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B.D.W. Associates Inc. v. Busy Beaver Building Centers Inc.

filed: January 11, 1989.

B.D.W. ASSOCIATES, INC., DEBTOR
v.
BUSY BEAVER BUILDING CENTERS, INC., FAGEN'S, INC. AND JACKEL DEVELOPMENT CO., APPELLANTS



On Appeal from the United States District Court for the Western District of Pennsylvania, Civil No. 87-2126.

Sloviter, Becker, Circuit Judges, and Fullam, Chief District Judge.*fn*

Author: Fullam

FULLAM, J.

Appellants petitioned the Bankruptcy Court to have appellee B.D.W. Associates, Inc. declared bankrupt. B.D.W. contested the petition but, after a hearing, the bankruptcy judge granted relief. The debtor appealed, and the district court reversed, ordering dismissal of the petition on the ground that the petitioning creditors lacked standing to obtain the relief they sought, because their claims establish the existence of a bona fide dispute. The petitioning creditors have timely appealed from the district court's order.

I.

Section 303(b)(1) of the Bankruptcy Code, 11 U.S.C. § 303(b)(1), provides:

"(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, or an indenture trustee representing such a holder . . ." (emphasis added).

Section 303(h) of the Bankruptcy Code, 11 U.S.C. § 303(h) provides:

"(h) [If the petition is timely controverted], after trial, the court shall order relief against the debtor in an involuntary case . . . only if --

"(1) the debtor is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute. . ." (emphasis added).

In this case, the debtor having timely controverted appellants' petition, the Bankruptcy Court was required to decide whether the claims of appellants as petitioning creditors were or were not the subject of bona fide dispute. If a bona fide dispute existed, the Bankruptcy Court was obliged to dismiss the petition, rather than resolve the dispute. The district court reversed the Bankruptcy Court's order because, in its view, the bankruptcy judge had resolved a bona fide dispute, rather than permitting the dispute to be resolved in an appropriate forum.

The test to be applied in determining the existence vel non of a bona fide legal dispute in this context has been described in various ways. For example, in In re Johnston Hawks, Ltd., 49 B.R. 823 (Bky. Dist. of Hi. 1985), a bona fide dispute was defined as "a conflict in which an assertion of a claim or right made in good faith and without fraud or deceit on one side is met by contrary claims or allegations made in good faith and without fraud or deceit on the other side". Id. at 830. In In re Stroop, S. B.R. 210 (D.Colo. 1985), the test was equated with the standards for granting summary judgment. A more complete formulation was expressed in In re Lough, 57 B.R. 993 (Bky. E.D. Mich. 1986), viz: "If there is a genuine issue of a material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts, then the petition must be dismissed." Id. at 997. The Seventh Circuit Court of Appeals has adopted that definition with a gloss, see In re Busick, 831 F.2d 745 (7th Cir. 1987) ("substantial" factual and legal questions raised by debtor preclude finding of involuntary bankruptcy), which the parties agree is acceptable, and we adopt it here.

Appellants contend that the bankruptcy judge properly determined that appellants' claims against the debtor were not subject to any bona fide dispute. Appellee, on the other hand, argues that appellants could hold the debtor liable for their claims only by establishing a right to pierce the corporate veil -- a concept which, they argue, necessarily involves disputed issues inappropriate for resolution by the ...


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