Opinion ID: 822724
Heading Depth: 4
Heading Rank: 1

Heading: by three or more entities, each of which is

Text: 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) (emphasis added). IN RE: MARCIANO 17 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.” § 303(b)(1). In Vortex, we adopted “the objective test used by the other circuits” for determining whether there is a “bona fide dispute” under § 303(b). 277 F.3d at 1062. The test requires courts to “determine whether there is an objective basis for either a factual or a legal dispute as to the validity of the debt.” Id. at 1064 (quoting In re Busick, 831 F.2d 745, 750 (7th Cir. 1987)). This is a factual inquiry. Id. “A bankruptcy court is not asked to evaluate the potential outcome of a dispute, but merely to determine whether there are facts that give rise to a legitimate disagreement over whether money is owed, or, in certain cases, how much.” Id. By requiring a factual, case-by-case inquiry into the nature of each claim, Vortex precludes the majority’s per se rule. 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 18 IN RE: MARCIANO 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  (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.