When David Strumpf filed bankruptcy in January 1991 he probably thought that his bank account was safe. The automatic stay of Bankruptcy Code Section 362 protects debtors from their creditors, so he (and his lawyer) probably thought there was nothing to worry about from his bank. Although he owed the bank over $5,000, and was in default, any act by the bank to seize his funds should have been forbidden by the Bankruptcy Code.
Or so he thought.
When the US Supreme Court ruled in 1995 that the bank was within its rights to place an administrative hold on Strumpf’s funds, the ruling was unanimous: 8-0 in favor of the bank (Rehnquist had been absent). Why was the Supreme Court so united, when both the Bankruptcy Court and the 4th Circuit had felt otherwise?
The answer is that the Supremes focused on the account not as property of Strumpf, but as the symbol of an obligation of the bank. According to the Court, the bank took nothing of Strumpf, but simply declined to satisfy its own obligation to pay Strumpf on demand. In their own words:
That view of things might be arguable if a bank account consisted of money belonging to the depositor and held by the bank. In fact, however, it consists of nothing more or less than a promise to pay, from the bank to the depositor.
The question then is, why was the bank allowed to get away with not satisfying its obligation? The Court specifically declined to answer this question:
[Bank] refused to pay its debt, not permanently and absolutely, but only while it sought relief under §362(d) from the automatic stay. Whether that temporary refusal was otherwise wrongful is a separate matter–we do not consider… All that concerns us here is whether the refusal was a setoff. We think it was not.
It appears that the Court was comfortable with the bank refusing to pay its debt, as long as the motion for relief from the stay was promptly filed. In that case, the bank filed its motion only 5 days after placing the funds on administrative hold. Whether the Court would have come to a different result had the bank never filed its motion for relief we cannot know.
In retrospect, looking back it appears that the Supreme Court did debtors a great service by making clear the need for pre-bankruptcy planning. David Strumpf filed his Chapter 13 case on January 25, 1991, but the bank didn’t assert the administrative hold until October 2, 1991, nearly 9 months later. Today, it should be inconceivable that a debtor would enter bankruptcy with any money held at a creditor bank. The risk of unexpectedly losing the right to access that money would devastate most businesses and families. Yet another reason to carefully plan your bankruptcy.