Citizens Bank of Md. v. Strumpf
133 L. Ed. 2d 258, 516 U.S. 16, 1995 U.S. LEXIS 7408 (1995)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A creditor's temporary administrative hold on a debtor's bank account, placed to preserve a right of setoff while seeking relief from the automatic stay, does not constitute a 'setoff' and therefore does not violate the automatic stay provisions of the Bankruptcy Code.
Facts:
- David Strumpf maintained a checking account with Citizens Bank of Maryland.
- Strumpf was also in default on a loan he had taken from Citizens Bank.
- On January 25, 1991, Strumpf filed for relief under Chapter 13 of the Bankruptcy Code, which triggered an automatic stay against creditor actions.
- On October 2, 1991, Citizens Bank placed an 'administrative hold' on the funds in Strumpf's checking account, refusing to pay withdrawals that would reduce the balance below the amount Strumpf owed on the defaulted loan.
Procedural Posture:
- Citizens Bank filed a 'Motion for Relief from Automatic Stay and for Setoff' in the Bankruptcy Court.
- Strumpf filed a motion to hold Citizens Bank in contempt for violating the automatic stay.
- The Bankruptcy Court ruled for Strumpf, finding the administrative hold was a prohibited setoff and held Citizens Bank in contempt.
- Citizens Bank appealed to the U.S. District Court, which reversed the Bankruptcy Court's decision, holding the hold was not a violation.
- Strumpf, as appellant, appealed to the U.S. Court of Appeals for the Fourth Circuit, which reversed the District Court, finding the hold was 'tantamount to the exercise of a right of setoff' and thus a violation of the stay.
- The U.S. Supreme Court granted certiorari to resolve the issue.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a bank's temporary 'administrative hold' on a portion of a bankrupt debtor's checking account, intended to preserve the bank's right of setoff, violate the automatic stay imposed by 11 U.S.C. § 362(a)?
Opinions:
Majority - Justice Scalia
No, a temporary administrative hold does not violate the automatic stay. A bank's temporary refusal to pay a debt owed to a debtor in bankruptcy is not a 'setoff' within the meaning of § 362(a)(7). The Court reasoned that a setoff requires an intent to permanently settle accounts, which was absent here. The bank's action was a temporary refusal to pay while it sought judicial relief, as evidenced by its filing of a 'Motion for Relief from Automatic Stay' just five days after placing the hold. Furthermore, other provisions of the Bankruptcy Code, such as § 542(b) and § 553(a), implicitly permit such a temporary freeze by preserving a creditor's pre-petition right of setoff and excusing a creditor from immediately turning over funds that may be subject to that right. To prohibit a temporary hold would force the creditor to pay the debtor, thereby destroying the very right of setoff the Code aims to protect.
Analysis:
This decision provides critical guidance for financial institutions, establishing a safe harbor for them to preserve their setoff rights upon a debtor's bankruptcy filing. By distinguishing a temporary 'administrative hold' from a prohibited 'setoff,' the Court allows creditors to take defensive measures without violating the automatic stay. This prevents a debtor from quickly withdrawing funds that would otherwise be subject to setoff, thus balancing the debtor's protection under the stay with the creditor's substantive rights preserved by the Bankruptcy Code. The ruling solidifies the understanding that the automatic stay freezes the status quo but does not extinguish a creditor's underlying rights.
