Here, the Bank of Newport had a standing policy that upon notice of a checking account customer filing a Chapter 7 Bankruptcy, the funds on deposit are held for the benefit of the Trustee, or released upon verification that such funds are exempt property.

Upon debtor’s filing for bankruptcy, the bank refused the debtors access to their checking account funds in order to determine if the debtors were entitled to the deposits or if the Trustee was entitled to the funds.

The bank’s attorney attempted to contact the Trustee and ascertain if the Trustee had any interest in the money, however, the Trustee did not return the telephone messages.

Similarly, the bank attempted to contact the debtors’ attorney, but for several weeks debtors’ attorney failed to respond to the bank’s request for verification that the funds were property allowed as exempt under the Bankruptcy Code.

The funds were released to the debtors as soon as their attorney provided verification that they were exempted under the Bankruptcy Code.

Debtors sought a determination from the court adjudging the bank in contempt for freezing the funds and violating the automatic stay.

The bankruptcy court held in favor of the bank and found the freeze on debtors’ account did not violate the bankruptcy stay.

In significant contrast to this court’s ruling however, the court noted that a credit union’s freeze on a Chapter 13 debtor’s account (where the credit union also claimed a potential secured claim as a result of an alleged right of setoff) did in fact violate the automatic stay. See In re Homan, 116 B.R. 595.

The court distinguished the Homan decision on the ground that Homan involved a controversy with a Chapter 13 debtor who retained possession and control over his credit union account, as opposed to these Chapter 7 debtors, whose title to their former property vested in the Trustee upon their filing for bankruptcy.

In the immediate case, the debtors’ motion to hold the bank in contempt, and their request for sanctions to be assessed against the bank, were denied. In re Pimental,142 B.R. 26.

EDITOR’S COMMENT

Credit unions are encouraged to consult their attorneys in regard to freezing a member’s deposits. The Pimental case above was a Chapter 7 proceeding, while the Homan case reported in this Newsletter, as well as the B.F. Goodrich Credit Union case reported by this Newsletter, involved Chapter 13 filings. In the Homan and B.F. Goodrich cases, the courts found against the credit unions and held that the freeze on the members’ accounts constituted a violation of the bankruptcy court’s automatic stay.

Since debtors’ attorneys are increasingly challenging creditors rights to setoff and freezing a bankrupt’s accounts, contact your attorney if there is any question in proceeding.

Author: Charles R. Harroun, Attorney at Law