WASHINGTON – The Supreme Court ruled unanimously last week that banks have the right to freeze the accounts of bankrupt customers who owe them money.
The court overturned an appeals court decision and ruled that Citizens Bank of Maryland did not violate bankruptcy law when it froze money in the account of bankrupt customer David Strumpf, who had defaulted on a consumer loan.
In an opinion published Oct. 31, Justice Antonin Scalia wrote that Citizens Bank did not violate laws protecting debtors’ assets from creditors because the bank did not permanently take the money from the account.
The bank in 1991 had placed an “administrative hold” on $3,500 in the checking account of Strumpf, about eight months after he had declared bankruptcy. The Greenbelt, Md., retiree still owed the bank for an unsecured consumer loan from 1989.
The hold prevented Strumpf from withdrawing $3,500 of the $11,279 in his account, but did not bar him from removing the other money.
The court also rejected the arguments of Strumpf’s lawyers that the hold was an interference with Strumpf’s ability to use his money. The justices wrote that the $3,500 Strumpf owed the bank wasn’t really his.
Strumpf “rests on the false premise that [Citizens Bank’s] administrative hold took something from [him],” Scalia wrote. “That view of things may be arguable if a bank account consisted of money belonging to the depositor and held by the bank. In fact, however, [the account] consists of nothing more or less than a promise to pay, from the bank to the depositor.”
Irving Walker, a lawyer for the bank, said the decision “protects the rights of financial institutions and clearly defines a bank’s rights.”
Walker added that the decision should have wide-ranging effects, impacting everything from landlord-tenant agreements to the secured credit card industry.
For instance, he said the decision may be interpreted to allow landlords to keep security deposits from bankrupt tenants who owe them money.
“This decision is important because it even applies to non- bank creditors,” Walker said.
But John Owen Jr., a lawyer who represented Strumpf, disagreed.
“I don’t think this decision will have much impact on future decisions,” Owen said. “I just think that now, bankruptcy lawyers will tell their clients to withdraw their money before filing bankruptcy,” Owen said. -30-