Freezing Bankrupt Debtor's Accounts—Part 2

    Last month we examined whether a creditor can freeze the accounts of bankrupt debtors in order to protect the rights of offset  in Chapter 7 Banktuptcy. This month we continue the discussion specifically in reference to Chapter 13 bankruptcy.

    In regard to Chapter 13 cases, the case of Sperberg v. Virginia League Central Union, tried with assistance from the Virginia Credit Union League in the United States District Court for the Western District of Virginia, Lynchburg Division, gave helpful guidance.  In Sperberg  the debtors, at the time of the filing, were obligated on two note loans to the credit union.  The debtors had a share account with the credit union with a balance of $348.60.  Counsel for the credit union sent a letter to the debtor’s counsel asking that the Chapter 13 plan be amended to permit the credit union to offset its indebtedness against the share account outside the Chapter 13 plan.  The credit union’s position was that the small amount to be offset did not justify paying a filing fee and an attorney’s fee for a motion to lift stay.  The credit union’s counsel reported that the debtor’s counsel responded in writing refusing the request to amend the plan, stating in part:

 “Hopefully this will make the credit unions realize that if they wish to pursue this action by freezing my clients accounts, they will incur the necessary attorney’s fees and costs associated with this action. Based on these requirements the credit unions think twice before freezing accounts…”

Accordingly, the credit union then objected to the plan stating that the plan failed to give proper treatment to the credit union’s claims and that the debtor’s attorney’s actions demonstrated bad faith.

The debtors then filed an amended plan which gave the credit union two options:

1. The debtors could agree to surrender the share account funds after the credit union first filed a motion to lift stay and had a hearing thereon; or

2. The share account funds would be classified as secured debt and would be paid under the plan by the Chapter 13 Trustee but only upon the immediate release of these funds to the debtors by the Credit Union.

Following an adverse ruling by the Bankruptcy Court and an appeal by the credit union, the District Court ruled that the plan should not have been confirmed by the Bankruptcy Court.  The District Court held that the Bankruptcy Code §1325 (a)(5)(C), which permits a plan provision to surrender collateral to a secured creditor, does not recognize conditioning the surrender upon the secured parties filing a motion to lift stay.  Likewise the alternative proposal that the credit union release the share account back to the debtor and be paid as a secured creditor by the Chapter 13 Trustee was not found to meet the requirements of Bankruptcy Code §1325 (a)(5)(B), because it did not provide for the credit union to retain its lien.

The District Court also addressed the question as to whether the debtor proposed the plan in bad faith.  The District Court found that the debtor’s amended plan was not proposed in good faith.

It is important to note that there are times when the principal must be argued in order to establish a precedent.  Although the amount in question was not high in Sperberg, the principal was.