Vol. 7, No. 6, Pg. 14. To Freeze or Not to Freeze: Supreme Court Addresses the Banker's Dilemma.

• Author: By Jan M. Baker

South Carolina Lawyer

1996.

Vol. 7, No. 6, Pg. 14.

To Freeze or Not to Freeze: Supreme Court Addresses the Banker's Dilemma

14TO FREEZE OR NOT TO FREEZE: Supreme Court Addresses the "Banker's Dilemma"By Jan M. BakerOn October 31, 1995, the Supreme Court unanimously reversed the Fourth Circuit Court of Appeals and held that to protect its right to setoff, a bank may temporarily freeze funds in a debtor's account without violating the automatic stay-the injunctive cornerstone of bankruptcy law that shields a debtor from creditor collection attempts the moment a bankruptcy petition is filed. Citizens Bank of Maryland v. Strumpf, 116 S.Ct. 286, 133 L.Ed.2d. 258 (1995).

Strumpf presents the classic "banker's dilemma:" whether a bank creditor should (a) relinquish to the debtor the funds held in the debtor's account and in all likelihood forfeit any right to repayment or (b) exercise its right to setoff and risk violating the automatic stay. To the delight of banks and other credit institutions, the reversal appears to eradicate the protection of the stay by allowing a bank to hold a debtor's funds on deposit against any debt the debtor owes the bank. For both debtors and banks, however, the opinion presents problematic "what ifs" that forecast potential hazards in implementing the law of the case.

Factual Background

On November 28, 1989, Citizens Bank of Maryland loaned David Strumpf $5,068.75. The note required payment of the unsecured consumer loan in 24 monthly installments and guaranteed Citizens the right to immediate acceleration of the amount due, recovery of attorney's fees and the right of setoff upon default. Citizens Bank of Maryland v. Strumpf, 37 F.3d 155, 157 (4th Cir. 1994). Strumpf filed a Chapter 13 bankruptcy petition on January 25, 1991. Id. At the time of filing, Strumpf had $11,279.86 in a checking account with Citizens and the note was in default. Id.

16On October 7, 1991, Citizens filed a motion for relief from the automatic stay and for setoff. Id. Citizens also placed an administrative hold on $3,500 in Strumpf's account to cover the arrearage due on the note. Strumpf filed a motion to hold Citizens in contempt for violating the automatic stay. Id. The bankruptcy court granted the motion on November 13, 1991, awarding Stumpf attorney's fees, punitive damages, and nominal damages. Id.

On December...