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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES No 96-1911, 1997 U.S. App. LEXIS 27859 (4* Cir. 9 October 1997)
Topics:
Bankruptcy; Set Off Rights; Reimbursement.
Type of Lawsuit:
Action by lender/issuer to lift automatic stay to enable it to reimburse itself for LC payment. Counterclaim by debtor for violation of automatic stay by placing hold on certificate of deposit.
Parties:
Plaintiff/Issuer's Successor- Tysons National Bank
Defendant/Applicant- Dennis Lennan
Counsel:
For Plaintiff: Henry F. Brandenstein, Jr., Rees, Broom& Diaz, P.C., Vienna, Virginia.
For Defendant: Konstantinos Alexakis, Alexandria, Virginia.
Underlying Transaction:
Security from franchisee to franchisor.
LC:
Standby for US$ 15,000. Silent as to the UCP.
Decision:
The U.S. Fourth Circuit Court of Appeals, per curiam, affirmed the judgment of the U.S. District Court for the Eastern District of Virginia which found that the issuer had not violated the automatic stay of 11 U.S.C. - 362 by placing a hold on the applicant's accounts.
Rationale:
The interplay between 11 U.S.C. - 362(a) (automatic stay) and 11 U.S.C. - 553(a) (right to offset) allows a bank to place an administrative hold on the debtor's funds pending a determination of the bank's right to offset.
Article
Factual Summary: In connection with a franchise agreement, the applicant caused a standby to be issued in favor of the franchisor to secure debts incurred during the relationship. As collateral for the standby, the applicant signed a note to the issuer which was fully secured by a certificate of deposit. The note also provided that the applicant would be responsible for any attorney's fees incurred by the issuer in collecting on the note. In addition, the applicant took out a SBA loan from the issuer secured by a deed of trust on the applicant's house and a lien on all of the applicant's accounts with the issuer. Subsequently, the plaintiff bank acquired all of the rights and interests of the issuer.
The applicant subsequently defaulted on amounts owed to the franchisor and on 29 November 1995, the franchisor drew on the standby. The next day, the applicant filed for bankruptcy, triggering the automatic stay provisions of 11 U.S.C. - 362. The issuer then asked the applicant to liquidate the certificate of deposit to satisfy its reimbursement obligation under the standby. The applicant refused, and on 8 December, the issuer placed an administrative hold on all of the applicant's accounts which held approximately $23,000 (including the certificate of deposit). This hold caused the applicant to default on the SBA loan and incur $ 150 in charges for overdrafts.
On 15 December, the issuer moved to lift the automatic stay so that it could liquidate the certificate of deposit. The applicant asked the court to hold the issuer in contempt for violating the automatic stay and moved for a release of the funds in the frozen accounts.
The bankruptcy court lifted the stay, allowing the issuer to liquidate the CD and collect its attorney's fees and interest. The court also, however, ordered the issuer to reimburse the applicant for the $150 in overdraft charges, pay the applicant $500 in damages, and not to consider the applicant's SBA loan in default.
On appeal, the U.S. District Court for the Eastern District of Virginia affirmed all of the bankruptcy court's holdings accept for the award of $500 in damages. On appeal, the 4th Circuit affirmed.
Legal Analysis:
1. Offset: Bankruptcy: Relying on the Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), the 4th Circuit found that 11 U.S.C. - 553(a) (right to offset) permits a bank to temporarily refuse "to honor a debtor's obligations that were subject to offset as against a debt that the debtor owed the bank." Simply placing a hold on the funds does not constitute an impermissible "offset" under the automatic stay provisions of 11 U.S.C. - 362(a). The court noted that the applicant had established the standby, executed the note, and placed the certificate of deposit as collateral all prior to the petition, thus contradicting the applicant's contention that there was no "pre-petition" debt to offset as allowed by - 553(a).
The court went on to rule that the applicant was not entitled to the $500 damages because the applicant's accounts, at the time the hold was placed on them, were debts owed to the bankruptcy estate, and not the property of the applicant. Therefore, the applicant could not suffer any damages from the freezing of the accounts.
The court also rejected the applicant's claim that the issuer was not entitled to attorney's fees in excess of the amount of the certificate of deposit. The court noted that the bankruptcy code gives the creditor a secured claim in any post-petition expenses provided for in the pre-petition contract to the full extent of the collateral held by the creditor. As all of the applicant's accounts were pledged as collateral to the issuer, the issuer could recover attorney's fees in excess of the value of the certificate of deposit.
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