In re Archer, Bankruptcy No. 583-00170.
| Decision Date | 29 September 1983 |
| Docket Number | Bankruptcy No. 583-00170. |
| Citation | 34 BR 28 |
| Parties | In re Mary Janice ARCHER, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Jeanette Robison, El Paso, Tex., for debtor.
Kelly G. Moore, Brownfield, Tex., for Brownfield State Bank & Trust Co.
Mary Janice Archer, debtor, filed petition for order for relief under Chapter 11 of Title 11, United States Code, on September 1, 1983. On September 6, 1983, Brownfield State Bank & Trust Company ("Bank") filed motion to prohibit use of cash collateral. The following summary constitutes findings of fact and conclusions of law after nonjury trial on September 13, 1983.
On the date the petition in bankruptcy was filed debtor owed at least $420,000.00 to the bank. On that same date the bank was indebted to debtor on a certificate of deposit in the principal sum of $8,000.00. The certificate of deposit had not been pledged by the debtor to the bank as additional collateral for her debt to it.
After she filed the petition for order for relief on September 1, 1983, debtor, accompanied by her attorney, took to the bank a copy of the first page of the skeletal petition reflecting that the petition had been received and filed by the bankruptcy clerk. Debtor tendered the certificate of deposit and demanded the amount of cash due thereon. The bank's enthusiasm for honoring debtor's demand, when she owed it more than fifty times the amount of the certificate, was not boundless. However, after conference with counsel, the bank paid over to debtor the sum of $7,539.88, representing the principal and accrued interest on the $8,000.00 certificate, less $544.00 penalty for early withdrawal.
The bank argued at the trial that it was on the horns of a dilemma. It thought that it had the common law right to setoff the amount which it owed to the debtor on the certificate against the debtor's obligation to it. However, its cognizant officers knew that a creditor is not permitted to setoff unilaterally after a bankruptcy petition has been filed, because setoff by virtue of § 553(a) is subject to the automatic stay provisions of § 362. The bank was faced with a turnover demand under § 542(a) which requires an entity in possession of property that the debtor-in-possession may use under § 363 to deliver to the debtor-in-possession such property or the value of the property. Section 542(b) appears to reserve to the bank the right to refuse to pay a debt which may be setoff under § 553, but because of the existence of the automatic stay no setoff could be made until the bank obtained relief from the automatic stay pursuant to § 362(a)(7). Also, through conference with counsel, the bank's officers learned that the cases which have meaningfully treated the setoff issues have taken different approaches where the setoff is attempted in a Chapter 7 liquidation case and in those cases where the setoff is incident to a reorganization case under Chapter 11. A primary purpose1 of the automatic stay provisions against setoff provided by § 362(a)(7) is to afford the debtor in a Chapter 11 reorganization an opportunity to continue its business with its available assets.
Therefore the bank was faced with a proper turnover demand made by a debtor-in-possession who is qualifiedly permitted to use property which is otherwise subject to the right of setoff. The bank could not exercise those setoff rights until it obtained relief from the automatic stay. The bank could "freeze" the account to prevent the debtor's use of the monies until it could file and prosecute it's claim for modification of stay to permit setoff. However, there is a split of authority as to whether the "freezing" of the account is, in effect, tantamount to setoff. See e.g. Kenney's Franchise Corporation v. Central Fidelity Bank N.A., Lynchburg, 22 B.R. 747 (D.C.W.D.Va.1982) (). In Matter of Gazelle, Inc., 17 B.R. 617 (Bkrtcy.W.D.Wis.1982) (). But see In re Executive Associates, Inc., 24 B.R. 171 (Bkrtcy.S.D.Tex.1982) (); In re Cusanno, 17 B.R. 879 (Bkrtcy.E.D.Pa.1982) ().
The bank's officers did not want to run the risk of a possible judgment of contempt if it froze the account until it could obtain relief from the automatic stay. It searched for an alternative. It found a possible vehicle to escape from the dilemma in § 506(a) which provides that an allowed claim of a creditor that is subject to setoff under § 553 is a secured claim. Concluding that if it honored the turnover demand the monies so delivered into the possession of the debtor-in-possession were subject to its secured claim it paid the monies to the debtor and promptly filed motion to prohibit use of cash collateral which is the subject of this memorandum.
The debtor's response to the motion to prohibit use of cash collateral set out three defenses. First, debtor claims the bank waived any setoff rights it might have had when it released the monies to debtor. Debtor claims the funds do not represent cash collateral to any extent and that in any event the bank had perfected no security interest under state law. Finally debtor says that the bank voluntarily paid the monies to her and thereby waived any right to claim an interest in these monies.
On the issue of whether the bank has waived its setoff rights the courts appear to be in...
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