Case on Bankrupt Borrowers To Open High Court's Term

WASHINGTON - The Supreme Court will open its fall term Monday with a case that could make it easier for banks to collect loans from some bankrupt borrowers.

The case, Field v. Mans, is the first of a half-dozen appeals the Supreme Court will hear this year that will affect the banking industry. Others involve lender liability for environmental clean-ups, bank insurance sales, interbank check clearing disputes, and innocent owner defenses in asset forfeiture proceedings.

"This might be our busiest year ever," said Michael Crotty, deputy general counsel for litigation at the American Bankers Association. "We've got at least seven cases up there already that are of considerable interest to us."

The Field case centers on a provision in bankruptcy law that allows debtors to avoid repaying bank loans. The law, however, exempts any loan obtained under false pretenses.

The lower courts have been unable to agree on what this exemption means. One group of courts has declared that any lie by the borrower triggers the exemption. A second group has ruled that a lie by itself is not enough. They've said the bank must have a "reasonable" basis for believing the lie.

The justices must choose which of these standards the industry needs to meet.

The Supreme Court will hear its second bankruptcy case on Tuesday, when it holds oral arguments in Citizens Bank of Maryland v. Strumpf.

The court must decide if a bank can freeze a bankrupt borrower's accounts to cover an outstanding loan balance. The lower courts are split, with some saying the banks are violating the bankruptcy code and others saying they are enforcing binding contracts.

The justices also have agreed to resolve a dispute between Banc One and Midwest Bank and Trust over a $64,000 bounced check. The federal appeals court in Chicago ruled that the Federal Reserve must settle this debate, finding that lawmakers stripped the federal courts of jurisdiction.

The Fed, through the Solicitor General's office, filed a friend of the court brief arguing that it lacks both the resources and authority to resolve interbank check disputes. Rather, it said the case belongs in federal court.

The high court also has taken Bennis v. Michigan. The case centers on Tina Bennis, who lost her investment in a car that the police seized after they caught her husband having sex in it with a prostitute.

The banking industry, fearful that the next case could involve a car on which it holds a lien, argued that the Constitution requires Michigan to give innocent owners a chance to recover their property.

Both these cases are expected to be argued this fall.

The justices also agreed to decide whether owners of contaminated property can sue for money damages under the Resource Conservation and Recovery Act. A court decision in Meghrig v. KFC Western Inc. in favor of the property owners would provide plaintiffs with another avenue to sue banks.

The court also has agreed to hear arguments in Barnett Banks Inc. v. Gallagher, which centers on whether states can block national banks from selling insurance. Bankers argue that the National Bank Act expressly permits them to sell insurance from branches in small towns, while the insurance industry claims the McCarran-Ferguson Act gives states complete authority to decide who can sell insurance.

Arguments are expected in January in these two cases.

Banking attorneys said another half-dozen cases could make it to the Supreme Court this year. But if they do, they are unlikely to be argued until late spring or next fall.

Topping their list is a lower-court decision that required Bankers Trust Co. to comply with a subpoena for its examination reports. Regulators likely will ask the Supreme Court to require litigants to subpoena an agency directly for the reports.

The court also could be asked to decide if the government can charge bank officers and directors with an easier-to-prove form of negligence, if a state can limit bank insurance sales to residents of a small town, and if credit unions can have memberships that do not have a common bond.

Another eight banking cases are among the 1,500 appeals the Supreme Court has yet to rule on. Most observers give these cases little chance of making the cut, noting that the court annually takes fewer than 100 of the 5,000 appeals filed.

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