Opinion ID: 570088
Heading Depth: 2
Heading Rank: 1

Heading: The Existence of a Bona Fide Dispute

Text: 6 The Code allows an involuntary case to be commenced when three or more entities holding claims against the debtor file a petition so long as those claims are not contingent as to liability or the subject of a bona fide dispute. 11 U.S.C. § 303(b)(1) (1988). The Code does not define a bona fide dispute and thereby leaves the term's meaning to judicial determination. 7 This circuit has never had occasion to define the term. Our efforts to do so on this occasion are guided by the prior efforts of other circuits. We note that the three circuits that have addressed this issue have been heavily persuaded by the reasoning contained in In re Lough, 57 B.R. 993 (Bankr.E.D.Mich.1986), and have adopted substantially similar tests for determining the existence of a bona fide dispute. Both the Seventh and the Tenth Circuits have stated that the proper standard requires the bankruptcy court to determine whether there is an objective basis for either a factual or a legal dispute as to the validity of the debt. Matter of Busick, 831 F.2d 745, 750 (7th Cir.1987); Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544 (10th Cir.1988) (quoting Busick). The Third Circuit, relying on the Seventh Circuit's decision in Busick, has indicated that a bona fide dispute exists if there are  'substantial' factual and legal questions raised by the debtor bearing upon the debtor's liability. B.D.W. Assoc. v. Busy Beaver Building Centers, Inc., 865 F.2d 65, 66-67 (3d Cir.1989) (citing Busick, 831 F.2d at 750). Because we agree with the Seventh Circuit that this approach best effectuates Congress' intent, see Busick, 831 F.2d at 749, we also adopt this objective inquiry to determine whether a bona fide dispute exists. 8 In applying this standard, the petitioning creditor must establish a prima facie case that no bona fide dispute exists. Once this is done, the burden shifts to the debtor to present evidence demonstrating that a bona fide dispute does exist. Bartmann, 853 F.2d at 1544. Because the standard is objective, neither the debtor's subjective intent nor his subjective belief is sufficient to meet this burden. Id. The court's objective is to ascertain whether a dispute that is bona fide exists; the court is not to actually resolve the dispute. Id. This does not mean that the bankruptcy court is totally prohibited from addressing the legal merits of the alleged dispute; indeed, the bankruptcy court may be required to conduct a limited analysis of the legal issues in order to ascertain whether an objective legal basis for the dispute exists. Busick, 831 F.2d at 750. Finally, because the determination as to whether a dispute is bona fide will often depend (as it did in this case) upon an assessment of witnesses' credibilities and other factual considerations, the bankruptcy court's determination in this regard is a factual finding that may be overturned on appeal only if it is clearly erroneous. See Bankruptcy Rule 8013. 9 In the case at bar, the bankruptcy court conducted the inquiry we now hold to be appropriate. Specifically, the bankruptcy court examined the loan documents proffered by the banks and noted that the parties did not dispute the amounts due, the genuineness or the terms of the guarantees, or the effect of their terms. Rimell, 111 B.R. at 257. The court then afforded the debtors an opportunity to present evidence demonstrating that there was an additional, oral agreement that allowed the debtors to change the loans' terms at will in order to facilitate payment. After reviewing the evidence, the bankruptcy court concluded that the parties did not, either orally or through prior course of dealing, agree to alter, extend or modify the existing written contractual terms on any of the loans in the instant case. Given that the parties did not agree to such terms, it follows that there could be no bona fide dispute. Id. at 259. We have reviewed the record and do not believe the bankruptcy court's findings are clearly erroneous; hence, we affirm the determination that the banks' claims were not subject to a bona fide dispute. 10