No Stay Violation – Voluntary Payments
Here, the Chapter 13 debtors moved to hold Idaho Central Credit Union in contempt for allegedly violating the Bankruptcy Court’s automatic stay after the credit union froze members’ funds on deposit.
Debtors also sought sanctions against the credit union for the alleged violation.
The credit union responded by contending it did not violate the automatic stay by freezing debtors’ deposit funds since the credit union had an agreement with debtors for an overdraft protection loan; the credit union also contended it had a lien on all of the debtors’ deposits and a right of setoff under Idaho law.
In addition, the credit union filed a motion to lift the automatic stay so that it could apply the deposit funds to the debt owed by the members.
The court held in favor of the credit union and found that: (1) the amounts debtors had on deposit in the credit union were “cash collateral” for a lien granted to the credit union in connection with an overdraft protection loan; (2) the credit union did not violate the automatic stay by placing a freeze on debtors’ account (the credit union had not yet applied the funds to the debt owing); and (3) even if the credit union had technically violated the automatic stay, debtors were not injured and there would have been no damages.
Debtors’ motion to hold the credit union in contempt, and for sanctions to be assessed, was denied; the credit union was permitted to apply the deposit funds to the members’ outstanding obligation. In re Lough, 163 B.R. 586.
EDITOR’S COMMENT
In the case reported above, it was of utmost importance that the credit union loan documentation specifically granted a lien on any of debtors’ deposit funds for the loan balance. If this provision had not been included in the loan documents, the court probably would have been compelled to grant debtors’ motion and the funds would have been ordered to be returned to debtors.
It is also noteworthy that the credit union only initially froze the debtors’ deposit funds and did not apply those funds until after it filed a motion to lift the automatic stay and obtained court approval.
Each credit union should consult with its own attorney to determine whether their loan documentation properly pledges the members’ deposits as collateral.
Author: Charles R. Harroun, Attorney at Law