967 F.2d 505 (11th Cir. 1992), 91-7669, In re Patterson

Docket Nº:91-7669.
Citation:967 F.2d 505
Party Name:In re: Fred C. PATTERSON, Jr., Mary Patterson, Debtors. B.F. GOODRICH EMPLOYEES FEDERAL CREDIT UNION, Plaintiff-Appellant, v. Fred C. PATTERSON, Jr., Mary L. Patterson, Defendants-Appellees, C. Michael Stilson, Trustee.
Case Date:July 29, 1992
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

Page 505

967 F.2d 505 (11th Cir. 1992)

In re: Fred C. PATTERSON, Jr., Mary Patterson, Debtors.



Fred C. PATTERSON, Jr., Mary L. Patterson, Defendants-Appellees,

C. Michael Stilson, Trustee.

No. 91-7669.

United States Court of Appeals, Eleventh Circuit

July 29, 1992

Page 506

Carleton P. Ketcham, Jr., Birmingham, Ala., for plaintiff-appellant.

Annette Crain, Tuscaloosa, Ala., for defendants-appellees.

Melinda Murphy Dionne, Schoel, Ogle, Benton, Gentle & Centeno, Birmingham, Ala., for Trustee.

Appeal from the United States District Court for the Northern District of Alabama.

Before TJOFLAT, Chief Judge, ANDERSON, Circuit Judge and ALAIMO [*], Senior District Judge.

Page 507

ALAIMO, Senior District Judge:

This case presents an issue of first impression: whether a credit union, upon receiving notice of a bankruptcy filing by its members, violates the automatic stay provisions of 11 U.S.C. § 362(a) and the anti-discrimination provisions of 11 U.S.C. § 525, when it freezes the members' accounts, files a proof of claim that shows a loan balance reduced by a savings account balance, and suspends credit union services to the members. The bankruptcy court held that the credit union violated those sections of the bankruptcy code, Patterson v. B.F. Goodrich Employees Federal Credit Union (In re Patterson), 125 B.R. 40 (Bankr.N.D.Ala.1990), and the district court affirmed. The credit union appeals. We affirm.


Fred C. Patterson worked at UniRoyal Goodrich in Tuscaloosa, Alabama. Mr. Patterson's employment at UniRoyal Goodrich entitled him to apply for membership in the B.F. Goodrich Employees Federal Credit Union (the "Credit Union"). Mr. Patterson and his wife, Mary L. Patterson, joined the Credit Union when Mr. Patterson began his employment at UniRoyal Goodrich. The Pattersons maintained a share account ("savings account") and a share draft account ("checking account") with the Credit Union. The Pattersons also were indebted on a loan from the Credit Union. The promissory note on that loan provides that the Pattersons' checking and savings accounts serve as security for the loan. The Pattersons make payments on the loan through a payroll deduction on Mr. Patterson's paycheck. The loan payments are due on the tenth of each month.

On January 17, 1990, the Pattersons filed a bankruptcy petition under Chapter 13 of the United States Bankruptcy Code (the "Code"). After the Credit Union received notice of the Pattersons' bankruptcy filing, it responded, on January 23, 1990, by blocking any activity in the Pattersons' accounts. The Credit Union refers to this action as an administrative freeze. The Credit Union took this action because its loan to the Pattersons was secured by these accounts and the outstanding loan balance exceeded the balance in the accounts. As a result of this freeze, the Credit Union dishonored checks drawn on the Pattersons' checking account and prevented the Pattersons from making deposits to cover these dishonored checks. 1 The Credit Union also suspended all services to the Pattersons so they could not cash checks. The Credit Union notified the Pattersons of this action in a letter that reads: "due to the fact that you have filed a Bankruptcy, the credit union will cease deposit to or withdrawal from your accounts." Patterson, 125 B.R. at 42.

The manager of the Credit Union, James P. Phillips, testified that the Credit Union's letter was sent in response to the Pattersons' bankruptcy filing. Mr. Patterson questioned Phillips about the administrative freeze. Phillips informed Mr. Patterson that the policy of the Credit Union's Board of Directors is that the Credit Union stops all services to a member who causes the Credit Union a loss. Phillips testified,

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however, that the Credit Union had not suffered a loss due to the Pattersons as of January 23, 1990. In another conversation, Phillips told Mr. Patterson that credit union services would be restored "if he would reaffirm his debt to the Credit Union or make the obligation non-plan." Patterson, 125 B.R. at 43.

The Credit Union filed a proof of claim with the bankruptcy court on January 25, 1990. In paragraph 5 of the proof of claim, the Credit Union stated that "No security interest is held for this claim except: $668.24 in a deposit in which claimant has a lien, which will be applied at an appropriate time and is deducted below." In paragraph 7 of the proof of claim, the Credit Union calculated the amount of its claim as follows:

Principal Amount $922.52 Interest or Finance Charge Additional Charges TOTAL 922.52 ________ Less Credits on Account $ 668.24 Present Amount Due $ 254.28. ========= In late January and early February of 1990, the Pattersons filed two adversary proceedings against the Credit Union. First, the Pattersons requested a turnover of funds frozen by the Credit Union. Second, the Pattersons moved for an injunction restraining the Credit Union from closing their accounts. The Credit Union responded that its actions were proper because it had no other adequate protection to preserve its secured interest in the Pattersons' accounts and because the Pattersons had no equity in the accounts based on common law and contractual and statutory liens. Furthermore, the Credit Union asserted that its actions were not in violation of the automatic stay provisions of 11 U.S.C. § 362 ("Section 362"), and the anti-discrimination provisions of 11 U.S.C. §§ 524 and 525 ("Section 524" and "Section 525"). The Credit Union also included in its response a motion to lift the stay in order to apply the assets in the frozen accounts to the Pattersons' loan obligation. While the motions were under consideration, the Pattersons consented to the Credit Union's motion for relief from the automatic stay and withdrew their motion for turnover of funds. Thereafter, the Credit Union was free to reduce its outstanding loan balance, pursuant to the Court's order of March 23, 1990.

On October 5, 1990, the bankruptcy court granted the Pattersons' motion to restrain the Credit Union and awarded damages and attorney's fees to the Pattersons and against the Credit Union for violating the automatic stay and wrongfully discriminating against the Pattersons. The Court denied the Credit Union's later motion to alter or amend. The Credit Union then appealed to the United States District Court for the Northern District of Alabama, which affirmed the bankruptcy court.


We review findings of fact of the bankruptcy court under the clearly erroneous standard. Club Assocs. v. Consolidated Capital Realty Investors (In re Club Assocs.), 951 F.2d 1223, 1228 (11th Cir.1992). The bankruptcy and district courts' conclusions of law are subject to de novo review by this court. Id.

  1. The Automatic Stay

    The bankruptcy court held, and the district court affirmed, that the Credit Union's administrative freeze violated the automatic stay of Section 362(a). The Credit Union argues that a freeze merely protects its right of setoff, which is explicitly preserved under separate provisions of the Code and, therefore, does not violate the automatic stay. This argument attacks the very foundation of the bankruptcy court's holding but is flawed in several aspects. We address this argument first. We then review the findings of the courts below that the freeze violates specific subsections of Section 362(a).

    1. The Right of Setoff Under the Code.

    Setoff is an established creditor's right to cancel out mutual debts against one another in full or in part. The purpose of setoff is to avoid "the absurdity of making A pay B when B owes A." Studley v.

    Page 509

    Boylston Nat'l Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913). The Code explicitly preserves the right of setoff. 11 U.S.C. § 553 (1988) ("Section 553"). 2 Section 553 does not create a right of setoff, however. E.g., In re Saugus Gen. Hosp., Inc., 698 F.2d 42, 44-45 (1st Cir.1983); see generally 4 Collier on Bankruptcy p 553.06 (15th ed. 1992). Substantive law, usually state law, determines the validity of the right. Id.

    The right of setoff is not absolute. The right preserved under Section 553 is limited by its own language to the provisions of the automatic stay in Section 362. In order to exercise a valid right of setoff, a creditor must move the...

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