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Fustolo v. 50 Thomas Patton Drive, LLC

United States Court of Appeals, First Circuit

February 24, 2016

STEVEN C. FUSTOLO, Plaintiff, Appellant,
v.
50 THOMAS PATTON DRIVE, LLC; THE PATRIOT GROUP LLC; RICHARD MAYER, Defendants, Appellees

Page 2

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Rya W. Zobel, U.S. District Judge.

David M. Nickless, with whom Nickless, Phillips and O'Connor, was on brief for appellant.

Michael J. Fencer, with whom Howard P. Blatchford, Jonathan M. Horne, and Jager Smith P.C., were on brief, for appellees 50 Thomas Patton Drive, LLC, and Richard Mayer.

Colleen C. Cook, with whom Michael Paris, Jack I. Siegal, and Nystrom Beckman & Paris LLP, were on brief, for appellee The Patriot Group LLC.

Before Torruella, Lynch,[*] and Kayatta, Circuit Judges.

OPINION

Page 3

KAYATTA, Circuit Judge.

We hold in this case that a claim to payment that 50 Thomas Patton Drive, LLC (" Patton Drive" ) holds against Steven Fustolo (" Fustolo" ) " is not contingent as to liability or the subject of a bona fide dispute as to liability or amount" within the meaning of section 303(b)(1) of the Bankruptcy Code. 11 U.S.C. § 303(b)(1). We therefore affirm the decision of the bankruptcy court, which found Patton Drive qualified to join with two other creditors also holding non-contingent, undisputed claims to force Fustolo into an involuntary bankruptcy proceeding.

I.

Patton Drive's claims against Fustolo arise out of four promissory notes issued to Patton Drive by Fustolo's affiliate companies in connection with two real estate transactions. Fustolo personally guaranteed two of the notes (the " Guaranteed

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Notes" ), which together totaled $1.25 million, but did not guarantee the other two notes (the " Unguaranteed Notes" ), which together totaled $1.5 million. When the principal debtors defaulted on all four notes, Patton Drive sued the debtor companies and Fustolo, asserting that Fustolo was personally liable on his guarantee. The Massachusetts state court found Fustolo liable for breach of contract and rejected Fustolo's argument that Patton Drive's technical violation of a state usury statute should reduce the amount of interest owed on the notes. The court entered a final judgment against Fustolo in favor of Patton Drive in the amount of roughly $6.76 million.[1] Fustolo contends that this judgment overstated his liability by approximately $4 million because it erroneously assumed that he had guaranteed all of the notes. In response, Patton Drive demurs, declining to offer any defense of the state court's damages calculation. Fustolo lodged a timely appeal of the state court judgment but did nothing further to prosecute the appeal, which we are told has rested more or less dormant on the state court's appellate docket for at least four years.

Meanwhile, Fustolo, who admittedly has at least twelve creditors, failed to satisfy his financial obligations to at least two of those other creditors, The Patriot Group LLC (" Patriot" ) and Richard Mayer (" Mayer" ). On May 6, 2013, eighteen months after entry of the state court judgment, Patton Drive joined with Patriot and Mayer to file a petition with the United States Bankruptcy Court, seeking to place Fustolo into involuntary Chapter 7 bankruptcy, and to thereby cause Fustolo's debts to be determined and his assets gathered and liquidated in an orderly fashion to satisfy those debts. See 11 U.S.C. § § 303(b)(1), 701 et seq.

The creditors' ability to force Fustolo into bankruptcy rests on 11 U.S.C. § 303(b)(1), which provides that involuntary bankruptcy proceedings may be commenced via petition to the bankruptcy court

by three or more entities, each of which is . . . a holder of 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 . . . 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); see also id. § 104(a). Fustolo does not dispute that Patriot and Mayer hold eligible claims against him. Nor does Fustolo dispute that the total amount of those undisputed claims exceeds the value of any related liens on his property by the statutorily requisite amount. However, Fustolo maintains that Patton Drive has not asserted a claim that qualifies it to serve as a petitioning creditor because his pending state court appeal subjects Patton Drive's judgment to " bona fide dispute as to liability or amount." Id. § 303(b)(1).

Following an evidentiary hearing in the bankruptcy court on Fustolo's challenge to their qualifications to initiate an involuntary proceeding, the three petitioning creditors moved for summary judgment. Fustolo opposed the motion and filed his own ...


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