In re Byrd

• Decision Date: 11 February 2004
• Docket Number: No. 03-1185.,03-1185.
• Citation: 357 F.3d 433
• Parties: In Re: Ralph T. BYRD, Debtor, Platinum Financial Services Corporation, Plaintiff-Appellant, Roger Schlossberg, Chapter 7 Trustee, Trustee-Appellant, v. Ralph T. Byrd, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

357 F.3d 433

In Re: Ralph T. BYRD, Debtor Platinum Financial Services Corporation, Plaintiff-Appellant Roger Schlossberg, Chapter 7 Trustee, Trustee-Appellant, v. Ralph T. Byrd, Defendant-Appellee.

No. 03-1185.

United States Court of Appeals, Fourth Circuit.

Argued: December 5, 2003.

Decided: February 11, 2004.

COPYRIGHT MATERIAL OMITTED

ARGUED:

Ronald Scott Canter, Wolpoff & Abramson, L.L.P., Rockville, Maryland, for Appellant Platinum; James Martin Hoffman, Shulman, Rogers, Gandal, Pordy & Ecker, P.A., Rockville, Maryland, for Appellant Schlossberg. Ralph T. Byrd, Laytonsville, Maryland, for Appellee.

Before WILKINS, Chief Judge, and WILKINSON and MOTZ, Circuit Judges.

Reversed and remanded by published opinion. Judge WILKINSON wrote the opinion, in which Chief Judge WILKINS and Judge MOTZ joined.

OPINION

WILKINSON, Circuit Judge:

The question here is whether an unstayed state court judgment that is pending appeal can constitute a "bona fide dispute" for purposes of the Bankruptcy Code. 11 U.S.C. § 303(b) (2000). Defendant Ralph T. Byrd is a Maryland attorney who was unable to pay sizeable balances that he accrued on various credit cards. Platinum Financial Services Corporation ("Platinum") held some of Byrd's credit card accounts, and it reduced over $32,000 of Byrd's debts to judgment in Maryland state court. While those judgments were pending appeal, Platinum filed an involuntary bankruptcy petition against Byrd, seeking to enforce its unstayed state court judgments in bankruptcy. However, Byrd responded that, notwithstanding the judgments against him, his credit card debts were the subject of a "bona fide dispute." The bankruptcy court concluded that Byrd's debts were not the subject of a bona fide dispute, but the district court reached the opposite conclusion. Because Byrd failed to present any substantial factual or legal questions as to his liability, the bankruptcy court properly found that Byrd's debts were not the subject of a "bona fide dispute" for purposes of the Bankruptcy Code. Accordingly, we reverse the judgment of the district court.

I.

The Bankruptcy Code permits a single creditor like Platinum to file an involuntary bankruptcy petition against a debtor like Byrd, so long as (1) Byrd has fewer than twelve creditors and (2) Platinum holds claims totaling more than $11,625 that are not the subject of a "bona fide dispute." 11 U.S.C. § 303(b)(2) (2000 & Supp.2003). Byrd concedes that he has fewer than twelve creditors. Byrd contends only that Platinum's claims are the subject of a bona fide dispute, and therefore that Platinum was not eligible to file its petition. Byrd admits that, if Platinum was eligible to file its petition, the bankruptcy court was justified in ordering relief against him. We therefore must decide only whether Platinum's claims are the subject of a bona fide dispute.

Byrd argues that his credit card debts are subject to a bona fide dispute, because the credit card issuers failed to comply with Maryland's Retail Credit Accounts Law ("RCAL"). See Md.Code Ann., Com. Law II §§ 12-501 to -515. (2000). The RCAL prohibits a card issuer from assessing finance charges on any transactions other than cash advances, unless the issuer has obtained a signed account agreement from the borrower. Id. §§ 12-501(f), -503(e), -513(a). According to Byrd, he did not sign any such agreements for the credit card accounts held by Platinum; Platinum nevertheless levied impermissible finance charges; and over the years, Byrd paid those finance charges, which were greater than the remaining principal on the accounts. Byrd therefore asserts that he does not owe anything to Platinum.

Assessing whether Byrd's dispute is a "bona fide" one requires a brief look at the history of this litigation. It began when Platinum, which held six of Byrd's credit card accounts totaling over $74,000, filed separate actions in Maryland state court to collect on three of the accounts. In June 2001, the District Court for Montgomery County rejected Byrd's argument regarding the RCAL, and it rendered judgment in Platinum's favor in the amount of $2,322.60. Once more in June 2001 and then again in October 2001, the court rendered judgments in Platinum's favor of $10,600.71 and $19,269.33 on the other two accounts. All told, Platinum reduced to judgment over $32,000 of the $74,000 that the company claims it is owed.

The first of these Maryland state court judgments was affirmed in early December 2001, after a trial de novo before the Circuit Court for Montgomery County. The circuit court noted that Byrd's argument had "brought [it] up short ..., because his argument does carry some merit." Ultimately, however, Platinum had offered unrebutted evidence to show that it was not suing for impermissible finance charges. The circuit court therefore affirmed the $2,322.60 judgment against Byrd. Shortly thereafter, on December 14, 2001, Platinum filed its involuntary bankruptcy petition against Byrd. Subsequent to the petition's filing, Byrd's appeals of the $10,600.71 and $19,269.33 judgments were also affirmed by the state circuit court.

Meanwhile, Platinum and Byrd filed cross-motions for summary judgment before the United States Bankruptcy Court for the District of Maryland. After oral argument, the bankruptcy court granted Platinum's summary judgment motion, because it held that unstayed state court judgments cannot be the subject of a bona fide dispute for purposes of the Bankruptcy Code. According to the bankruptcy court, an unstayed judgment may be enforced even though an appeal is pending, and the filing of an involuntary petition is but one of many means by which a creditor like Platinum can seek collection of its judgments.

On appeal, the district court reversed the bankruptcy court, ruling that a bona fide dispute can exist as to unstayed state court judgments that are pending appeal. In the district court's view, the key question was not the enforceability in bankruptcy of Platinum's unstayed judgments, but the preclusive effect of those judgments in the jurisdiction in which they were rendered. In other words, the central inquiry for the district court was whether the Maryland state court judgments had preclusive effect under Maryland state law. Since Maryland law on this point was unsettled, the district court held that Platinum had failed to prove the absence of a bona fide dispute. The district court therefore dismissed Platinum's involuntary petition. Platinum now appeals the district court's decision.

II.

The Bankruptcy Code does not define the term "bona fide dispute," and we have done no more than recognize that the term "clearly entails some sort of meritorious, existing conflict." Atlas Mach. & Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709, 715 (4th Cir.1993). We agree, however, with the unanimous view of our sister circuits that a bona fide dispute requires "an objective basis for either a factual or a legal dispute as to the validity of [the] debt." Matter of Busick, 831 F.2d 745, 750 (7th Cir.1987); see also Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 330 F.3d 111, 117-18 (2d Cir.2003); Liberty Tool, & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, 1064 (9th Cir.2002); Subway Equip. Leasing Corp. v. Sims (Matter of Sims), 994 F.2d 210, 220-21 (5th Cir. 1993); Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir. 1991); B.D.W. Assocs., Inc. v. Busy Beaver Bldg. Ctrs., Inc., 865 F.2d 65, 66-67 (3d Cir.1989); Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543-44 (10th Cir. 1988); Booher v. Eastown Auto Co. (In re Eastown Auto Co.), 215 B.R. 960, 965 (6th Cir. BAP 1998). Thus a bona fide dispute exists only when there are substantial factual or legal questions that bear upon the debtor's liability. See, e.g., Busick, 831 F.2d at 750. The bankruptcy court need not resolve the merits of the bona fide dispute, but simply determine whether one exists. See, e.g., BDC 56 LLC, 330 F.3d at 118; Sims, 994 F.2d at 221.

A.

Before the bankruptcy court, the initial burden rested on Platinum as the petitioning creditor to establish a prima facie case that no bona fide dispute existed as to Byrd's debts. See, e.g., BDC 56 LLC, 330 F.3d at 118; Sims, 994 F.2d at 221; Bartmann, 853 F.2d at 1544. There can be little question that Platinum met its burden. Platinum did more than merely present evidence that Byrd owed thousands of dollars on a handful of credit card accounts. Rather, it presented unstayed judgments resulting from three separate state court trials, in which Maryland courts had accepted Platinum's evidence and rejected Byrd's defenses. At the very least, this was strong evidence that Platinum's claims were valid. A state court judgment is not to be treated lightly, particularly where it interprets state law. Consider Nat'l Bank of Washington v. Pearson, 863 F.2d 322, 327 (4th Cir.1988) (deferring to state trial court's interpretation of state law).

The bankruptcy court, however, believed that the state court judgments ended the inquiry. According to the bankruptcy court, a claim that has been reduced to an unstayed judgment, even if an appeal is pending, can never be the subject of a bona fide dispute. The court was certainly not alone in its view, see, e.g., In re Norris, 183 B.R. 437, 452-54 & n. 17 (Bankr.W.D.La.1995) (unstayed, appealed judgment not subject to bona fide dispute); In re Galaxy Boat Mfg. Co. Inc., 72 B.R. 200, 202 (Bankr.D.S.C.1986) (same); In re Drexler, 56 B.R. 960, 967-68 (Bankr. S.D.N.Y.1986) (same), but it is a view that we find unpersuasive.

While we recognize the general enforceability of unstayed judgments, see, e.g., Drexler, 56 B.R. at 967-68, the text of the Bankruptcy Code establishes no such hard-and-fast rule. Section 303(b) prohibits a creditor from filing an involuntary petition if the creditor's "claim" is "the subject of a bona fide dispute." 11 U.S.C. § 303(b). Section 101(5) then...