Here, the debtor borrowed funds from the Utica Community Federal Credit Union and signed a security agreement pledging all deposits at the credit union as security for the loan. The loan documentation specifically provided that if the loan was in default, the credit union would have an interest, up to the amount of the outstanding balance, in the member’s shares.

Debtor had $1,257.73 on deposit at the credit union.

The loan was in “default” and the member advised the credit union that he may have to file bankruptcy.

Prior to debtor’s filing of bankruptcy, the credit union placed an administrative freeze on the funds and then applied the share balance to the outstanding loan balance.

Debtor filed a motion with the bankruptcy court alleging the credit union violated the bankruptcy stay and sought a return of those funds as a preferential transfer.

The bankruptcy court held that the pre-petition transfer of shares by the credit union was warranted by virtue of the pledge of shares in the loan documentation. The court also held that the transfer was not a preferential transfer. The court additionally denied debtor’s request for sanctions and attorney fees to be assessed against the credit union.  In re Michael Carmen Centolella, 142 B.R. 624.

Article Author: Charles R. Harroun, Attorney at Law