Can a Bank Place An Administrative Hold and Have a Right of Setoff If the Borrower Had Filed for Bankruptcy ?
In Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995) the bank placed an administrative hold on that part of a borrower's checking account claimed by the bank to be subject to setoff, i.e., the bank refused to pay withdrawals from the account that would reduce the balance below the amount that was due on the borrower's loan.
The borrower previously had filed for bankruptcy.
After placing the hold, the bank filed a motion for relief from automatic stay and for setoff, and the borrower filed a motion for contempt alleging that the bank had violated the automatic stay provision of Section 362(a) of the Bankruptcy Code, 11 U.S.C. 362(a).
In reversing the Court of Appeals' decision that the setoff violated the automatic stay provisions, the Supreme Court held that the bank's "temporary refusal to pay was neither a taking of possession of [the borrower's] property nor an exercising of control over it, but merely a refusal to perform its promise." 516 U.S. at 21.
The court recognized the general rule, with certain exceptions, that the right of setoff that a creditor (bank) possessed prior to a debtor (borrower) filing for bankruptcy is not affected by the automatic stay provisions of the Code.