WASHINGTON – The extent to which banks are able to protect their interests by freezing funds in bankrupt customers’ accounts will be analyzed by the Supreme Court Tuesday.
The court will hear Citizen’s Bank v. Strumpf, a case that began in federal bankruptcy court in Maryland nearly five years ago.
In October 1991 Citizens Bank of Maryland placed an “administrative hold” on $3,500 in the checking account of a customer who had filed for bankruptcy eight months earlier.
The customer, David Strumpf of Greenbelt, Md., had defaulted on an unsecured consumer loan from Citizen’s Bank in 1989.
In placing the hold on his account, Strumpf claimed the bank violated federal bankruptcy law, which says banks can’t hold withdrawals from customers’ accounts until they receive permission from a court.
Citizen’s Bank had not received the permission of the court to put a hold on Strumpf’s withdrawals.
In its defense, Citizen’s Bank argued in court papers that freezing an account was merely maintaining the status quo. The bank did not take from Strumpf’s account, which would have been subject to the scrutiny of the law, officials argued.
Strumpf’s lawyer, John Owen, said the bank also violated bankruptcy law by ignoring the 36-month repayment plan for all his debts that Strumpf had agreed to in court.
The repayment plan listed Citizen’s Bank as one of the creditors to be repaid, but did not specify any exact time.
“The bank placed the funds on hold because it was eight months after [Strumpf] filed for bankruptcy, and the bank saw no prospect of getting payment,” said Irving Walker, counsel for Citizen’s Bank.
Strumpf asked the bankruptcy court in October 1991 to hold Citizen’s Bank in contempt for violating bankruptcy laws. Strumpf also asked the court to remove the hold that the bank had placed on his account.
“Our concern is that a creditor cannot be allowed to ignore the whole bankruptcy process and disrupt the purpose behind it,” Owen said.
The court ruled that Citizen’s Bank was in violation of the law. It ordered the bank to remove the hold on Strumpf’s account and pay Strumpf $900 for punitive damages and attorney fees.
Citizen’s Bank appealed to the U.S. District Court of Maryland, which overturned the lower court’s decision in December 1991.
By this point however, Strumpf had already withdrawn his money from his Citizen’s Bank account.
Strumpf appealed, and the decision was reversed again, leading to Citizen’s Bank’s appeal to the Supreme Court.
“If the court reverses the previous decision and recognizes that such a hold is allowed, I believe that the implications will be wide-ranging,” Walker said.
It will be especially significant to the federal government, Walker said.
The government is restricted from collecting money owed it by debtors who file bankruptcy, but the debtors can receive income tax refunds, Walker said. “There are many unintended inequities that exist right now,” Walker said. “If the Supreme Court were to sustain the [decision forbidding banks from freezing funds], there would be very negative implications on the rights of creditors.” -30-