In re: Marciano

Unstayed non-default state judgments on appeal are “not contingent as to liability or the subject of a bona fide dispute as to liability or amount” for purposes of involuntary petitions pursuant to § 303(b)(1) of the Bankruptcy Code.

In 2007, Georges Marciano sued his former employees (“Petitioning Creditors”) for theft, who then cross-complained alleging defamation and intentional infliction of emotional distress. A jury awarded $105.3 million in damages to the Petitioning Creditors. Marciano appealed, but he did not post a bond to have the judgment stayed during the appeal. His requests to stay were ultimately denied, and the California Supreme Court denied his petition for review. While the appeals were pending, five various creditors also received judgments against Marciano and began collection efforts. The Petitioning Creditors filed an involuntary petition pursuant to § 303(b)(1) of the Bankruptcy Code. The bankruptcy court denied Marciano’s motion to dismiss for defective service of process, rejected his efforts to conduct discovery to determine whether the involuntary petition had been filed in bad faith, and granted the Petitioning Creditors’ motion for summary judgment. Marciano subsequently appealed. The Ninth Circuit held the service was not defective because it was sent to an address that Marciano designated for service with the California Secretary of State, and the bankruptcy court did not abuse its discretion in denying further discovery on the allegations of bad faith. Additionally, Marciano argued that “because the judgments obtained by the Petitioning Creditors were on appeal when the involuntary petition was filed,” the petition should have been dismissed as not meeting the requirements of § 303(b)(1), which allows creditors, meeting certain requirements, to file involuntary bankruptcy against a debtor. The panel, following the Drexler rule, held that unstayed non-default state judgments on appeal are “not contingent as to liability or the subject of a bona fide dispute as to liability or amount” for purposes of § 303(b)(1) of the bankruptcy code. AFFIRMED.