Opinion ID: 787272
Heading Depth: 3
Heading Rank: 1

Heading: Bona Fide Dispute

Text: 18 Petitioners in an involuntary Chapter 7 proceeding must establish that they have claims totaling at least $10,775 that are not subject to bona fide dispute. 11 U.S.C. § 303(b)(1). Here, Focus contends that the petitioning creditors' claims are subject to bona fide dispute, notwithstanding the bankruptcy court's finding that Focus owed the petitioning creditors millions of dollars. Focus contends that its obligations to these creditors is in dispute because of potential adjustments Focus' clients may be entitled to from the petitioning creditors. 19 In declarations filed in Focus' state court litigation with Sears, Focus' chairman and chief executive officer, Tom Rubin, explained that Focus routinely [paid] the media 90 days after [receiving] their bills. Rubin also admitted that Focus was liable to the media for many millions of dollars. A document that surfaced in the bankruptcy proceedings, Focus' aged payables report, confirmed Rubin's admission, listing $3 million in debts older than 90 days that Focus owed to the petitioning creditors as of March 31, 2000. 6 This amount far exceeds the $10,775 required by § 303(b)(1). 7
20 Focus contends that the amounts listed in its aged payables report overstate its actual debts because of an adjustment process called post-analysis, whereby Focus would reconcile advertising charges with the media for commercial spots that failed to run at the promised time or to achieve the promised audience. According to Focus, post-analysis is completed 90 to 180 days after the end of the quarter, after which Focus would contact the media stations to negotiate compensation for nonconforming commercials. Thus, for example, [t]he parties... agreed that Focus Media would pay invoices from NBC's stations within 90 days after receipt of the station invoice, and that [post-analysis] would be resolved by negotiation and compromise, before any litigation was filed. 21 It is undisputed that the commercial spots giving rise to the debts listed in Focus' aged payables report were never subjected to post-analysis. Focus contends, however, that it was unable to conduct a post-analysis because its employees quit during the bankruptcy proceeding and because the trustee took custody of the relevant files. In lieu of a post-analysis, Focus submitted to the bankruptcy court declarations from analysts who alleged that the petitioning creditors had overcharged Focus and, more generally, that a full post-analysis would reduce the amounts Focus owed to the petitioning creditors. Focus contends that because there has not been a full reconciliation of its debts to the petitioning creditors, those debts cannot be ascertained with certitude and are thus in dispute. 22 Moreover, relying on our decision in Liberty Tool & Manufacturing v. Vortex Fishing Systems, Inc. (In re Vortex Fishing Systems), 277 F.3d 1057 (9th Cir.2002), Focus further contends that any uncertainty or dispute as to the amount of a debt is a bona fide dispute unless the dispute arises from a transaction that is wholly separate from the debt itself. Vortex held that a bona fide dispute exists when there is a legitimate disagreement over whether money is owed, or, in certain cases, how much. Id. at 1064 (emphasis added). Vortex also discussed Chicago Title Insurance Co. v. Seko Investment, Inc. (In re Seko Investment, Inc.), 156 F.3d 1005(9th Cir.1998), noting that Seko had held that a dispute as to the amount of a claim is not a bona fide dispute if it is based on a counterclaim arising from a wholly separate transaction. Vortex, 277 F.3d at 1065 n. 2. Focus argues that the uncertainty of the amounts owed to the petitioning creditors does not arise from a wholly separate transaction within the meaning of Vortex and Seko, and is therefore a bona fide dispute that defeats the petition under 11 U.S.C. § 303(b)(1). We conclude that the bankruptcy court properly found against Focus both on the facts and as a matter of law.
23 Regarding the facts, the bankruptcy court found that even if post-analysis would have discovered nonconforming commercials that would have entitled Focus (or its clients) to an adjustment, the amounts shown as currently due in Focus' aged payables report remained valid. Rubin's explanation of post-analysis and his acknowledgment that Focus owed millions of dollars to the media companies establish that Focus was obligated to pay the amounts billed by the media as they came due, with any adjustments coming from a later and separate post-analysis. Further, as the district court explained: 24 Focus makes only an argument for the potential that the amounts would be in dispute. At the stage of summary adjudication, it was incumbent upon Focus Media to present evidence to support its contention of disputes as to the actual amounts, listed in the reports or otherwise at issue, not merely to speculate how such claim could, potentially, be disputed.... [The declaration it submitted] amounted to argument, not a demonstration of a bona fide dispute. 25 Thus, the bankruptcy court properly concluded that Focus had not established any actual dispute as to the amounts owed the petitioning creditors. 26 Regarding our case law, even assuming there was an actual, non-theoretical dispute as to the precise amounts Focus owed the petitioning creditors, under Seko such a dispute is relevant only if it takes the total debt below $10,775. We disagree with Focus' contention that an uncertainty or dispute as to amounts owed above $10,775 can create a bona fide dispute as to the entire debt. When a counterclaim arises from the same transaction as the debtor's claim, it: 27 may serve to work a diminution or setoff of the claim of the petitioning creditors. Because the Bankruptcy Code requires that the claims of petitioning creditors against a debtor aggregate [a certain amount], this diminution can reduce a petitioning creditor's claim so that the creditor is no longer eligible to file an involuntary petition. 28 Seko, 156 F.3d at 1008(citations and internal quotation marks omitted). 8 Under Seko, a dispute as to the amount of a claim gives rise to a bona fide dispute only when (1) it does not arise from a wholly separate transaction and (2) netting out the claims of debtors could take the petitioning creditors below the amount threshold of § 303. Id. 29 That Vortex referred only to the first of Seko's premises does not undermine the second. Seko's discussion of netting out the claims of debtors merely stated a widely accepted proposition regarding involuntary bankruptcy petitions: [I]f at least a portion of the debt that is the subject of the petition is undisputed, the undisputed portion is sufficient to create a debt under Section 303(b)(1) not subject to a bona fide dispute. IBM Credit Corp. v. Compuhouse Sys., Inc., 179 B.R. 474, 479 (W.D.Pa.1995); see Subway Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 221 (5th Cir.1993) (explaining that even if creditors had failed to make reasonable efforts to mitigate their damages, any such failure would serve only to reduce the amount of [their] claims ... [;] it would not constitute a substantial factual or legal question bearing on the debtors' liability); see also In re Willow Lake Partners II, L.P., 156 B.R. 638, 642-43 (Bankr.W.D.Mo.1993); In re F.R.P. Indus., Inc., 73 B.R. 309, 312 (Bankr.N.D.Fla.1987); In re Onyx Telecomm., Ltd., 60 B.R. 492, 497 (Bankr.S.D.N.Y.1985); 2 Collier on Bankruptcy § 303.03[2][b][i] (15th Ed. revised 2000) [hereinafter Collier] (citing Seko for the proposition that a counterclaim arising out of a different transaction (and hence not creating a right of recoupment) does not evidence the existence of a bona fide dispute. Counterclaims, however, may be relevant in determining whether the requisite dollar amount is met under section 303(b)(1) or whether the debtor is generally not paying its debts as they become due under section 303(h)(1).). 30 Applying this proposition here, we conclude that Focus did not raise a triable issue of fact as to whether the petitioning creditors have claims totaling at least $10,775 that are not subject to a bona fide dispute. Plainly, Focus did not present evidence to show that its debts to the petitioning creditors fell below this threshold. Nothing in the record rebuts the petitioning creditors' documented assertions that their claims totaled millions of dollars, well over $10,775. Nor is there evidence suggesting that any post-analysis would have generated adjustments of the magnitude necessary to shrink the millions of dollars of debt anywhere near $10,775, much less below that amount. Moreover, Focus has not pointed to evidence that the interim trustee prevented it from conducting post-analysis, or any authority supporting its view that the departure of Focus' employees excused it from having to conduct post-analysis. We therefore hold that the bankruptcy court appropriately granted summary judgment to the petitioning creditors, finding that they collectively held claims totaling at least $10,775 that were not subject to a bona fide dispute.