In re: Ralph T. Byrd

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 In Re: RALPH T. BYRD,
Debtor,
PLATINUM FINANCIAL SERVICES
CORPORATION,
Plaintiff-Appellant, No. 03-1185 ROGER SCHLOSSBERG, Chapter 7
Trustee,
Trustee-Appellant,
v.
RALPH T. BYRD,
Defendant-Appellee. 
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
William M. Nickerson, Senior District Judge.
(CA-02-2675-WMN, BK 01-25006)
Argued: December 5, 2003
Decided: February 11, 2004
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.

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COUNSEL
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.
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 bank-
ruptcy court concluded that Byrd’s debts were not the subject of a
bona fide dispute, but the district court reached the opposite conclu-
sion. 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 pur-
poses 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
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fide dispute." 11 U.S.C. § 303(b)(2) (2000 & Supp. 2003). Byrd con-
cedes 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 jus-
tified 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 dis-
pute, 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 there-
fore 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 judg-
ment 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 judg-
ments 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 argu-
ment 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
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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 Plati-
num’s summary judgment motion, because it held that unstayed state
court judgments cannot be the subject of a bona fide dispute for pur-
poses of the Bankruptcy Code. According to the bankruptcy court, an
unstayed judgment may be enforced even though an appeal is pend-
ing, 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 judg-
ments, 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 cir-
cuits 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
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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. Eas-
town Auto Co. (In re Eastown Auto Co.), 215 B.R. 960, 965 (B.A.P.
6th Cir. 1998). Thus a bona fide dispute exists only when there are
substantial factual or legal questions that bear upon the debtor’s liabil-
ity. 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 dol-
lars 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 Plati-
num’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) (defer-
ring to state trial court’s interpretation of state law).
The bankruptcy court, however, believed that the state court judg-
ments 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 Drex-
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ler, 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 judg-
ments, see, e.g., Drexler, 56 B.R. at 967-68, the text of the Bank-
ruptcy 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 defines a "claim" in part as a "right to payment,
whether or not such right is reduced to judgment." Id. § 101(5)(A)
(emphasis added). In other words, the Code does not make the exis-
tence of a bona fide dispute depend on whether a claim has been
reduced to judgment. It permits some creditors who have not reduced
their claims to judgment to file involuntary petitions, just as it pre-
vents other creditors who have reduced their claims to judgment from
filing.
After all, the purpose of the "bona fide dispute" provision is to pre-
vent 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." In re Prisuta, 121 B.R. 474,
476 (Bankr. W.D. Pa. 1990); see also In re Lough, 57 B.R. 993, 997
(Bankr. E.D. Mich. 1986). Yet substantial questions may remain
about a debtor’s liability, notwithstanding judgments in a creditor’s
favor. In the present case, Maryland trial courts ruled in Platinum’s
favor on particular factual or legal questions. These judgments go a
long way toward establishing the absence of a bona fide dispute.
Indeed it will be the unusual case in which a bona fide dispute exists
in the face of claims reduced to state court judgments. Such judg-
ments do not guarantee the lack of a bona fide dispute, however, espe-
cially absent rulings by Maryland appellate courts or in the face of
contrary rulings by other Maryland trial courts. As a result, a creditor
like Platinum may not reduce a claim to judgment elsewhere and then
automatically seek enforcement in bankruptcy, at least where the
judgment to be enforced is pending an appeal that presents substantial
factual or legal questions.1
1We do not hold that an unappealed or unappealable judgment may be
subject to a bona fide dispute. Substantial questions as to a debtor’s lia-
bility are unlikely to remain where a debtor has ceased, or can no longer
continue, contesting his liability.
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B.
Once Platinum had made its prima facie case by presenting
unstayed state court judgments in its favor, the burden shifted to Byrd
to demonstrate the existence of a bona fide dispute. See, e.g., BDC 56
LLC, 330 F.3d at 118; Sims, 994 F.2d at 221; Rimell, 946 F.2d at
1365; Bartmann, 853 F.2d at 1544. But at no point in this litigation
has Byrd offered any evidence to support his contention that a bona
fide dispute exists.
Before the bankruptcy court, Byrd argued that a bona fide dispute
existed because his ongoing appeals in the Maryland courts had merit.
According to Byrd, based on favorable comments by the Maryland
Circuit Court during this litigation and statements in a related case
before the Maryland Court of Special Appeals, his appeals raised
legitimate doubts about Maryland law, specifically application of the
state’s Retail Credit Accounts Law. Ultimately, however, Byrd lost all
of these appeals: each of Platinum’s three judgments was affirmed by
the Maryland Circuit Court.
Byrd now claims that we cannot consider the outcome of the very
appeals he filed and prosecuted, because Platinum’s filing of its invol-
untary petition should have stayed any proceedings in the state court
cases against him. See 11 U.S.C. § 362(a)(1). Byrd is only partly cor-
rect. The first of Platinum’s judgments, in the amount of $2,322.60,
was affirmed on the record by the Circuit Court for Montgomery
County prior to Platinum’s filing of its involuntary proceeding. See
J.A. 145; Supp. J.A. 233; Davis v. Davis, 646 A.2d 365, 372-73 (Md.
1994). It was therefore unaffected by the stay. However, that judg-
ment alone did not render Platinum eligible to file its petition. In
order to have been eligible to file, Platinum must have held claims
totaling more than $11,625 that were not the subject of a bona fide
dispute. Id. § 303(b)(2).
Yet Platinum’s other judgments, in the amounts of $10,600.71 and
$19,269.33, were affirmed subsequent to its filing of its involuntary
petition. Even though it was Byrd, rather than Platinum, who pursued
the appeals, his appeals were still "continuation[s]" of "action[s] or
proceeding[s] against the debtor." Id. § 362(a)(1). The plain language
of Section 362 stays appellate proceedings in actions originally
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brought against the debtor, even when it is the debtor who files the
appeal. See, e.g., Simon v. Navon, 116 F.3d 1, 4 (1st Cir. 1997); Par-
ker v. Bain, 68 F.3d 1131, 1135-36 & nn.6, 8 (9th Cir. 1995); Farley
v. Henson, 2 F.3d 273, 275 (8th Cir. 1993); Sheldon v. Munford, Inc.,
902 F.2d 7, 8-9 (7th Cir. 1990); Borman v. Raymark Indus., Inc., 946
F.2d 1031, 1035 (3d Cir. 1991); Matter of Barbier and Shearson Leh-
man Hutton Inc., 943 F.2d 249, 250 (2d Cir. 1991); Marcus, Stowell
& Beye Gov’t Sec., Inc. v. Jefferson Inv. Corp., 797 F.2d 227, 230 n.4
(5th Cir. 1986); Cathey v. Johns-Manville Sales Corp. 711 F.2d 60,
62 (6th Cir. 1983); but see Chaussee v. Lyngholm (In re Lyngholm),
24 F.3d 89, 91-92 & n.4 (10th Cir. 1994). Byrd is thus correct that
his two post-petition appeals should have been stayed.
But this hardly leaves Byrd home-free. The mere fact that a judg-
ment is pending appeal does not mean that a bona fide dispute exists,
any more than the fact that a state court has rendered judgment means
that a bona fide dispute does not exist. Before the Maryland trial
courts, Byrd asserted that he had paid impermissible finance charges
in excess of the balances then owing on his credit card accounts. The
Maryland trial courts found little evidence to support Byrd’s asser-
tions, and they rendered judgment in Platinum’s favor.
Before the bankruptcy court, Byrd reiterated his same argument —
again without supporting evidence. J.A. 105-06. He did not furnish
any credit card billing statements that showed unjustified finance
charges. Supp. J.A. 110, 470. Nor did he provide any documentation
showing that he had paid such allegedly improper charges, much less
that such charges had exceeded the current account balances. Id. And,
of course, Byrd only argued that the RCAL prohibited Platinum from
assessing finance charges on transactions other than cash advances.
Yet Platinum presented evidence in the three Maryland state court
cases that it had not sued for finance charges, Supp. J.A. 232-33; or
that most, if not all, of the account balances were due to cash
advances, Supp. J.A. 399-400, 503-04. Again, Byrd offered no con-
trary evidence to the bankruptcy court.2
2Even if Byrd had demonstrated a bona fide dispute with regard to any
portion of Platinum’s claim that was for finance charges, Platinum still
might have had an undisputed claim for principal in excess of
§ 303(b)(2)’s $11,625 threshold. See In re Cohn-Phillips, Ltd., 193 B.R.
757, 763 (Bankr. E.D. Va. 1996) ("A bona fide dispute must exist as to
the validity of an entire claim and not merely some of the claim.") (citing
In re Fox, 162 B.R. 729, 732 (Bankr. E.D. Va. 1993)).
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In short, Byrd has offered nothing more than his belief that he has
paid more than the principal amount of each debt in impermissible
finance charges, but a debtor’s subjective beliefs do not give rise to
a bona fide dispute. See, e.g., BDC 56 LLC, 330 F.3d at 118; Sims,
994 F.2d at 221; Rimell, 946 F.2d at 1365; Bartmann, 853 F.2d at
1544. Byrd cannot defeat Platinum’s standing to file under
§ 303(b)(2) simply by refusing to concede the validity of Platinum’s
claim, without presenting any evidence to support his factual and
legal arguments. See, e.g., In re Smith, 243 B.R. 169, 182 (Bankr.
N.D. Ga. 1999). The bankruptcy court therefore correctly concluded,
though on the basis of an overly broad rule, that Platinum’s unstayed
state court judgments were not the subject of a bona fide dispute.
C.
The district court, however, disagreed with the bankruptcy court.
It held that a bona fide dispute did exist, and that Platinum’s involun-
tary petition therefore had to be dismissed.3 According to the district
court, whether Platinum’s unstayed state court judgments created a
bona fide dispute depended on "the preclusive effect given to [each]
judgment under the law of the forum in which the judgment was ren-
dered." In other words, the central issue was whether, under Maryland
law, Platinum’s unstayed state court judgments were final for pur-
poses of res judicata.
Although lower courts have occasionally taken this approach, see,
e.g., In re Everett, 178 B.R. 132, 140 (Bankr. N.D. Ohio 1994), we
think that it asks the wrong question. It asks whether Byrd was pre-
cluded from relitigating his liability, or whether Platinum was pre-
cluded from litigating additional issues that should have been raised
in its suit against Byrd. But whether Platinum or Byrd could pursue
other actions was unrelated to whether Byrd’s appeals themselves
3The district court did not make clear what standard of review it was
applying. According to some of our sister circuits, a bankruptcy court’s
decision that a claim is subject to a bona fide dispute is a factual finding
reviewed for clear error. See Vortex, 277 F.3d at 1064; Sims, 994 F.2d
at 221; Rimell, 946 F.2d at 1365. We think the sounder view, however,
is that the applicable standard of review depends on the nature of the
bankruptcy court’s decision. See BDC 56 LLC, 330 F.3d at 119.
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constituted genuine disputes. The latter, not the former, inquiry is the
one required by the text of 11 U.S.C. § 303(b). And by inquiring into
the genuineness of Byrd’s appeals, the bankruptcy court was not reli-
tigating Byrd’s liability in violation of settled rules of res judicata, see
In re Genesys Data Techs., Inc., 204 F.3d 124, 127-30 (4th Cir.
2000), because it was not actually resolving any disputed question of
fact or law, see BDC 56 LLC, 330 F.3d at 118; Sims, 994 F.2d at 221;
Rimell, 946 F.2d at 1365.
III.
The Bankruptcy Code does not require that a debtor’s assets be dis-
sipated 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. Platinum was eligible to file
an involuntary petition against Byrd not simply because Platinum had
reduced its claims to judgment, but because Byrd failed to raise any
substantial factual or legal questions about the continued viability of
those judgments. We therefore reverse the judgment of the district
court and remand for further proceedings consistent with this decision.4
REVERSED AND REMANDED
4Platinum’s involuntary petition listed all six of its claims against
Byrd. However, Platinum’s motion for summary judgment addressed
only the three of its six claims already reduced to judgment, and the
bankruptcy court likewise addressed only those three claims in granting
Platinum’s motion. On remand, the bankruptcy court will have to deter-
mine whether relief on the three claims not reduced to judgment is also
appropriate under 11 U.S.C. § 303(h)(1).
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