In re Patterson
| Decision Date | 05 October 1990 |
| Docket Number | Bankruptcy No. 90-70139,Adv. No. 90-70032. |
| Citation | 125 BR 40 |
| Parties | In re Fred C. PATTERSON, Jr. and Mary Patterson, Debtors. Fred C. PATTERSON and Mary Patterson, Plaintiffs, v. B.F. GOODRICH EMPLOYEES FEDERAL CREDIT UNION, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
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Annette Crain, Tuscaloosa, Ala., for debtors and plaintiffs.
C. Michael Stilson, Tuscaloosa, Ala., Standing Trustee.
Michael E. Bybee, Birmingham, Ala., for defendant.
This matter came before the Court on the Debtors' February 8, 1990 motion to restrain Creditor B.F. Goodrich Employees Federal Credit Union from closing accounts held by Debtors with the financial institution and to award Debtors costs incurred from the Credit Union's actions.
Debtors contended that: I. Creditor's action was a violation of the automatic stay provisions of 11 U.S.C. Section 362 and II. That Creditor's action was unlawful discrimination because of Debtors' bankruptcy as prohibited by 11 U.S.C. Section 525.
B.F. Goodrich Employees Federal Credit Union, on the other hand, maintained it had not violated the automatic stay by the "freeze," citing its common law, statutory and contractual lien rights to serve "a form of notice"1 of setoff rights. It contended its actions were not unlawful discrimination due to bankruptcy. Creditor asked that Debtors' motion be denied and that it be granted relief from the automatic stay. The latter was granted in March.
After reviewing the record of the case, including testimony at a February 23, 1990 hearing, documents on file and the briefs of the parties, it is the opinion of this Court that the Debtors' motion is due to be granted.
Fred C. Jr. and Mary L. Patterson filed a Petition for Relief under Chapter 13 of Title 11 of the U.S.Code on January 17, 1990. The Debtors' plan, which proposed to pay 100 percent to unsecured creditors, was confirmed on February 23, 1990.
At the time the Pattersons filed their petition, they owed the Credit Union an estimated $3,626.55. They listed the Credit Union as a secured creditor with a 1981 Chevrolet Pickup as collateral. The Debtors had maintained a share account and share draft account with the Credit Union since Fred Patterson was employed by Uniroyal approximately four years before. The Pattersons listed $822.78 as the amount in the share draft account.
In a January 23, 1990 letter, less than a week after the petition was filed, the debtors were notified by the Credit Union that: "Please be advised that due to the fact that you have filed a Bankruptcy, the credit union will cease deposit to or withdrawal from your accounts."2 Claims No. 2, 3, 4 and 5, on file in the Pattersons' Chapter 13 case, showed balances due on four loans — $110.82, $254.28 (the Credit Union said it did not "apply" the $668.24 balance it showed in the couple's savings account to this $922.52 loan balance on January 24, 1990 — it merely "reduced" that loan balance to the $254.28 shown on the proof of claim by the amount of the savings account)3, $2,419.27 and $204.23 respectively.
On January 26, 1990, the Debtors filed Adversary Proceeding No. 90-70015, a complaint for the turnover of funds in accounts frozen by B.F. Goodrich Employees Federal Credit Union. On February 8, 1990, the Debtors filed Adversary Proceeding No. 90-70032 against the Credit Union seeking to prevent it from closing the accounts and to recover costs of the adversary proceeding.
Documents in the case reflect that payments on all four obligations claimed by the Credit Union were due on the 10th of each month, and testimony showed the ongoing payroll deduction for the loans continued up to and even after the Pattersons' bankruptcy filing. Therefore, there was no default on any obligations owed the Credit Union at the point it announced its freeze with the January 23, 1990 letter.
At the February 23, 1990 confirmation hearing, James P. Phillips, manager of the B.F. Goodrich Employees Federal Credit Union, testified that the Credit Union's policy is to stop all services to members when the Credit Union receives notice of a bankruptcy filing (even on a 100 percent payment to unsecured creditors in Chapter 13 plan). At this hearing, the Creditor also asked for relief from the stay on the already impounded funds based on its claimed lien rights.
Mr. Phillips testified in answer to several questions that this cessation and/or freeze of Credit Union services had nothing to do with loss to the Credit Union caused by the Pattersons. He said the Credit Union's board directs staffers to cease all services immediately on bankruptcy filing alone.
Fred C. Patterson Jr. testified at the hearing that the Debtors had outstanding checks at the time the "freeze" was placed on their checking account by the Credit Union. Although the Debtors attempted to make deposits to cover these checks, the Credit Union would not accept the funds and seven checks were returned to the payees for insufficient funds, Mr. Patterson testified. The Pattersons suffered a "not sufficient funds" service charge for these returned checks in the amount of $40 because of the "freeze." Mary L. Patterson also testified at the hearing that in the four years the couple had been members of the Credit Union, they had never had a check returned for insufficient funds until the "freeze" after their bankruptcy.
Mr. Patterson said that Mr. Phillips informed him in a telephone conversation that he could no longer write checks, cash checks or make deposits because of his Chapter 13 filing. He said that, in a second telephone conversation, Mr. Phillips told him that "if he would reaffirm his debt4 to the Credit Union or make the obligation non-plan," the Pattersons' Credit Union services would be restored.
In answer to a question from the Court, Mr. Phillips testified that normally the Credit Union would pay overdrafts when the member writing the checks had funds in a share account — but not in this particular case where the account was frozen. He also said that while the Credit Union froze services to the Pattersons, its regular payroll deduction of $225 per week continued for three weeks after the filing of the Chapter 13 petition on January 17, 1990. He described the Pattersons as still being members in good standing of the Credit Union despite the freeze then in place on prepetition funds and the termination of service.
The record in this case reflects that the Credit Union moved to "reduce" one of its loan balances by the amount in the debtors' savings account before any payment was due, much less delinquent, on the loan. For the earliest the Pattersons could have been delinquent on their Credit Union obligations was after February 10, 1990 when the next payments were due.
Services were also "frozen", deposits refused and checks returned for insufficient funds, before the Pattersons were late or in default on a payment and while payroll deduction in favor of the Credit Union continued.
On March 20, 1990, the Court held a preliminary hearing on a motion to lift the stay filed by B.F. Goodrich Employees Federal Credit Union in connection with Adversary Proceeding No. 90-70015. Following that hearing, and by consent of the parties, the Court granted the Credit Union's motion, in effect ratifying the setoff of some $643.16 in "shares" in the Patterson savings account. The Debtors withdrew their complaint for turnover of those funds. An order to that effect was entered March 23, 1990.
That determination left Adversary Proceeding No. 90-70032, the complaint to restrain the Creditor from closing the Pattersons' accounts and asking for an award of the costs the debtors have suffered in this matter, still active. This decision addresses that complaint.
Based on the totality of evidence on file in this case, including Debtors' Exhibit 4; Claims No. 2, 3, 4, and 5; and the testimony of Mr. Phillips, it is obvious that B.F. Goodrich Employees Federal Credit Union froze the Pattersons' accounts, impounding the contents of accounts to "reduce" a loan balance, refusing deposits, returning checks and denying them all services available to other members solely because they filed the Chapter 13 petition and in advance of any adjudication of the issue.5
The Court must review the situation between the Pattersons and their Credit Union along two statutory lines of inquiry:
I. Did the action of B.F. Goodrich Employees Federal Credit Union to "freeze" services and funds constitute a violation of the automatic stay that under 11 U.S.C. § 362 gives debtors "breathing room" to reorganize? Or was it a valid means of "notice" of intent to claim setoff rights guaranteed creditors under 11 U.S.C. § 553?
II. Did the actions of the Credit Union constitute discrimination based solely on the fact of the debtors' bankruptcy as prohibited by 11 U.S.C. § 525(b)?
The short answer to both questions is yes. The Credit Union's unilateral and unadjudicated action against the Pattersons was not a valid setoff action under either state or federal law prior to the order of this court in March. Consequently, the act violated the 11 U.S.C. § 362(a) automatic stay. Additionally, the Credit Union's freeze of the Debtors' checking accounts and services in conjunction with other communications with the Debtor constitute a violation of the stay. The action also violates the antidiscrimination provisions of 11 U.S.C. § 525(b).
Imposition of an administrative "freeze" on a bankrupt debtor's account has been a highly controversial topic before the courts in recent years. The difficult and complex issues surrounding application of the administrative "freeze" have resulted in a split in...
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