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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
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Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Please answer this question with case law to support your answer. In

Customer Question

Please answer this question with case law to support your answer.

In a Chapter 7, can a bank lawfully put an "administrative hold" for setoff on ALL funds in a checking/savings account regardless of whether the deposits into the accounts were pre- AND post-petition?

Will a court grant "relief from automatic stay" for the bank to proceed with setoff in a case where a bank has done this? Or will they deny it? Or will they order that only a the pre-petition amount should be setoff?

Case law to support your answer please. Thanks!
Submitted: 5 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 5 years ago.

The United States Supreme Court has held that an "administrative freeze" placed on a debtor's bank account by a depositary bank did not violate the automatic stay because the freeze was temporary and the bank sought relief from stay to exercise its setoff rights. Citizens Bank v Strumpf (1995) 516 US 16.

 

However, to enforce a setoff of the frozen account funds, the bank moust prove that it has a right to the money under nonbankruptcy law and that this right should be preserved in bankruptcy under 11 USC §553. Hal, Inc. v U.S. (In re Hal, Inc.) (9th Cir 1997).

 

The typical example is where the bank requires a deposit account as security for a separate credit line. If this does not apply to your facts, then it's likely that the bankruptcy trustee will move to force the bank to release the hold and the money will become part of the bankruptcy estate, to the extent that the assets are nonexempt under Washington law and the facts of your case.

 

Hope this helps.

 

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Customer: replied 5 years ago.
In my case, I do have a Line of Credit with the Credit Union. They are doing an "administrative freeze", applying for relief, and then hoping to get permission to do a setoff from that request for relief.

My question arises to what the bank is allowed in the setoff. They have frozen my entire account, even funds that we deposited post-petition. Is this a violation of the automatic stay, because they have frozen the incorrect amount of funds (in my opinion)? Should relief to the bank be denied?

Side note for you: All of my cash in the accounts does fall under an exception in Washington State. When we filed we claimed it all exempt.
Expert:  socrateaser replied 5 years ago.

Setoff is not available to the extent that the creditor's claim is disallowed. See 11 USC §553(a)(1).

 

Setoff is not available for any portion of a creditor's claim that was transferred to it by an entity other than the debtor after the commencement of the case or within 90 days before the petition date while the debtor was insolvent. See 11 USC §553(a)(2).

 

Setoff is not permitted to the extent that the debt that the creditor owes to the debtor was incurred within 90 days before the petition date while the debtor was insolvent for the purpose of obtaining a right of setoff against the debtor. See 11 USC §553(a)(3).

 

Postpetition income can be used to satisfy a prepetition Chapter 7 debt, unless the income is from postpetition personal services. See 11 USC §541(a)(6)-(7). To the extent that the bank has frozen such income, along with prepetition income or non-personal service income, this would almost certainly violate the automatic stay.

Customer: replied 5 years ago.
So you're basically saying that according to 11 USC §553(a)(1)(2)(3) that the bank does not have a right to setoff.

If that is the case, then why is the bank doing an administrative freeze? Just so they can TRY to get relief from the court of the stay? If that is what they are trying to do (get relief) then what would justify a court granting them relief? What are the conditions that must be met for a creditor to get relief for a setoff?

I will give you a bonus once I get the answer... thanks for the info!
Expert:  socrateaser replied 5 years ago.

I don't know enough about the facts and circumstances to know whether or not the bank has a legitimate claim to the money. That's why I've tried to give you all of the relevant law, so that you can filter your facts and see if the bank has a claim.

 

As for why the bank is freezing your account, in case you missed it, banks are practically immune to sanction. They can cheat borrowers, and then get the government to give them money back when the loans go bad. Banks can borrow at 0% and then charge borrowers more. They literally have a license to print money. Bank executives pay themselves enormous bonuses based on nothing but their desire to do so and the taxpayers pick up the bills. Banks get sanctioned occasionally for bad acts, but the amount of the sanctions don't affect their botXXXXX XXXXXne, because they get the money to pay the sanctions from the same taxpayers who are demanding the sanctions.

 

Why should a little thing like an administrative freeze or a bankruptcy contempt charge bother a bank???

 

I'm being completely serious here. Banks are effectively beyond the law, and no one in this country is doing anything about it.

 

 

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Attorney and Real Estate Broker -- Retired (mostly)