Citizens Bank Maryland v. Strumpf

• Decision Date: 31 October 1995
• Docket Number: 941340
• Citation: 116 S.Ct. 286,133 L.Ed.2d 258,516 U.S. 16
• Parties: CITIZENS BANK OF MARYLAND, Petitioner, v. David STRUMPF
• Court: U.S. Supreme Court

516 U.S. 16

116 S.Ct. 286

133 L.Ed.2d 258

CITIZENS BANK OF MARYLAND, Petitioner,

v David STRUMPF.

No. 94-1340.

Supreme Court of the United States

Argued Oct. 3, 1995.

Decided Oct. 31, 1995.

Syllabus ^*

When respondent filed for relief under the Bankruptcy Code, he had a checking account with, and was in default on the remaining balance of a loan from, petitioner bank. Under the Code, a bankruptcy filing gives rise to an automatic stay of a creditor's "setoff of any d ebt owing to the debtor that arose before the commencement of the [bankruptcy case] against any claim against the debtor." 11 U.S.C. § 362(a)(7). After respondent had filed in bankruptcy, petitioner placed an "administrative hold" on so much of respondent's account as it claimed was subject to setoff—that is, it refused to pay withdrawals that would reduce the account balance below the sum it claimed to be due on the unpaid loan—and filed a "Motion for Relief from Automatic Stay and for Setoff" under § 362(d). In granting respondent's motion to hold petitioner in contempt, the Bankruptcy Court concluded that petitioner's "administrative hold" constituted a "setoff" in violation of § 362(a)(7). The District Court disagreed and reversed, but was in turn reversed by the Court of Appeals.

Held:

1. Petitioner's refusal to pay its debt to respondent upon the latter's demand was not a setoff within the meaning of § 362(a)(7), and hence did not violate the automatic stay. Petitioner refused to pay, not permanently and absolutely, but merely temporarily while it sought relief under § 362(d) from the automatic stay. The requirement of an intent permanently to settle accounts is implicit in the prevailing state-law rule that a setoff has not occurred until (i) a decision to effectuate it has been made, (ii) some action accomplishing it has been taken, and (iii) a recording of it has been entered. Even if state law were different, the question whether a setoff under § 362(a)(7) has occurred is a matter of federal law, and other provisions of the Bankruptcy Code such as §§ 542(b) and 553(a) would lead this Court to embrace the same intent requirement. Pp. ___-___.

2. Petitioner's refusal to pay its debt to respondent also did not violate § 362(a)(3) or § 362(a)(6) of the Bankruptcy Code. P. 290.

37 F.3d 155 (CA 4 1994), reversed.

SCALIA, J., delivered the opinion for a unanimous Court.

Irving E. Walker, Baltimore, MD, for petitioner.

Miguel A. Estrada, amicus curiae, by special leave of the Court, Washington, DC, for U.S.

Roger Schlossberg, Hagerstown, MD, for respondent.

Justice SCALIA delivered the opinion of the Court.

We must decide whether the creditor of a debtor in bankruptcy may, in order to protect its setoff rights, temporarily withhold payment of a debt that it owes to the debtor in bankruptcy without violating the automatic stay imposed by 11 U.S.C. § 362(a).

I

On January 25, 1991, when respondent filed for relief under Chapter 13 of the Bankruptcy Code, he had a checking account with petitioner, a bank conducting business in the State of Maryland. He also was in default on the remaining balance of a loan of $5,068.75 from the bank. Under 11 U.S.C. § 362(a), respondent's bankruptcy filing gave rise to an automatic stay of various types of activity by his creditors, including "the setoff of any debt owing to the debtor that arose before the commencement of the [bankruptcy case] against any claim against the debtor." 11 U.S.C. § 362(a)(7).

On October 2, 1991, petitioner placed what it termed an "administrative hold" on so much of respondent's account as it claimed was subject to setoff—that is, the bank refused to pay withdrawals from the account that would reduce the balance below the sum that it claimed was due on respondent's loan. Five days later, petitioner filed in the Bankruptcy Court, under § 362(d), a "Motion for Relief from Automatic Stay and for Setoff." Respondent then filed a motion to hold petitioner in contempt, claiming that petitioner's administrative hold violated the automatic stay established by § 362(a).

The Bankruptcy Court ruled on respondent's contempt motion first. It concluded that petitioner's "administrative hold" constituted a "setoff" in violation of § 362(a)(7) and sanctioned petitioner. Several weeks later, the Bankruptcy Court granted petitioner's motion for relief from the stay and authorized petitioner to set off respondent's remaining checking account balance against the unpaid loan. By that time, however, respondent had reduced the checking account balance to zero, so there was nothing to set off.

The District Court reversed the judgment that petitioner had violated the automatic stay, concluding that the administrative hold was not a violation of § 362(a). The Court of Appeals reversed. "[A]n administrative hold," it said, "is tantamount to the exercise of a right of setoff and thus violates the automatic stay of § 362(a)(7)." 37 F.3d 155, 158 (C.A.4 1994). We granted certiorari. 514 U.S. ----, 115 S.Ct. 1398, 131 L.Ed.2d 286 (1995).

II

The right of setoff (also called "offset") allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding "the absurdity of making A pay B when B owes A." Studley v. Boylston Nat. Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913). Although no federal right of setoff is created by the Bankruptcy Code, 11 U.S.C. § 553(a) provides that, with certain exceptions, whatever right of setoff otherwise exists is preserved in bankruptcy. Here it is undisputed that, prior to the bankruptcy filing, petitioner had the right under Maryland law to set off the defaulted loan against the balance in the checking account. It is also undisputed that under § 362(a) respondent's bankruptcy filing stayed any exercise of that right by petitioner. The principal question for decision is whether petitioner's refusal to pay its debt to respondent upon the latter's demand constituted an exercise of the setoff right and hence violated the stay.

In our view, petitioner's action was not a setoff within the meaning of § 362(a)(7). Petitioner 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, for example, respondent's contention that the portion of the account subjected to the "administrative hold" exceeded the amount properly subject to setoff. All that concerns us here is whether the refusal was a setoff. We think it was not, because—as evidenced by petitioner's "Motion for Relief from Automatic Stay and for Setoff"—petitioner did not purport permanently to reduce respondent's account balance by the amount of the defaulted loan. A requirement of such an intent is implicit in the rule followed by a majority of jurisdictions addressing the question, that a setoff has not occurred until three steps have been taken: (i) a decision to effectuate a setoff, (ii) some action accomplishing the setoff, and (iii) a recording of the setoff. See, e.g., Baker v. National City Bank of Cleveland, 511 F.2d 1016, 1018 (C.A.6 1975) (Ohio law); Normand Josef Enterprises, Inc. v. Connecticut Nat. Bank, 230 Conn. 486, 504-505, 646 A.2d 1289, 1299 (1994). But even if state law were different, the question whether a setoff under § 362(a)(7) has occurred is a matter of federal law, and other provisions of the Bankruptcy Code would lead us to embrace the same requirement of an intent permanently to settle accounts.

Section 542(b) of the Code, which concerns turnover of property to the estate, requires a bankrupt's debtors to "pay" to the trustee (or on his order) any "debt that is property of the estate and that is matured, payable on demand, or payable on order . . . except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor." 11 U.S.C. § 542(b) (emphasis added). Section 553(a), in turn, sets forth a general rule, with certain exceptions, that any right of setoff that a creditor possessed prior to the debtor's filing for bankruptcy is not affected by the Bankruptcy Code. It would be an odd construction of § 362(a)(7) that required a creditor with a right of setoff to do immediately that which § 542(b) specifically excuses it from doing as a general matter: pay a claim to which a defense of setoff applies.

Nor is our assessm ent of these provisions changed by the fact that § 553(a), in generally providing that nothing in the Bankruptcy Code affects creditors' prebankruptcy setoff rights, qualifies this rule with the phrase "[e]...