OCTOBER TERM, 1995
Syllabus
CITIZENS BANK OF MARYLAND
v. STRUMPF
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH
CIRCUIT
No. 94-1340. Argued October 3, 1995-Decided October 31, 1995
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 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). 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 loanand
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. 18-20.
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.
21.
37 F.3d
155, reversed.
SCALIA, J., delivered the opinion for a unanimous Court.
17
Irving E. Walker argued the cause for petitioner. With
him on the briefs were
James R. Eyler and
Jefferson
v:
Wright.
Miguel A. Estrada argued the cause for the United States as
amicus curiae urging reversal. With him on the brief were Solicitor
General Days, Assistant Attorney General Argrett, Deputy Solicitor
General Wallace, Kent L. Jones, and Gary D. Gray.
Roger Schlossberg argued the cause for respondent.
With him on the brief were John R. Owen, Jr., Brian R. Seeber,
and Gregory P. Johnson.
*
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." § 362(a)(7).
On October 2, 1991, petitioner placed what it termed an
"administrative hold" on so much of respondent's account as
*Briefs of amici curiae urging reversal were filed for
BankAmerica Corp. by Harold R. Lichterman and Michael
J.
Halloran; and for the New York Clearing House Association et al. by
Bruce E. Clark, Norman R. Nelson, John
J. Gill III, Michael
F. Crotty, Leonard
J. Rubin, John H. Culver III, and Charles
P. Seibold.
18
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 (CA4 1994). We granted certiorari. 514 U. S. 1035
(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
(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
19
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 (CA6 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.
20
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 assessment of these provisions changed by the fact
that § 553(a), in generally providing that nothing in the
Bankruptcy Code affects creditors' pre bankruptcy setoff rights,
qualifies this rule with the phrase "[e]xcept as otherwise provided
in this section and in sections 362 and 363." This undoubtedly
refers to § 362(a)(7), but we think it is most naturally read as
merely recognizing that provision's restriction upon
when an
actual setoff may be effected-which is to say, not during
the automatic stay. When this perfectly reasonable reading is
available, it would be foolish to take the § 553(a) "except" clause
as indicating that § 362(a)(7) requires immediate payment of a debt
subject to setoff. That would render § 553(a)'s general rule that
the Bankruptcy Code does not affect the right of setoff
meaningless, for by forcing the creditor to pay
its debt
immediately, it would divest the creditor of the very thing that
supports the right of setoff. Furthermore, it would, as we have
stated, eviscerate § 542(b)'s exception to the duty to pay debts.
It is an elementary rule of construction that "the act cannot be
held to destroy itself."
Texas &
Pacific R. Co.
v.
Abilene Cotton Oil Co., 204 U. S. 426, 446
(1907).
21
Finally, we are unpersuaded by respondent's additional
contentions that the administrative hold violated §§ 362(a)(3) and
362(a)(6). Under these sections, a bankruptcy filing automatically
stays "any act to obtain possession of property of the estate or of
property from the estate or to exercise control over property of
the estate," 11 U. s. C. § 362(a)(3), and "any act to collect,
assess, or recover a claim against the debtor that arose before the
commencement of the case under this title," § 362(a)(6).
Respondent's reliance on these provisions rests on the false
premise that petitioner's administrative hold took something from
respondent, or exercised dominion over property that belonged to
respondent. That view of things might be arguable if a bank account
consisted of money belonging to the depositor and held by the bank.
In fact, however, it consists of nothing more or less than a
promise to pay, from the bank to the depositor, see
Bank of
Marin v.
England, 385 U. S. 99, 101 (1966);
Keller v.
Frederickstown Sav. Institution, 193 Md.
292, 296, 66 A. 2d 924, 925 (1949); and petitioner's temporary
refusal to pay was neither a taking of possession of respondent's
property nor an exercising of control over it, but merely a refusal
to perform its promise. In any event, we will not give § 362(a)(3)
or § 362(a)(6) an interpretation that would proscribe what §
542(b)'s "except[ion]" and § 553(a)'s general rule were plainly
intended to permit: the temporary refusal of a creditor to pay a
debt that is subject to setoff against a debt owed by the bankrupt.
*
The judgment of the Court of Appeals for the Fourth Circuit is
reversed.
It is so ordered.
*We decline to address respondent's contention, not raised
below, that the confirmation of his Chapter 13 Plan under 11 U. S.
C. § 1327 precluded petitioner's exercise of its setoff right. See
Granfinanciera, S.
A. v.
Nordberg, 492 U. S. 33, 39
(1989).
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