WASHINGTON - The Supreme Court has given banks the right to freeze the accounts of bankrupt borrowers who default on their loans.
Justice Antonin Scalia, writing for a unanimous court, said Citizens Bank of Maryland did not violate the Bankruptcy Code when it froze more than $3,500 David Strumpf held in accounts at the institution.
The decision, issued Tuesday, said the bank never seized the funds, an act that would have violated the Bankruptcy Code. Rather, the bank temporarily set them aside until a federal judge could rule if it was entitled to use those deposits to pay off the loan.
"Petitioner's temporary refusal to pay was neither a taking of possession of respondent's property, nor an exercising of control over it," Justice Scalia wrote.
Industry officials applauded the decision, which came four weeks after oral arguments.
"It is wonderful," said Michael Crotty, deputy general counsel for litigation at the American Bankers Association. "A nine-to-nothing Supreme Court win is great stuff."
"We are gratified the Supreme Court has taken what is a demonstratively common sense approach to interpreting an exceptionally obscure statute," he added.
Jeffrey Springer, president of Citizens Bank of Maryland, said he was pleased with the quick, practical decision.
"It is just logical to say the bank should have the right to hold deposits until a final decision is made on what should be done," Mr. Springer said. "That is just fundamental."
Banks have being freezing bankrupt borrowers' accounts for years, he said.
"For me, it doesn't set up a precedent," he said. "It clears up an error by the lower court."
The case began in 1991 when Mr. Strumpf filed for bankruptcy, triggering many laws that protect him from creditors, including banks. He soon stopped paying off a car loan he took out from Citizens. The bank, exercising a provision in the loan agreement, froze $3,500 Mr. Strumpf had in his accounts at the bank.
The bank also applied to the Bankruptcy Court for permission to seize the money to retire Mr. Strumpf's debt.
Mr. Strumpf challenged the bank's right to freeze his accounts, saying the Bankruptcy Code protected him from the bank and any other creditor.
The Bankruptcy Court agreed, fining the bank and ordering it to release the funds. Citizens lifted the freeze, and Mr. Strumpf withdrew his cash.
The bank appealed to the U.S. district court in Baltimore, which overturned the Bankruptcy Court's decision. By that time, however, the money was gone.
Mr. Strumpf appealed the decision anyway, persuading the federal appeals court in Richmond to rule that the bank violated the law when it froze the account. The court equated the bank's action to seizing assets without a judge's approval, something the Bankruptcy Code prohibits.
Citizens National appealed last spring to the Supreme Court.