Here is a good link to read. If your wondering if it is OK to leave money in a bank you also owe money to, better read this! It is from 1995 so might be outdated, but it was a Supreme Court ruling.
November 1, 1995
FINANCIAL SERVICES NEWSLETTER
U.S. SUPREME COURT VALIDATES TEMPORARY
FREEZE OF BANKRUPT DEPTOR'S ACCOUNT
On October 31 the United States Supreme Court ruled that, in certain instances, a creditor does not violate the automatic stay by freezing a bankrupt debtor's deposit account to protect the creditor's right of setoff. The facts of the case, Citizens Bank of Maryland v. Strumpf, demonstrate why this ruling is so necessary and significant.
At the time the debtor filed his bankruptcy petition, he had on deposit with the bank approximately $11,000.00 and owed the bank approximately $3,500.00 as the outstanding balance on a defaulted loan. The bank placed an administrative freeze on a portion of the account approximately equal to the loan balance and filed a motion in the bankruptcy court for relief from the automatic stay to enable the bank to exercise its right of setoff against the account. The debtor retaliated by filing a motion for sanctions and to hold the bank in contempt for violation of the automatic stay. The court first addressed the motion for contempt and ruled that the bank's action violated the automatic stay and ordered the bank to release its freeze on the account. A few weeks later, the court granted the bank's motion for relief, ruling that the bank indeed did have a valid right of setoff against the bank account. Of course, by that time no money was left in the debtor's account.
The case ultimately reached the U. S. Supreme Court, which held that the bank's action did not constitute a setoff in violation of the automatic stay. The bank had not attempted to exercise permanent control over the account when it instituted the administrative freeze, but merely sought to maintain the status quo pending a hearing on its motion for relief. The Court also was persuaded by the fact that the bank did not freeze the entire deposit account, but merely an amount sufficient to satisfy the debt owed to the bank.
The holding of the U. S. Supreme Court in Strumpf will now enable banks to freeze accounts and avoid the risk of having the debtor dissipate all of the funds in the account prior to the bank's obtaining court approval of its right of setoff. The normal requirements applicable to the exercise of setoff obviously still must be applied, a few of which are listed below:
The amount frozen must be limited to the amount of outstanding obligations owed to the bank by the debtor;
The debt owed to the bank and the bank's obligation to its depositor must be mutual obligations owing in the same capacities; in other words, an individual's deposit account may not be used to setoff against corporate debt, unless the individual has guaranteed the debt;
Joint accounts may still be setoff for the obligations of only one of the account holders, with certain limitations and so long as the deposit agreement so provides;
The debt must be "mature," that is, the lender must have accelerated future installments; and
Other restrictions on setoff, such as the inability to setoff against trust funds or IRA funds or to use setoff to satisfy debt incurred in connection with credit cards, still must be observed.
November 1, 1995
FINANCIAL SERVICES NEWSLETTER
U.S. SUPREME COURT VALIDATES TEMPORARY
FREEZE OF BANKRUPT DEPTOR'S ACCOUNT
On October 31 the United States Supreme Court ruled that, in certain instances, a creditor does not violate the automatic stay by freezing a bankrupt debtor's deposit account to protect the creditor's right of setoff. The facts of the case, Citizens Bank of Maryland v. Strumpf, demonstrate why this ruling is so necessary and significant.
At the time the debtor filed his bankruptcy petition, he had on deposit with the bank approximately $11,000.00 and owed the bank approximately $3,500.00 as the outstanding balance on a defaulted loan. The bank placed an administrative freeze on a portion of the account approximately equal to the loan balance and filed a motion in the bankruptcy court for relief from the automatic stay to enable the bank to exercise its right of setoff against the account. The debtor retaliated by filing a motion for sanctions and to hold the bank in contempt for violation of the automatic stay. The court first addressed the motion for contempt and ruled that the bank's action violated the automatic stay and ordered the bank to release its freeze on the account. A few weeks later, the court granted the bank's motion for relief, ruling that the bank indeed did have a valid right of setoff against the bank account. Of course, by that time no money was left in the debtor's account.
The case ultimately reached the U. S. Supreme Court, which held that the bank's action did not constitute a setoff in violation of the automatic stay. The bank had not attempted to exercise permanent control over the account when it instituted the administrative freeze, but merely sought to maintain the status quo pending a hearing on its motion for relief. The Court also was persuaded by the fact that the bank did not freeze the entire deposit account, but merely an amount sufficient to satisfy the debt owed to the bank.
The holding of the U. S. Supreme Court in Strumpf will now enable banks to freeze accounts and avoid the risk of having the debtor dissipate all of the funds in the account prior to the bank's obtaining court approval of its right of setoff. The normal requirements applicable to the exercise of setoff obviously still must be applied, a few of which are listed below:
The amount frozen must be limited to the amount of outstanding obligations owed to the bank by the debtor;
The debt owed to the bank and the bank's obligation to its depositor must be mutual obligations owing in the same capacities; in other words, an individual's deposit account may not be used to setoff against corporate debt, unless the individual has guaranteed the debt;
Joint accounts may still be setoff for the obligations of only one of the account holders, with certain limitations and so long as the deposit agreement so provides;
The debt must be "mature," that is, the lender must have accelerated future installments; and
Other restrictions on setoff, such as the inability to setoff against trust funds or IRA funds or to use setoff to satisfy debt incurred in connection with credit cards, still must be observed.