WASHINGTON -- The Supreme Court agreed yesterday, in a Maryland bank case, to rule on the power of banks, credit card issuers and credit unions to stop bankrupt customers from withdrawing money from accounts after defaulting on a loan or a credit advance.
At issue in an appeal by Citizens Bank of Maryland is a section of federal law that bars creditors from disturbing the financial assets of debtors while they are going through bankruptcy proceedings.
The 4th U.S. Circuit Court of Appeals in Richmond, Va., which decides federal legal issues for a five-state region that includes Maryland, ruled in October that it is illegal for a bank to freeze a bankrupt customer's account to make sure funds are left to cover a debt owed to the bank.
Conceding that a bank faces a dilemma when a bankrupt customer owes it money yet seeks to withdraw funds, the appeals court said the federal bankruptcy law nevertheless blocks the bank from imposing a freeze on withdrawals to gain time to protect its interests in the account.
The law's ban on efforts to collect on debts while bankruptcy goes forward, the appeals court said, "is one of the fundamental debtor protections" meant to give debtors "a breathing spell from creditors."
A freeze on an account, it added, would diminish the bankrupt debtor's chances for financial rehabilitation.
Although the Supreme Court agreed to review the ban on collection efforts in the context of a bank loan, the justices were told in other briefs that the legal outcome will affect the ability of issuers of secured credit cards to maintain minimum required deposits in customer accounts, and the ability of credit unions to retain assets of their depositors who borrow from the unions.
Citizens Bank's appeal in the case is supported by the Justice Department, by First National Bank of Maryland, NationsBank, the American Bankers Association and the Credit Union National Association.
In 1989, Citizens Bank had made a personal consumer loan to David Strumpf, a Prince George's County man. He borrowed $5,068.75, with the loan to be paid off in 24 monthly installments. In 1991, after failing to keep up the payments on the loan, he filed for bankruptcy.
At the time, he had a checking account with Citizens containing $11,279.86. The bank put a hold on $3,500 of those funds to cover the amount of debt still outstanding. But Mr. Stumpf went to court and got the freeze lifted. By the time the bank got relief from the bankruptcy court, Mr. Stumpf had withdrawn all the funds from his account.
A final Supreme Court ruling on the case is expected by early this summer.