Court Opinion

ID: 822724
Source: CourtListenerOpinion
Date Created: 2013-02-28 18:09:23.099834+00
Date Added: 2024-06-11T11:12:57.202159
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

IN RE: GEORGES MARCIANO,                   No. 11-60070
                             Debtor.
                                             BAP No.
GEORGES MARCIANO,                            11-1008
                          Appellant,

                 v.                         OPINION

STEVEN CHAPNICK; JOSEPH FAHS;
ELIZABETH TAGLE,
                       Appellees,

                and

DAVID K. GOTTLIEB, Chapter 11
Trustee,
                       Intervenor.

              Appeal from the Ninth Circuit
               Bankruptcy Appellate Panel
Kirscher, Markell, and Dunn, Bankruptcy Judges, Presiding

               Argued and Submitted
        November 7, 2012—Pasadena, California

                 Filed February 27, 2013
2                        IN RE: MARCIANO

          Before: Susan P. Graber, Sandra S. Ikuta,
           and Andrew D. Hurwitz, Circuit Judges.

                   Opinion by Judge Hurwitz;
                    Dissent by Judge Ikuta

                           SUMMARY*

                            Bankruptcy

   Affirming the bankruptcy court’s summary judgment, the
panel held that an involuntary bankruptcy petition met the
requirements of 11 U.S.C. § 303(b)(1) even though the
judgments obtained by the petitioning creditors were on
appeal when the petition was filed.

    Following the “Drexler” rule, and declining to follow the
approach of the Fourth Circuit, the panel held that an
unstayed state judgment on appeal is per se a “claim against
[the debtor] that is not contingent as to liability or the subject
of a bona fide dispute as to liability or amount,” and thus
meets the requirements of § 303(b)(1) for the claims of
petitioning creditors.

    The panel also held that service of the summons and
complaint was proper, and the bankruptcy court did not err in
entering an order precluding discovery as to the petitioning
creditors’ alleged bad faith in filing the involuntary petition.

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                      IN RE: MARCIANO                           3

    Dissenting, Judge Ikuta wrote that the majority’s adoption
of a per se rule for claims arising from certain state court
judgments created a circuit split, was contrary to In re Vortex
Fishing Sys., Inc., 277 F.3d 1057 (9th Cir. 2001), and erased
a protection given to debtors under the Bankruptcy Code.

                          COUNSEL

Daniel J. McCarthy, Hill, Farrer & Burrill, LLP, Los Angeles,
California; Richard C. Macias and Sanford L. Frey, Creim
Macias Koenig & Frey LLP, Los Angeles, California, for
Appellant/Chapter 11 Debtor.

Bradley E. Brook, Law Offices of Bradley E. Brook, Los
Angeles, California, for Appellees/ Petitioning Creditors.

Jeremy V. Richards, Pachulski Stang Ziehl & Jones LLP, Los
Angeles, California, for Chapter 11 Trustee.

                          OPINION

HURWITZ, Circuit Judge:

    This case presents a question of first impression in this
court: Under § 303(b)(1) of the Bankruptcy Code, 11 U.S.C.
§ 303(b)(1), is an unstayed state judgment on appeal per se a
“claim against [the debtor] that is not contingent as to liability
or the subject of a bona fide dispute as to liability or
amount?” Our answer to that question is “yes.”
4                         IN RE: MARCIANO

                                    I.

    In 2007, Georges Marciano sued five of his former
employees in California Superior Court, alleging theft. Three
employees—Joseph Fahs, Steven Chapnick, and Elizabeth
Tagle (the “Petitioning Creditors”)—cross-complained,
alleging defamation and intentional infliction of emotional
distress. As a sanction for a pattern of discovery abuses, the
state trial court struck Marciano’s answers to the cross-
claims. After a jury trial on damages, the trial court entered
judgments in favor of Fahs, Chapnick, and Tagle for $55
million, $35 million, and $15.3 million, respectively.1

   Marciano appealed the three judgments to the California
Court of Appeal but did not post a bond to stay them during
appeal. See Cal. Civ. Proc. Code § 917.1(1) (“Unless an
undertaking is given, the perfecting of an appeal shall not stay
enforcement of the judgment or order in the trial court if the
judgment or order is for . . . [m]oney or the payment of
money . . .”). The Superior Court and Court of Appeal denied
Marciano’s stay requests, and the California Supreme Court
denied his petition for review.

    In addition to the Petitioning Creditors, five others had
obtained judgments against Marciano totaling approximately
$190 million. While the appeals of the Petitioning Creditors’
judgments were pending, various judgment creditors began
collection efforts. The Petitioning Creditors then filed an
involuntary petition, pursuant to § 303(b)(1) of the

    1
    The jury originally returned verdicts in the amount of $74,044,000 in
favor of each Petitioning Creditor. The trial court reduced the jury awards
so that the damages did not exceed the amount demanded in each cross-
complaint.
                         IN RE: MARCIANO                              5

Bankruptcy Code, against Marciano in the United States
Bankruptcy Court for the Central District of California.

    Marciano moved to dismiss the petition for defective
service of process. The bankruptcy court denied the motion.
The bankruptcy court subsequently rejected Marciano’s
efforts to conduct discovery as to whether the involuntary
petition had been filed in bad faith and granted the Petitioning
Creditors’ motion for summary judgment. In re Marciano,
446 B.R. 407 (Bankr. C.D. Cal. 2010). The United States
Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”)
affirmed. Marciano v. Fahs (In re Marciano), 459 B.R. 27
(B.A.P. 9th Cir. 2011).

   This appeal followed. We have jurisdiction pursuant to
28 U.S.C. § 1291 and 28 U.S.C. § 158.2

                                  II.

    Marciano’s first argument on appeal—that the bankruptcy
court erred in denying his motion to dismiss for defective
service of process—need not detain us long. Bankruptcy
Rule 7004(b) permits service of the summons and complaint
by first class mail “to the individual’s dwelling house or usual
place of abode or to the place where the individual regularly
conducts a business or profession.” Fed. R. Bankr. P.
7004(b)(1). The petition and summons here were served at

 2
   Upon Marciano’s motion, we granted a stay pending appeal, subject to
appropriate conditions to be established by the BAP. The BAP then
issued an order establishing such conditions and giving Marciano thirty
days to satisfy them. Rather than comply, Marciano filed a motion to
vacate or modify the conditions in this court. We denied that motion and
dissolved the stay.
6                    IN RE: MARCIANO

a Beverly Hills address. At the time of service, Marciano had
listed that address with the California Secretary of State as
the place where he could be served with process as the agent
for four of his businesses. Marciano’s designation of the
Beverly Hills address for service of process was a
certification that he either lived at or regularly conducted
business there, see Cal. Corp. Code § 1502(b), and the
bankruptcy court therefore did not err in denying the motion
to dismiss.

                             III.

    Marciano’s second argument, however, requires more
extended discussion. He contends that, because the
judgments obtained by the Petitioning Creditors were on
appeal when the involuntary petition was filed, the
bankruptcy court should have dismissed the petition as not
meeting the requirements of § 303(b)(1) of the Bankruptcy
Code.

   Under § 303(b)(1), an involuntary bankruptcy may be
commenced against a debtor by the filing of a petition

           by three or more entities, each of which is
       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[.]
                         IN RE: MARCIANO                                7

11 U.S.C. § 303(b)(1) (footnote omitted). The bankruptcy
court and the BAP successively held that an unstayed non-
default state judgment is a claim not in bona fide dispute as
to liability or amount under § 303(b)(1). In re Marciano,
446 B.R. at 422; In re Marciano, 459 B.R. at 54–55. Because
the issue turns on interpretation of the Bankruptcy Code, we
review those holdings de novo. Temecula v. LPM Corp. (In
re LPM Corp.), 300 F.3d 1134, 1136 (9th Cir. 2002).

    Perhaps because the Bankruptcy Code does not define
“bona fide dispute,” interpretation of § 303(b)(1) has divided
courts. The majority view—the “Drexler” rule—is that
unstayed non-default state judgments on appeal are not
subject to bona fide dispute for purposes of § 303(b)(1).3 In
re Drexler, 56 B.R. 960, 967 (Bankr. S.D.N.Y. 1986); accord
In re AMC Investors, LLC, 406 B.R. 478, 487 (Bankr. D. Del.
2009); Norris v. Johnson (In re Norris), 1997 WL 256808, at
*5, 114 F.3d 1182 (5th Cir. 1997); In re Euro-Am. Lodging
Corp., 357 B.R. 700, 712 (Bankr. S.D.N.Y. 2007) (per
curiam) (unpublished); In re Amanat, 321 B.R. 30, 37 (Bankr.
S.D.N.Y. 2005); In re Raymark Indus., Inc., 99 B.R. 298, 300
(Bankr. E.D. Pa. 1989); In re Caucus Distribs., Inc., 83 B.R.
921, 929 (Bankr. E.D. Va. 1988). Cases following this
approach reason that it would be “contrary to the basic
principles respecting, and would effect a radical alteration of,
the long-standing enforceability of unstayed final judgments

  3
    When a claim arises from a default judgment, the bankruptcy court
may determine whether the court entering the judgment lacked personal
jurisdiction. See In re AMC Investors, LLC, 406 B.R. 478, 487 (Bankr. D.
Del. 2009); see also Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites
de Guinee, 456 U.S. 694, 706 (1982) (“A defendant is always free to
ignore the judicial proceedings, risk a default judgment, and then
challenge that judgment on jurisdictional grounds in a collateral
proceeding.”).
8                    IN RE: MARCIANO

to hold that the pendency of the debtor’s appeal created a
‘bona fide dispute.’” In re AMC Investors, 406 B.R. at 484
(quoting In re Drexler, 56 B.R. at 967).

    The minority approach—the “Byrd” rule—holds that,
although “it will be the unusual case in which a bona fide
dispute exists in the face of claims reduced to state court
judgments[,] [s]uch judgments do not guarantee the lack of a
bona fide dispute.” Platinum Fin. Servs. Corp. v. Byrd (In re
Byrd), 357 F.3d 433, 438 (4th Cir. 2004). Under the Byrd
rule, the petitioning creditor makes a “prima facie” case of
compliance with § 303(b)(1) by presenting an unstayed state
judgment, but the debtor is given the opportunity nonetheless
to demonstrate the existence of a bona fide dispute as to
liability or the amount of the debt. Id. at 439; accord In re
Henry S. Miller Commercial, LLC, 418 B.R. 912, 920–21
(Bankr. N.D. Tex. 2009); In re Graber, 319 B.R. 374, 377–78
(Bankr. E.D. Pa. 2004); In re Prisuta, 121 B.R. 474, 476
(Bankr. W.D. Pa. 1990); In re Tucker, No. 5:09-bk-914, 2010
WL 4823917, at *3 (Bankr. N.D. W.Va. Nov. 22, 2010); In
re Briggs, Nos. 07-34534, 07-34533, 2008 WL 190463, at *2
(Bankr. N.D. Tex. Jan. 18, 2008).

    With appropriate deference to our sister circuit, we
conclude that the Drexler rule is correct as a matter of both
statutory interpretation and federalism.

    Section 303(b)(1) requires that a petitioning creditor hold
a “claim” against the debtor. Under § 101(5)(A) of the
Bankruptcy Code, a “claim” is a “right to payment, whether
or not such right is reduced to judgment.” 11 U.S.C.
§ 101(5)(A). Thus, a right to payment includes a “judgment.”
Accordingly, the “claims” of the three Petitioning Creditors
to which the “not in bona fide dispute” screen of § 303(b)(1)
                     IN RE: MARCIANO                        9

applies are the three unstayed California judgments, not the
underlying tort claims of defamation or slander. Under
California law, these judgments, in the absence of a stay
pending appeal, were plainly not contingent as to liability or
amount. Rather, the Petitioning Creditors were entitled to
immediate payment of those claims in the amounts set by the
superior court judgments. See Cal. Civ. Proc. Code
§ 917.1(a)(1). The Petitioning Creditors thus had fully vested
property interests in these claims under California law. See
Butner v. United States, 440 U.S. 48, 55 (1979) (noting that
property interests in bankruptcy proceedings are typically
defined by state law).

    Although conceding that the Petitioning Creditors were
free under California law to collect the amounts owed under
the judgments at the time the involuntary petition was filed,
Marciano nonetheless claims that the bankruptcy court should
have evaluated the merits of the pending appeals before
determining that the claims were not in bona fide dispute.
His argument relies heavily on Liberty Tool & Manufacturing
v. Vortex Fishing Systems, Inc. (In re Vortex Fishing Systems,
Inc.), which posed the relevant inquiry under § 303(b)(1) as
“whether there is an objective basis for either a factual or
legal dispute as to the validity of the debt.” 277 F.3d 1057,
1064 (9th Cir. 2001) (internal quotation marks omitted).

    The argument is not persuasive. Vortex dealt with
contract claims not yet reduced to judgment. Id. at 1062–63.
Under those circumstances, § 303(b)(1) compelled an inquiry
by the bankruptcy court as to the validity of the alleged debt
in order to prevent the debtor from being forced into
involuntary bankruptcy on the basis of a naked allegation of
debt by a Petitioning Creditor. Id.; see also In re Byrd,
357 F.3d at 438 (noting that a central purpose of § 303(b)(1)
10                    IN RE: MARCIANO

is “to prevent creditors from using involuntary bankruptcy to
coerce a debtor to satisfy a judgment even when substantial
questions may remain concerning the liability of the debtor”
(internal quotation marks omitted)). But where, as here, the
amount and validity of the claims of the Petitioning Creditors
have been established by non-default state judgments and the
debtor’s immediate liability cannot be disputed under
governing state law, there can be no such concerns. Indeed,
it is difficult to imagine a more “objective” measure of the
validity of a claim than an unstayed judgment entered by a
court of competent jurisdiction.

    In these circumstances, allowing the bankruptcy court to
inquire further as to the validity of the Petitioning Creditor’s
claims, rather than establishing an objective basis for
evaluating § 303(b)(1) claims, instead “turns the court into an
odds maker on appellate decision-making.” In re AMC
Investors, 406 B.R. at 485. Such a process, which almost
always will turn on a judgment by an Article I federal court
as to whether a state trial court erred as a matter of state law
in entering the judgment or whether a state court erred in
denying a stay pending appeal, cannot be more “objective”
than simply honoring the unstayed state judgment. If
required to evaluate the merits of a debtor’s appeal at the time
an involuntary petition is filed (often before appellate briefs
are filed), reasonable jurists might well reach differing
decisions. But there can be no dispute as to whether a state
court judgment on appeal has been stayed.

    Moreover, the Byrd approach runs counter to principles
of federalism. Section 1738 of Title 28 of the United States
Code requires a federal court to accord the judicial
proceedings of a state court “the same full faith and credit in
every court within the United States . . . as they have by law
                       IN RE: MARCIANO                          11

or usage in the courts of such State.” 28 U.S.C. § 1738. Such
“full faith and credit” would be of little consequence if a
federal court treated a non-default unstayed state judgment
differently than it would be treated in its state of origin. If the
creditor is entitled to have the judgment treated as valid in the
state courts, we see no reason why a bankruptcy court should
be allowed to question the judgment.

    Congress could, of course, have modified the historic
recognition of state sovereignty in § 1738 (which has its roots
in the First Congress, see 1 Stat. 122 (May 26, 1790)), in
adopting the Bankruptcy Code, but we discern no such intent
in the current statute or its history. Section 63a of the
Bankruptcy Act of 1898, the predecessor to § 303(b),
required that a creditor filing an involuntary bankruptcy
petition have a claim based upon a “fixed liability, as
evidenced by a judgment or an instrument in writing,
absolutely owing at the time of the filing of the petition
against [the debtor].” In interpreting § 63a, we held almost
a century ago:

              Where a judgment has not been paid, or
        has not been superseded on appeal by a bond
        . . . surely the judgment debtor cannot avoid
        the effect of levy and execution. And here the
        effect of the appeal . . . did not itself operate
        to stay execution or to stay proceedings or to
        make the judgment any the less an obligation
        absolutely owing by the bankrupt. . . . If the
        debt was then a fixed liability in the form of a
        judgment the right to file the claim existed.

Moore v. Douglas (In re Berlin Dye Works & Laundry Co.),
230 F. 399, 402 (9th Cir. 1916); see also Grafton v. Lloyd,
12                    IN RE: MARCIANO

86 F.2d 205 (9th Cir. 1936) (per curiam) (rejecting a debtor’s
contention that unstayed state judgments could not support an
involuntary petition). Section 63a was replaced by § 303 in
the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598,
92 Stat. 2549. The Reform Act was designed to lighten the
burden for creditors seeking to file an involuntary bankruptcy
petition. Comm’n on the Bankruptcy Laws of the United
States, Report of the Comm’n on the Bankruptcy Laws of the
United States, H.R. Doc. No. 137, 93d Cong., 1st Sess. 1
(1973). Section 303(b) therefore should not be read as sub
silentio lowering the status of unstayed state court judgments.
See also Lawrence Ponoroff, Involuntary Bankruptcy and the
Bona Fides of a Bona Fide Dispute, 65 Ind. L.J. 315, 322
(1990) (noting that the Reform Act “appreciably lightened the
burden for creditors seeking to establish entitlement to
involuntary relief”).

    Moreover, the Drexler approach well serves a central
purpose of the involuntary bankruptcy laws—to “protect the
threatened depletion of assets or to prevent the unequal
treatment of similarly situat[ed] creditors.” In re Manhattan
Indus., Inc., 224 B.R. 195, 200 (Bankr. M.D. Fla. 1997).
When a bankruptcy court prevents holders of unstayed state
judgments from invoking involuntary bankruptcy, the ready
alternative is precisely what the Code seeks to
avoid—creditors “racing to the courthouse to dismember the
debtor.” Danning v. Bozek (In re Bullion Reserve of N. Am.),
836 F.2d 1214, 1217 (9th Cir. 1988).

    We thus hold that an unstayed non-default state judgment
is not subject to bona fide dispute for purposes of § 303(b)(1).
The bankruptcy court did not err in finding that the
                          IN RE: MARCIANO                              13

Petitioning Creditors held claims meeting the requirements of
§ 303(b)(1).4

                                   IV.

    Finally, Marciano contends that the bankruptcy court
erred in entering an order precluding discovery as to the
Petitioning Creditors’ alleged bad faith in filing the
involuntary petition because (1) two Petitioning Creditors
were the most aggressive of his creditors in their collection
efforts, (2) the third Petitioning Creditor joined in the
involuntary petition only after her settlement overtures were
rebuffed, and (3) the Petitioning Creditors opposed
Marciano’s various stay applications. We review the entry of
a protective order for abuse of discretion. Foltz v. State Farm
Mut. Auto. Ins. Co., 331 F.3d 1122, 1130 (9th Cir. 2003).

    The Bankruptcy Code does not expressly provide for
dismissal of an otherwise proper involuntary petition because
of the subjective “bad faith” of the filers. But even assuming
the theoretical availability of such a defense, we cannot
perceive the benefit of discovery on the issue here, where
each of the Petitioning Creditors held a substantial judgment
against Marciano. The bankruptcy court did not abuse its
discretion in concluding that further discovery would have
been unlikely to produce any evidence material to the

 4
   Shortly before oral argument, the California Court of Appeal affirmed
the three judgments held by the Petitioning Creditors, but reduced each to
$10 million. Gottlieb v. Fahs, No. BC375824, 2012 WL 5310004, at *1
(Cal. Ct. App. Oct. 29, 2012) (unreported). No timely petition for review
was filed, and the Court of Appeal’s judgment is now final. Because the
issue of whether the involuntary petition was appropriate is measured at
the time of filing, In re Drexler, 56 B.R. at 968, this affirmance does not
inform our analysis today.
14                    IN RE: MARCIANO

pending summary judgment motions. See Fed. R. Civ. P.
26(b)(2)(C)(iii) (requiring a protective order if the “burden or
expense of the proposed discovery outweighs its likely
benefit”); Fed. R. Bankr. P. 7026 (providing that Fed. R. Civ.
P. 26 applies in adversarial bankruptcy proceedings).

     AFFIRMED.

IKUTA, Circuit Judge, dissenting:

    The initiation of an involuntary bankruptcy case can have
substantial consequences for a debtor, including “loss of
credit standing, inability to transfer assets and carry on
business affairs, and public embarrassment.” In re Reid,
773 F.2d 945, 946 (7th Cir. 1985). To avoid potential abuses,
the Bankruptcy Code precludes creditors from forcing debtors
into bankruptcy based on claims that are subject to a bona
fide dispute, 11 U.S.C. § 303(b)(1), and we have required
bankruptcy courts to scrutinize such claims on a case-by-case
basis. See In re Vortex Fishing Sys., Inc. (Vortex), 277 F.3d
1057, 1064 (9th Cir. 2001). But the majority departs from
this precedent, adopting an unsupported per se rule that
claims arising from certain state court judgments are never
subject to a bona fide dispute. This new rule creates a circuit
split, see In re Byrd, 357 F.3d 433, 438 (4th Cir. 2004)
(rejecting this per se rule), is contrary to our case law, see
Vortex, 277 F.3d at 1064, and erases a protection given to
debtors under the Code. I respectfully dissent.
                     IN RE: MARCIANO                      15

                              I

                             A

    In this case, a state court awarded some $95.3 million in
damages to three of Marciano’s former employees for
defamation and intentional infliction of emotional distress.
See Fahs v. Marciano, No. BC 375824 (Cal. Super. Ct. July
29, 2009); Chapnick v. Marciano, No. BC 375824 (Cal.
Super. Ct. July 29, 2009); Tagle v. Marciano, No. BC
375824 (Cal. Super. Ct. July 30, 2009). The jury making this
award did not consider Marciano’s response to the
employees’ complaints, because the state court struck
Marciano’s answer and entered his default as a discovery
sanction. Marciano appealed the judgments, but did not
obtain a stay of the judgments pending appeal. See In re
Marciano (Marciano I), 446 B.R. 407, 416–17 (Bankr. C.D.
Cal. 2010). While the appeal was pending, the three
employees filed an involuntary petition against Marciano
based on these judgments. Id. at 417.

    Marciano argues, as he did before the bankruptcy court
and bankruptcy appellate panel, that at the time the
involuntary petition was filed, the claims arising from these
judgments were “the subject of a bona fide dispute as to
liability or amount” for purposes of § 303(b). Both
bankruptcy courts rejected Marciano’s argument without
undertaking the case-specific inquiry required by our
precedent. See Marciano I, 446 B.R. at 424; In re Marciano
(Marciano II), 459 B.R. 27, 54–55 (9th Cir. B.A.P. 2011); but
see Marciano II, 459 B.R. at 59–62 (Markell, J., dissenting)
(arguing that the per se rule is inconsistent with § 303(b)’s
text and Ninth Circuit precedent). Instead of correcting this
error, the majority today signs off on the bankruptcy courts’
16                          IN RE: MARCIANO

shortcut, and decides as a matter of law that there cannot be
“an objective basis for either a factual or a legal dispute as to
the validity,” Vortex, 277 F.3d at 1064, of a claim based on an
unstayed state court judgment, see Maj. op. at 8. This is
contrary to the text of the statute and our case law.

                                      B

     Section 303(b) of the Code specifies the circumstances in
which creditors can place a debtor into involuntary
bankruptcy.1 Because “[t]he filing of an [i]nvoluntary
[p]etition should not be lightly undertaken,” Higgins v. Vortex
Fishing Sys., Inc. (Higgins), 379 F.3d 701, 707 (9th Cir.
2004) (quoting In re Advance Press & Litho, Inc., 46 B.R.
700, 702 (Bankr. D. Colo.1984)), Congress created
safeguards to “discourage inappropriate and frivolous
filings.” Id. Among other things, at least three creditors must
join forces to commence an involuntary case against a debtor

 1
     Subsection (b), in relevant part, states:

           (b) An involuntary case against a person is commenced
           by the filing with the bankruptcy court of a petition
           under chapter 7 or 11 of this title—

               (1) by three or more entities, each of which is
               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 *1 (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.

                              II

    Instead of adhering to our precedent and following the
Fourth Circuit’s well-reasoned lead, the majority adopts a
shortcut solution that skips over the safeguard of scrutinizing
claims carefully before placing a debtor in involuntary
bankruptcy. None of the majority’s reasons for enunciating
this new per se rule withstands scrutiny.
                      IN RE: MARCIANO                        19

                               A

    First, the majority errs in concluding that an immediately
enforceable judgment is equivalent to an undisputed claim.
Maj. op. at 8–9. The majority’s reasoning seems to be that
once a claim is reduced to judgment, the judgment is a
“claim,” and because an unstayed state court judgment is
immediately enforceable, there can be no objective basis for
dispute as to the “claim’s” liability or amount. Id. Both parts
of this analysis are wrong. First, the Code’s definition of
“claim” does not include “judgment.” Section 101(5) of Title
11 defines “claim” to mean a “right to payment, whether or
not such right is reduced to judgment.” Id. (emphasis added).
As this language makes clear, a claim is a “right to payment,”
not a “judgment,” and it is irrelevant whether the right to
payment has been reduced to judgment. Reading § 101(5)
and § 303(b) together, therefore, the bankruptcy court must
determine whether the right to payment is subject to a bona
fide dispute, not whether any resulting judgment is subject to
such a dispute.

    Once this error is corrected, it is clear that the immediate
enforceability of an unstayed judgment has no bearing on
whether there is “an objective basis for either a factual or a
legal dispute as to the validity of the debt.” Vortex, 277 F.3d
at 1064. If a “judgment” is not a “claim,” then it is irrelevant
whether the enforceability of a judgment is beyond dispute.
See, e.g., In re Henry S. Miller Commercial, LLC , 418 B.R.
912, 920 (Bankr. N.D. Tex. 2009) (“[A]ll of the courts that
conclude that an unstayed judgment (even if on appeal) is not
a claim that is the subject of a bona fide dispute seem to
conflate the concept of ‘enforceable judgment’ with the
concept of there being a claim that is not subject to a bona
fide dispute.”). Under California law, a creditor’s claim may
20                    IN RE: MARCIANO

be subject to a bona fide dispute, and the debtor may
ultimately prevail on appeal, even if the creditor has enforced
an unstayed judgment issued by the trial court. If the debtor
does ultimately prevail on appeal, a court can simply unwind
the creditor’s collection efforts. See Stockton Theatres, Inc.
v. Palermo, 264 P.2d 74, 78 (Cal. Dist. Ct. App. 1953);
9 Witkin, Cal. Proc. 5th, §§ 900–03 (2008). When a
judgment is reversed, both the appellate court and the trial
court will attempt “to place the parties in as favorable a
position as they could have been in had the judgment[ ] not
been enforced pending appeal.” Gunderson v. Wall, 126 Cal.
Rptr. 3d 880, 883 (Cal. Ct. App. 2011) (internal quotation
marks omitted); Cal. Code Civ. P. § 908 (“When the
judgment or order is reversed or modified, the reviewing
court may direct that the parties be returned so far as possible
to the positions they occupied before the enforcement of or
execution on the judgment or order.”).

    Because an unstayed state judgment is not a “claim,” and
because the immediate enforceability of a judgment is
irrelevant to the § 303(b) inquiry, neither argument justifies
the majority’s per se rule.

                                B

    The majority likewise errs in ignoring the objective test
we enunciated in Vortex. Although the majority claims that
Vortex is distinguishable on its facts, and should be read as
applying only to “contract claims not yet reduced to
judgment,” Maj. op. at 9, this purported distinction is plainly
wrong. We first noted in Vortex that “[t]his Circuit has not
defined a ‘bona fide dispute’ . . . nor is it defined by statute.”
                      IN RE: MARCIANO                        21

Vortex, 277 F.3d at 1064. We then considered the objective
test enunciated by the Seventh Circuit, and noted that “all
other circuit courts that have considered the question have
adopted some variation” of this objective test. Id. After
considering and rejecting the use of a subjective test, we
stated that “[w]e join our sister circuits in adopting the
objective test for dispute regarding liability or amount.” Id.
Clearly, our articulation of the objective test in Vortex
(expressly joining the other circuits that had adopted the test)
was not dependent on the facts of that case, but rather
provided the circuit’s construction of “subject to a bona fide
dispute” in § 303(b).

     Alternatively, the majority asserts that its per se rule is
consistent with Vortex, because a per se rule is even more
“objective” than the Vortex test. Maj. op. at 10. This makes
little sense. The Vortex test does not require courts to be
“objective” in some unspecified manner, but rather to
“determine whether there is an objective basis for either a
factual or a legal dispute as to the validity of the debt.”
Vortex, 277 F.3d at 1064 (quoting In re Busick, 831 F.2d 745,
750 (7th Cir. 1987)) (emphasis added). In other words,
Vortex requires a particular objective approach, and one
which is inconsistent with the majority’s approach.

                               C

   The majority also argues that “the Byrd approach runs
counter to principles of federalism,” Maj. op. at 10, by failing
to give state court judgments “full faith and credit” in
22                         IN RE: MARCIANO

accordance with the Full Faith and Credit Act, see 28 U.S.C.
§ 1738.2 This argument is unavailing.

    The Full Faith and Credit Act requires federal courts to
give state court judgments the same “full faith and credit”
they would receive in courts of that state. See Matsushita
Elec. Indus. Co. v. Epstein, 516 U.S. 367, 373 (1996).
Generally, this means that federal courts must “apply the
pertinent state’s collateral estoppel principles.” In re
Cantrell, 329 F.3d 1119, 1123 (9th Cir. 2003); see also
Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). In this
case, for instance, § 1738 requires us to give the California
judgment against Marciano the same preclusive effect it
would have in state court. Thus, under California issue
preclusion rules, we are barred from reconsidering
Marciano’s liability, see In re Diamond, 285 F.3d 822,
828–29 (9th Cir. 2002), or from adjusting the amount
awarded to the state court plaintiffs, see In re Sasson,

 2
     28 U.S.C. § 1738 states, in relevant part:

          The records and judicial proceedings of any court of
          any such State, Territory or Possession, or copies
          thereof, shall be proved or admitted in other courts
          within the United States and its Territories and
          Possessions by the attestation of the clerk and seal of
          the court annexed, if a seal exists, together with a
          certificate of a judge of the court that the said
          attestation is in proper form.

          Such Acts, records and judicial proceedings or copies
          thereof, so authenticated, shall have the same full faith
          and credit in every court within the United States and
          its Territories and Possessions as they have by law or
          usage in the courts of such State, Territory or
          Possession from which they are taken.
                      IN RE: MARCIANO                        23

424 F.3d 864, 872 (9th Cir. 2005), since these issues were
already fully adjudicated in state court.

    But giving effect to the language of § 303(b) does not
require federal courts to reassess liability or the amount of a
state court judgment. As Byrd explained in rejecting a similar
argument, the question whether the parties could relitigate
liability or amount is not related to the question whether the
debtor’s appeals “themselves constituted genuine disputes.”
Byrd, 357 F.3d at 440. A bankruptcy court does not relitigate
the debtor’s liability “by inquiring into the genuineness” of
the debtor’s appeals for purposes of § 303(b), because in
doing so it does not “actually resolv[e] any disputed question
of fact or law.” Id. at 440–41. We have recognized in other
settings that the question whether a determination is subject
to a genuine dispute is separate from determining the merits
of that dispute. See, e.g., 28 U.S.C. § 1292(b)(1) (2006)
(allowing district court judges to certify interlocutory appeals
of orders involving “a controlling question of law as to which
there is substantial ground for difference of opinion”); Slack
v. McDaniel, 529 U.S. 473, 484 (2000) (certificates of
appealability may issue if “the prisoner shows, at least, that
jurists of reason would find it debatable whether the petition
states a valid claim of the denial of a constitutional right.”).

   In short, determining whether a claim based on a state
court judgment is subject to a bona fide dispute does not
require us to relitigate any issue decided in a state court
proceeding. Therefore, the natural reading of § 303(b)(1),
under which federal bankruptcy courts must determine
whether such a bona fide dispute exists, is entirely consistent
with the Full Faith and Credit Act.
24                    IN RE: MARCIANO

                              D

    The majority’s legislative history argument likewise fails.
The majority asserts that legislative history shows that the
Bankruptcy Reform Act “was designed to lighten the burden
for creditors seeking to file an involuntary bankruptcy
petition.” Thus, according to the majority, § 303(b)(1)
“should not be read as sub silentio lowering the status of
unstayed state court judgments.” Maj. op. at 12.

    Yet, as is so often the case, different portions of the same
legislative history point in the other direction, and suggest
that the “bona fide dispute” language was added to protect
debtors from threats of involuntary bankruptcy by creditors
holding claims of questionable validity. See 130 Cong. Rec.
S.7,618 (daily ed. June 19, 1984) (statement of Sen. Baucus)
(“I believe this amendment, although a simple one, is
necessary to protect the rights of debtors and to prevent
misuse of the bankruptcy system as a tool of coercion.”);
148 Cong. Rec. S.11,728 (daily ed. Nov. 20, 2002) (statement
of Sen. Baucus) (“[A]n involuntary bankruptcy action should
not be employed by litigants seeking to gain more leverage
than they would have if they disputed contract performance
in the proper judicial forum.”); see also Lawrence Ponoroff,
Involuntary Bankruptcy and the Bona Fides of a Bona Fide
Dispute, 65 Ind. L. J. 315, 335 (1990) (noting that these
“remarks evince a revived concern about the potentially
ruinous consequences which the initiation of an involuntary
proceeding can have on a debtor’s business.”). At best, the
evidence we have about Congress’s intentions and purposes
with respect to the “bona fide dispute” language is limited
and ambiguous. The majority thus falls into the dangerous
trap of “allowing ambiguous legislative history to muddy
                      IN RE: MARCIANO                        25

clear statutory language.” Milner v. Dep’t of the Navy, 131
S. Ct. 1259, 1266 (2011).

                               E

     Finally, the majority turns to policy, and asserts that its
per se “approach well serves a central purpose of the
involuntary bankruptcy laws—to ‘protect the threatened
depletion of assets or to prevent the unequal treatment of
similarly situated creditors.’” Maj. op. at 12 (quoting In re
Manhattan Indus., Inc., 224 B.R. 195, 200 (Bankr. M.D. Fla.
1997)). But the Code does not instruct courts to pursue this
goal at all costs. “The Bankruptcy Code does not require that
a debtor’s assets be dissipated while frivolous or hopeless
appeals wend their way through the courts, but neither does
it permit debt collection by every creditor that has reduced its
claims to judgment.” Byrd, 357 F.3d at 441. To the contrary,
the “bona fide dispute” language in § 303(b)(1) functions as
a safeguard against abuses of involuntary bankruptcy. After
today’s opinion, that safeguard may now be circumvented.

                              III

    Under Vortex, the majority should have examined
whether there was an objective basis for Marciano’s
contention. By ignoring this case-specific inquiry in favor of
a per se rule, the majority has erroneously elevated judicial
efficiency above Congress’s clear commands, ignored our
own precedent, and created a circuit split. This result is
especially worrisome in the context of bankruptcy, where
uniformity is sufficiently important that our Constitution
authorizes Congress to establish “uniform laws on the subject
of bankruptcies throughout the United States.” U.S. Const.
Art. I, § 8, cl. 4.
26                   IN RE: MARCIANO

    We could have avoided these problems merely by
following the language of the statute as interpreted by our
precedent. Because we failed to do so, I respectfully dissent.