Court Opinion

ID: 9735567
Source: CourtListenerOpinion
Date Created: 2023-08-26 18:24:04.369118+00
Date Added: 2024-06-11T18:27:00.034875
License: Public Domain

MARKELL, Bankruptcy Judge,
dissenting.
I respectfully dissent. I believe the majority incorrectly applies or adopts the law on at least two points. Initially, I think it is incorrect and bad policy to adopt a “per se” rule regarding undisputed claims. Next, I believe the majority opinion improperly and incorrectly limits good faith principles with respect to the commencement and conduct of involuntary cases.
Adoption of the “Per Se” Rule as to Disputed Claims
The majority adopts a per se rule that an unstayed state court judgment conclusively determines that there is no bona fide dispute as to the debtor’s liability for the debt underlying the judgment, even if the debtor has taken an appeal from that judgment and that appeal is pending. Given the distinctly federal policies embodied in Section 303, and especially under the facts present here, I disagree that Section 303 requires, and Congress intended, such an inflexible rule.
*59The first court to adopt the per se rule was In re Drexler, 56 B.R. 960 (Bankr.S.D.N.Y.1986). Drexler held that a claim represented by an unstayed final judgment never can be the subject of a bona fide dispute, even if subject to a pending appeal. Id. at 967. Drexler reasoned that precluding judgment creditors from filing involuntary petitions merely based on the pendency of an appeal would render involuntary petitions out of step with other debt collection remedies, because these other remedies may be utilized by holders of unstayed final judgments, even while their judgments are subject to appeals. Id. In Drexler’s own words:
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” within the meaning of Code § 303.
Id. (footnote omitted).
While several other courts have adopted Drexler’s per se rule,1 the Fourth Circuit Court of Appeals rejected it as unpersuasive. Platinum Fin. Serv. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 438 (4th Cir.2004). Other courts are in accord. See e.g., In re Starlite Houseboats, Inc., 426 B.R. 375 (Bankr.D.Kansas 2010); In re Henry S. Miller Commercial, LLC., 418 B.R. 912, 920-23 (Bankr.N.D.Tex.2009); see also In re Prisuta, 121 B.R. 474 (Bankr.W.D.Pa.1990).
While Byrd acknowledged the general enforceability of unstayed judgments, Byrd noted that nothing in § 303, or in the Bankruptcy Code as a whole, mandated that holders of unstayed final judgments be entitled to file involuntary petitions while their judgments are subject to appeal. As stated in Byrd, “the Code does not make the existence of a bona fide dispute depend on whether a claim has been reduced to judgment.” Id. After considering the underlying purpose of the bona fide dispute clause in § 303(b), to prevent creditors from coercing debtors into settlement of legitimately disputed claims based on the threat of involuntary bankruptcy,2 Byrd concluded that the per se rule was inappropriate. Rather, Byrd ruled that the unstayed final judgment was prima facie evidence that no bona fide dispute existed. The presumption arose upon presentation of the judgment, and the burden then shifted to the alleged debtor to demonstrate the existence of a bona fide dispute by presenting evidence of substantial legal or factual questions. Id. at 438-40.
*60The controversy over the per se rule has continued after Byrd. The Delaware bankruptcy court in In re AMC Investors, LLC, 406 B.R. at 484-87, rejected Byrd and instead followed Drexler. AMC Investors offered several different grounds for rejecting Byrd. According to AMC Investors, Byrd’s approach “was unnecessarily intrusive into the trial court’s ruling and undermine[d] the objective analysis of bona fide disputes.” Id. at 485. AMC Investors further determined that Byrd required an analysis of the debtor’s asserted factual and legal issues that was difficult and unnecessary, and that Byrd’s analysis rendered “the entry of a judgment completely irrelevant in determining the existence of a claim.” Id. at 485-86. AMC Investors also asserted that Byrd conflicted with Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), which held that the underlying rights of parties in bankruptcy cases generally are created and defined by applicable nonbankruptcy law. As AMC Investors put it:
[t]he analysis in Byrd runs counter to the Butner principle, which provides that, in the absence of a specific provision to the contrary, bankruptcy courts take non-bankruptcy rights and laws as they find them.
AMC Investors, 406 B.R. at 486 (emphasis added).3 Finally, AMC Investors stated that Byrd’s approach undermined the objective test for discerning bona fide disputes.
I find the reasoning of both Drexler and AMC Investors to be unpersuasive. Both cases disregard the plain meaning of Section 303(b)’s term “bona fide dispute.” Subsequent to both Drexler and AMC Investors, the Supreme Court has emphasized that, when Congress does not define a term, we must look first at its ordinary meaning. Ransom v. FIA Card Servs., N.A., — U.S. -, 131 S.Ct. 716, 724, 178 L.Ed.2d 603 (2011); Hamilton v. Lanning, - U.S. -, 130 S.Ct. 2464, 2471, 177 L.Ed.2d 23 (2010). The key portion of the term in question is “bona fide” which generally means “1. Made in good faith; without fraud or deceit. 2. Sincere; genuine.” Black’s Law Dictionary 199 (9th ed. 2009). See also Oxford English Dictionary (“bona fide” means “in good faith, with sincerity; genuinely.”) (last visited Sept. 13, 2011), http://www.oed.com/view/Entry/21238?.4
Courts construing § 303 generally have interpreted “bona fide dispute” according to its secondary meaning — focusing on genuineness rather than on subjective good faith. See, e.g., In re Vortex Fishing Systems, Inc., 277 F.3d at 1064-65. I do not take issue with that focus. But Drex-ler and AMC Investors would have us ignore the ordinary meaning of the term altogether. Both cases would replace the terminology chosen by Congress with something else, something fashioned from the courts’ understanding of when judgment creditors should be entitled to file an involuntary bankruptcy, rather than attempting to discern Congress’s understanding based on the language it used.
So long as the plain meaning of the statute does not lead to absurd results, our only task is to apply the statute as worded. Lamie v. U.S. Trustee, 540 U.S. 526, 538, *61124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004). If Congress actually meant to exclude un-stayed judgments on appeal from the category of claims subject to bona fide dispute, it is Congress’s sole prerogative to amend its statute to conform with its actual intent. Id. at 542, 124 S.Ct. 1028. As we recently stated,
in the argot of statutory interpretation, we will not read into a statute additional words or terms, so as to expand or contract the statute’s coverage, when the plain language of the statute as written is neither absurd nor leads to absurd results.
Meyer v. Scholz (In re Scholz), 447 B.R. 887, 894 (9th Cir. BAP 2011) (citing Lamie, 540 U.S. at 538, 124 S.Ct. 1023).
This is precisely the problem with Drex-ler and AMC Investors. Both substitute their judgment of how involuntary bankruptcies should commence for that of Congress, as expressed in § 303(b). Ransom, Hamilton and Lamie undermine most of Drexler’s and AMC Investors’ grounds for interpreting claims subject to “bona fide dispute” as excluding unstayed judgments on appeal. Drexler focused on keeping involuntary bankruptcies in step with non-bankruptcy collection remedies available to judgment creditors, and AMC Investors focused on the purportedly sacrosanct nature of state court judgments and interests created by state law. But numerous provisions of the Bankruptcy Code alter and affect nonbankruptcy remedies, interests and judgments. The powers of the bankruptcy trustee to assume or reject executo-ry contracts (see § 365), to sell property free and clear of liens when subject to dispute (see § 363(f)(4)), and to obtain credit secured by senior or equal liens on property of the estate already encumbered (see § 364(d)) are but a few of the Bankruptcy Code provisions that can significantly alter the rights and duties of parties from that set forth under nonbankruptcy law. Similarly, aspects of the automatic stay (see § 362) and claims estimation procedure (see § 502(c)) can drastically change the playing field from outside of bankruptcy. Drexler and AMC Investors offer no reason at all, let alone a persuasive one, why Congress could not move away from the nonbankruptcy playing field by precluding all holders of claims subject to bona fide dispute from filing an involuntary bankruptcy petition.
Nor is AMC Investors’ other reasoning compelling. AMC Investors opined that it is both unnecessary and difficult for bankruptcy courts to have to analyze whether there is any genuine factual or legal issue raised in an appeal from a unstayed judgment. But that necessity was determined by Congress, and it is not the court’s role to second-guess that necessity. As for difficulty, “[t]he bankruptcy court need not resolve the merits of the bona fide dispute, but simply determine whether one exists.” Byrd, 357 F.3d at 437.
Even if I agreed that this analysis could be complicated, the difficulty of that analysis does not obviate our duty to undertake it as necessitated by the statute. Courts regularly undertake complex, time-consuming analyses as the result of provisions in procedural rules or statutes. See, e.g., Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 395, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) (adopting fact-intensive, case-by-case test for determining excusable neglect under Rule 9006(b)); Goeb v. Heid (In re Goeb), 675 F.2d 1386, 1390 (9th Cir.1982) (adopting a totality of the circumstances test for determining good faith under § 1325(a)(3)). In short, AMC Investors’ assessment of the necessity or difficulty of applying the plain meaning of a provision of the Bankruptcy Code does not give this court or any other court license to depart from the statute.
*62Finally, AMC Investors complained that Byrd’s approach served to undermine the objective test that most courts have adopted, including the Ninth Circuit in Vortex. AMC Investors appears to conflate a case-by-case inquiry with a subjective approach. While the existence of a genuine issue of fact or a defensible legal argument might be some evidence of subjective good faith, the two are not equivalent, and the existence of factual or legal issues just as easily could support an objective determination that the claim is subject to bona fide dispute.
The facts of this case underscore the need to hew to the statute’s words. The massive judgment against Marciano is not a judgment on the merits of petitioning creditors’ claims, but rather an unprecedented sanction for Marciano’s conduct with respect to the determination of those claims. The only reason that there is no dispute is that the state court 'precluded Marciano from defending himself by striking his answer and entering judgment as if he had made no appearance at all. Simply put, Marciano undisputedly disputes the claim; it is just that the state court muzzled him.
Byrd recognized that it would be “the unusual case in which a bona fide dispute exists in the face of claims reduced to state court judgments.” Byrd, 357 F.3d at 438. But if ever there were a case in which the debtor could claim a dispute, this would be it. And slavishly honoring the state-court sanctions judgment here introduces strategic considerations for future petitioning creditors. If such future creditors can convince a state court to enter a judgment by default or as sanctions, they can effectively dismantle the alleged debtor’s assets through an adroit use of Section 303, usually in a manner that is more advantageous to them than if they simply were left to the remedies afforded state-court judgment creditors. Coupled with the size of the judgment against Marciano, which effectively precluded a bond and thus a stay, the majority effectively gives the petitioning creditors more than they would have under applicable state law collection alternatives. This cannot be the proper reading of Section 303(b).
The majority’s reasoning in this case is entirely derivative of Drexler and AMC Investors. For the reasons set forth above, I reject that reasoning and would reject the per se rule, in favor of the approach adopted in Byrd, which held that an unstayed judgment on appeal is prima facie evidence that the claim in question is not subject to bona fide dispute, and that presentation of the judgment shifts the burden to the alleged debtor to demonstrate that genuine issues of fact or law have been raised in the appeal.
Bad Faith Filing of an Involuntary Petition
The majority also refuses to recognize the fundamental rule that good faith is essential for any filing in federal court. The majority would permit a bad faith filing of an involuntary petition so long as the numerical and other mechanical requirements of Section 303(b) are met. Because of the long tradition of requiring good faith to initiate any proceeding in federal court, I also dissent on this ground.
In considering whether a bankruptcy filing was appropriate, bankruptcy courts have broad discretion to examine the equity of the bankruptcy filing and to compare the motivation underlying the subject bankruptcy filing with the purposes behind the enactment of chapter 11. In re SGL Carbon Corp., 200 F.3d 154, 160 (3d Cir.1999); Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir.1994); In re Van Owen Car Wash, Inc., 82 B.R. 671, 673-74 *63(Bankr.C.D.Cal.1988).5 The weight of authority indicates that these considerations and principles apply to involuntary cases as well, especially in the case of collusive filings. See, e.g., In re Bicoastal Holding Co., 402 B.R. 916, 919-21 (Bankr.M.D.Fla. 2009); In re Sul, 380 B.R. 546, 555 (Bankr.C.D.Cal.2007); In re Winn, 49 B.R. 237, 239 (Bankr.M.D.Fla.1985). As Collier states, “[I]t is generally agreed that involuntary filings must be in good faith and that consequences flow if they are not. Dismissal is one possible consequence.” 2 Collier on Bankruptcy ¶ 303.16 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2011) (Emphasis added.).6
As stated in Van Owen Car Wash, “[t]he legislative history of § 1112(b) indicates Congress’ intent that the bankruptcy court retain broad equitable powers to dismiss petitions; ‘[t]he court will be able to consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases.’ ” Id. (quoting H.R.Rep. No. 95-595, at 405-06 (1977), 1978 U.S.C.C.A.N. 5963, 6362 and S.Rep. No. 95-989, at 117-18 (1978), 1978 U.S.C.C.A.N. 5787, 5903). Van Owen Car Wash further emphasized that good faith should “ ‘be viewed as an implicit prerequisite to the filing or continuation of a proceeding under Chapter 11 of the Code.’ ” Id. at 674 (quoting In re Victory Const. Co., Inc., 9 B.R. 549, 558 (Bankr.C.D.Cal.1981)).
Yet the majority upholds the bankruptcy court’s “staging” of discovery so as to effectively prevent Marciano from taking discovery concerning the petitioning creditors’ good faith. The underlying purpose of an involuntary bankruptcy filing always is relevant and may be grounds for dismissal if it amounts to an abuse of the bankruptcy process. See, e.g., In re Bicoastal Holding Co., 402 B.R. at 919-21; In re Sul, 380 B.R. at 555; In re Winn, 49 B.R. at 239. Without giving Marciano an opportunity to take discovery, the bankruptcy court committed reversible error by incorrectly and prematurely determining that Marciano could not adduce facts showing that the petitioning creditors had abused the bankruptcy process.
In short, unlike the majority, I believe that the subjective motivations underlying the involuntary bankruptcy filing are relevant even before entry of the order for relief. To hold otherwise undermines the broad discretion that Congress gave to the bankruptcy courts to investigate on a case-by-case basis the propriety of bankruptcy filings (whether voluntary or involuntary), to do equity, and to ensure that bankruptcies filed for improper purposes are dispensed with in an expeditious manner.
Conclusion7
For the reasons stated above, I respectfully dissent.

. See In re AMC Investors, LLC, 406 B.R. 478, 484 n. 20 (Bankr.D.Del.2009) (listing cases). But see 2 Collier on Bankruptcy ¶ 303.11 [1] n. 28 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011) (listing cases reaching conflicting results).

. The legislative history is thin on the addition of "bona fide dispute” to the statute. Drexler identified the following statement by its proponent, Senator Max Baucus of Montana, as the only relevant legislative history:
The problem can be explained simply. Some courts have interpreted Section 303’s language on a debtor’s general failure to pay debts as allowing the filing of involuntary petitions and the granting of involuntary relief even when the debtor's reason for not paying is a legitimate and good faith dispute over his or her liability. This interpretation allows creditors to use the Bankruptcy Code as a club against debtors who have bona fide questions about their liability but who would rather pay up than suffer the stigma of involuntary bankruptcy proceedings ....
I believe this amendment although a simply [sic] one is necessary to protect the rights of debtors and to prevent misuse of the bankruptcy system as a tool of coercion....
In re Drexler, 56 B.R. at 966 (quoting 130 Cong. Rec. 17,151 (1984) (statement of Sen. Max Baucus)).

. AMC Investors also argued that Byrd misconstrued the definition of claim (see § 101(5)). Because my analysis does not turn upon the definition of claim, I do not address this argument.

. The dictionary definition of bona fide perhaps could justify a subjective, good faith standard for determining whether a bona fide dispute exists — a standard rejected by most circuits, including the Ninth Circuit. See Liberty Tool, & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, 1064 (9th Cir.2002) (listing cases).

. In this regard, I believe that Section 1112(b) applies to this involuntary chapter 11 proceeding. That section requires “cause” in order to dismiss, and it is beyond cavil that a lack of good faith in filing can constitute such "cause.” See, e.g., In re SGL Carbon Corp., 200 F.3d at 160. For background on die good faith filing requirement in chapter 11, see Ali M.M. Mojdehi & Janet Dean Gertz, The Implicit "Good Faith” Requirement in Chapter 11 Liquidations: A Rule in Search of a Rationale?, 14 Am. Bankr.Inst. L.Rev. 143 (2006).

. Although this section of Collier nominally deals with bad faith in the context of Section 303(i), the listing of dismissal as a consequence of a bad faith filing logically precedes any determination of damages under Section 303(i), and thus it recognizes that bad faith alone can support dismissal of an involuntary petition.

. Although I also have concerns about the entry of an order for chapter 11 relief against an unwilling individual debtor, the record here does not adequately develop facts related *64to those concerns. Accordingly, I will just note that involuntary chapter 11 cases against individuals may raise serious constitutional issues. See generally Margaret Howard, Bankruptcy Bondage, 2009 U. Ill. L.Rev. 191; Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse and Consumer Protection Act of2005, 79 Am. Bankr.L.J. 571, 586-88 (2005).