used to initiate an involuntary bankruptcy proceeding?
Opinions:
Majority - Hurwitz, Circuit Judge
No. An unstayed, non-default state judgment that is pending appeal is per se not the subject of a bona fide dispute for the purposes of initiating an involuntary bankruptcy petition under § 303(b)(1). The court adopts the majority 'Drexler' rule, reasoning that the 'claim' under the Bankruptcy Code is the judgment itself, which constitutes a legal 'right to payment.' Under California law, an unstayed judgment creates an immediate, enforceable right to payment. Allowing a bankruptcy court to second-guess the merits of a pending state appeal would undermine principles of federalism and the Full Faith and Credit statute (28 U.S.C. § 1738), which requires federal courts to give state judgments the same effect they have in the state of origin. This bright-line rule provides an objective standard and serves the bankruptcy policy of preventing a 'race to the courthouse' by creditors to dismember the debtor's assets.
Dissenting - Ikuta, Circuit Judge
Yes. A claim based on an unstayed state court judgment can be the subject of a bona fide dispute, and bankruptcy courts must conduct a case-by-case factual inquiry to determine if one exists. The majority's per se rule contradicts Ninth Circuit precedent established in In re Vortex, which requires an objective, case-by-case analysis. A 'claim' is the underlying 'right to payment,' not the judgment itself, and the immediate enforceability of a judgment is distinct from whether the underlying liability is genuinely disputed on appeal. The majority's approach creates a circuit split with the Fourth Circuit's 'Byrd' rule and eliminates a key statutory protection designed to prevent creditors from using involuntary bankruptcy to coerce debtors over claims that may be overturned.
Analysis:
This decision establishes a bright-line rule in the Ninth Circuit for involuntary bankruptcy petitions, aligning it with the majority of jurisdictions following the 'Drexler' rule. By holding that an unstayed state judgment is per se not a 'bona fide dispute,' the court prioritizes federalism, comity, and the finality of state court decisions over a debtor's ability to challenge the underlying claim during a pending appeal. This ruling solidifies a circuit split with the Fourth Circuit, which requires a case-by-case analysis. For practitioners, this means a creditor holding an unstayed judgment has a powerful and straightforward tool to initiate involuntary bankruptcy, while debtors must secure a stay on appeal to prevent such actions.
