Freezing of bank accounts upheld Supreme Court rules in Maryland bankruptcy case

November 01, 1995|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- The Supreme Court, ruling in a Maryland case, yesterday gave banks and credit unions the power to freeze the deposit accounts of their borrowers who go bankrupt.

An account freeze can ensure that the money is not withdrawn before the institution can make a claim for repayment.

The ruling also is expected to protect banks that lend money to customers who hold bank-issued, secured credit cards. Customers with credit problems can get such credit cards by pledging to keep a minimum amount of money in an account. Yesterday's ruling allows banks to hold that money if the cardholder defaults on a credit debt and goes bankrupt.

A year ago, the 4th U.S. Circuit Court of Appeals in Richmond, Va., ruled that it is illegal for a bank to freeze a bankrupt customer's account to gain time to exercise its right to repayment for a loan to that customer.

In that decision, the appellate court, which covers Maryland and neighboring states, conceded that a bank faces a dilemma when a bankrupt customer who owes it money might withdraw money from an account before the bank can protect its claim for repayment. The bank must either let the customer withdraw all the money or move to cover the debt with a freeze, the appeals court ruled. But such a freeze, it said, would violate the federal bankruptcy clause that postpones the settlement of debts until the bankruptcy case is resolved.

Despite that dilemma, the appeals court added, the law does not allow banks to freeze accounts without a court's permission.

The Supreme Court overturned that decision yesterday in the case of David Strumpf of Greenbelt. Mr. Strumpf, a depositor at Citizens Bank of Maryland, also had obtained a loan of more than $5,000 from the bank. After falling behind in his repayments, he filed for bankruptcy.

Because his account still had enough money to cover the unpaid balance of his debt on the loan, the bank froze the account. It sought court permission to go ahead with its repayment claim. Ultimately, the bank was allowed to do so -- but not before Mr. Strumpf had emptied the account.

The Supreme Court ruled that the bank's freeze on the account was not a final settlement of the debt, but was merely a temporary step to ensure that the money potentially available to cover the debt was not put beyond its reach.

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