In re Tarbuck

• Decision Date: 03 December 2004
• Docket Number: No. 01-29836-JKF.,01-29836-JKF.
• Citation: 318 B.R. 78
• Parties: In re Michael D. TARBUCK, Debtor. Dollar Bank, FSB, Movant, v. Michael D. Tarbuck, Respondent.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

318 B.R. 78

In re Michael D. TARBUCK, Debtor.

Dollar Bank, FSB, Movant, v. Michael D. Tarbuck, Respondent.

No. 01-29836-JKF.

United States Bankruptcy Court, W.D. Pennsylvania.

December 3, 2004.

Dennis J. Spyra, Pittsburgh, PA, for Debtor.

Gary L. Smith, Pittsburgh, PA, trustee.

MEMORANDUM OPINION¹

JUDITH K. FITZGERALD, Chief Judge.

The matter before the court is Dollar Bank's ("Dollar") objection to Debtor's amended exemptions. The issue involved analysis of which of two sections of the Bankruptcy Code "trumps" the other: § 522 which protects a debtor's fresh start by permitting exemptions or § 553 which protects certain setoff claims of creditors. In our Memorandum Opinion dated February 2, 2004, 304 B.R. 718 (Bankr.W.D.Pa.2004) ("Tarbuck II"), we granted Dollar's motion for relief from stay to exercise its right of setoff. However, we stayed the order granting relief from stay to afford Debtor² the opportunity to amend his Schedule C to claim an exemption in the deposit account. We did not address the question now before us as to whether Dollar's right of setoff can defeat Debtor's claim of exemption.

The facts of this case are not disputed. In May of 1994, the Debtor and his wife borrowed $480,000 from Dollar pursuant to the terms of a note secured by a mortgage. Debtor defaulted on the loan prior to the commencement of the bankruptcy case. Dollar filed a complaint in confession of judgment against the Debtor and his wife in March of 2001, and received a judgment in the amount of $472,746.54, plus costs and additional interest from March 2, 2001. On September 26, 2001, the Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code and, on January 25, 2002, the case was converted to a chapter 7 proceeding. On June 12, 2002, Dollar was granted relief from the automatic stay to exercise its rights with respect to the real property secured by the mortgage. On or about August 26, 2002,³ Dollar filed a praecipe for a writ of execution and a sheriff's sale was set for November 1, 2002. The mortgaged premises were sold to Dollar at the Washington County Sheriff's Sale on November 1, 2002. The amount realized at the sheriff's sale was insufficient to satisfy the debt. On November 27, 2002, Dollar sold the premises for $505,718.30, realizing net proceeds of $418,457.33. After crediting all amounts received as result of the sale, Dollar Bank alleged a deficiency claim of $76,951.37 and "a general lien upon or right of [setoff] against all moneys or funds in its possession belonging to a depositor to secure the payment of the depositor's indebtedness to it." Brief in Support of Objection to Amended Exemption, Dkt. No. 161, at 5, citing Royal Bank of Pennsylvania v. Selig, 434 Pa.Super. 537, 644 A.2d 741, 744 (1994), appeal denied 540 Pa. 584, 655 A.2d 516 (1995). Dollar filed an adversary complaint at Adversary No. 03-2317 to fix the fair market value in accordance with the Pennsylvania Deficiency Judgment Act, 42 Pa.Cons.Stat.Ann. § 8103. This court held that Dollar failed to timely comply with the Deficiency Judgment Act and dismissed the complaint. See Tarbuck I, 304 B.R. 712 (Bankr.W.D.Pa.2004).

Dollar then filed a motion for relief from stay to set off against the funds in the deposit account the amount remaining due with respect to the note and mortgage on the real estate. This court entered an order granting Dollar relief from the automatic stay, but stayed the effect of the order to afford Debtor an opportunity to amend his exemptions to claim an interest in the deposit account. Tarbuck II, 304 B.R. 718 (Bankr.W.D.Pa.2004). On February 12, 2004, Debtor amended Schedule C to claim an exemption in the deposit account in the amount of $8,500, based upon 11 U.S.C. § 522(d)(5). Dollar filed an objection to this amended exemption and contends that its right of setoff is paramount. Dollar also asserts that it has a valid prepetition unavoidable lien in the account and that funds in the account are not property of Debtor's bankruptcy estate.

Under § 522(d)(5), also known as the "wild card exemption," debtors are allowed a general exemption of $975 plus up to $9250 of the unused portion of § 522(d)(1) (the homestead exemption). Debtor originally listed one § 522(d)(5) exemption in the amount of $1000. Inasmuch as he claimed no exemption under § 522(d)(1), there is available a sufficient amount under § 522(d)(5) to support this additional exemption of $8500. See Amended Schedule C.

In its Objection to Amended Schedule C, Dollar asserts that the money in the deposit account is not property of the estate, citing In re Nase, 297 B.R. 12, 19 (Bankr.W.D.Pa.2003) ("[m]oney deposited into an account ceases to be the property of the depositor"). However, the decision in Nase was based upon a setoff effectuated prepetition. Nase also states in pertinent part that, after the deposit is made into the account, "[t]hereafter, the bank owes a debt to the depositor in that amount." Id. The court in In re Erie Forge & Steel Corp., 456 F.2d 801 (3d Cir.1972), explains this concept in the context of a preference action:

... money deposited in a bank becomes the property of the bank in the sense that the bank may use it as its own. Prudential Trust Company's Assignment, 223 Pa. 409, 413, 72 A. 798, 799 (1909). Nevertheless, the mere deposit of money in a bank does not amount to a transfer of property to the bank where, "at the same time, on the part of the bank, an obligation to pay the amount of the deposit as soon as the depositor may see fit to draw a check against it" is created. New York County Nat'l Bank v. Massey, 192 U.S. 138[, 147, 24 S.Ct 199, 48 L.Ed. 380] (1904).... In other words, although money deposited in a checking account in the ordinary course of business becomes property of the bank, a transfer of the depositor's property has not occurred because of the obligation of the bank to pay checks drawn on the deposit.

456 F.2d at 804. Therefore, the Debtor has an interest in the funds in the account and may exempt his interest but whether his right to exempt is superior to the bank's right to set off what is owed it is the question before us.

In Tarbuck II we ruled that, although Dollar Bank was not entitled to a deficiency judgment, "... there is no basis upon which to deny Dollar Bank the common law right of setoff which § 553 of the Bankruptcy Code preserved to it." 304 B.R. at 725. Section 553, however, does not itself create any right of setoff but merely preserves certain rights of setoff that exist under nonbankruptcy law. See Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18-19, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). The threshold question in every case involving an asserted right of setoff is the source and validity of the underlying right. Whatever right of setoff that existed under state law prepetition is preserved in bankruptcy. Id. at 18, 116 S.Ct. 286. In the instant case, the right of setoff exists under Pennsylvania law.

We note that in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995), the United States Supreme Court, in the context of an action by a chapter 13 debtor to hold a bank in contempt for violation of the automatic stay with respect to an administrative freeze placed by the bank on the debtor's account, stated that a bank account is "nothing more or less than a promise to pay, from the bank to the depositor." 516 U.S. at 21, 116 S.Ct. 286. Strumpf also recognized the "absurdity of making A pay B when B owes A." 516 U.S. at 18, 116 S.Ct. 286. Furthermore, whether to permit a setoff rests within the bankruptcy court's discretion. See Matter of Bevill, Bresler & Schulman Asset Management Corp., 896 F.2d 54 (3d Cir.1990). The Court of Appeals for the Third Circuit stated in Bevill, Bresler

Section 553 incorporates and preserves in bankruptcy law the right of setoff available at common law.... However, setoff is at odds with a fundamental policy of bankruptcy, equality among creditors, because it "permits a creditor to obtain full satisfaction of a claim by extinguishing an equal amount of the creditor's obligation to the debtor, i.e., in effect, the creditor receives a `preference'" .... The provision is permissive rather than mandatory, and cannot be invoked in a case where the general principles of setoff would not justify it.

896 F.2d at 57. See also In re Myers, 362 F.3d 667, 672 (10th Cir.2004)(§ 553 "simply preserves setoff rights that might otherwise exist under federal or state law"); In re Gillingham, 150 B.R. 907, 909 (W.D.Pa.1993)("[t]he bankruptcy court's determination that [the creditor] is not entitled to a setoff is reviewed for abuse of discretion"); In re Nase, supra, 297 B.R. at 12 ("[p]reservation of a setoff under § 553 is equitable in nature. The provision is permissive rather than mandatory")(citing Bevill, Bresler, supra). Further, the general rule is that unsecured creditors "bear the burden of debtor exemptions." In re Simonson, 758 F.2d 103, 108 (3d Cir.1985)(superseded by statute on other grounds, In re Moe, 199 B.R. 737, 739 (Bankr.D.Mont.1995)).

Although we found that Dollar Bank had a right of setoff, there is a split of authority as to whether a debtor's exemptions prevail over a creditor's right of setoff. Thus, we address Dollar's objections.

Dollar relies on certain cases for the proposition that the right of setoff automatically extinguishes a depositor's property interest in a bank account. See Pittsburgh Nat. Bank v. United States, 657 F.2d 36, 38 (3d Cir.1981); Pennsylvania Nat. Bank & Trust Co. v. CCNB Bank, N.A., 446 Pa.Super. 625, 667 A.2d 1151, 1153 (1995). Pittsburgh Nat. Bank involved a challenge to an IRS levy brought by a bank asserting a right of setoff. The court noted that the doctrine of automatic setoff under Pennsylvania law provides that a depositor's right is extinguished when the debt to the bank matures, 657 F.2d at 38, citing Aarons v. Public Service Building &...