WASHINGTON - The Supreme Court heard arguments Tuesday in a case that will determine whether banks may freeze a bankrupt borrower's accounts.
In the case, Citizens Bank of Maryland's lawyers claimed that bankruptcy laws cannot prevent a bank from freezing the accounts of a customer who has defaulted on a loan.
The bank's position appeared to garner considerable support among the justices, several of whom came right out and said it made sense.
"You have to be able to create a temporary stalemate for the bankruptcy court to decide," Justice Sandra Day O'Connor said. "Otherwise it is too late."
"You have a perfectly reasonable position," Justice David Souter told Irving E. Walker, the lawyer representing Citizens Bank.
The justices appeared to fall into two camps, both of which favored the banking industry's position. One group, led by Justice Stephen Breyer, said the Bankruptcy Code prohibits a bank from seizing funds, but not freezing them.
The second, led by Justice Souter, said a freeze complies with the code because it preserves funds for creditors.
Michael Crotty, deputy general counsel for litigation at the American Bankers Association, said both groups would let banks freeze funds - the key dispute in the case.
"If those are the two currents of thought, then either way we win," he said.
Roger Schlossberg, who represented debtor David Strumpf in the case, argued that Congress never gave banks the power to freeze an account without first getting a judge's approval.
"What is being argued is a different construction of the Bankruptcy Code than what Congress intended," he said.
The case began in January 1991 when Mr. Strumpf filed for bankruptcy, triggering numerous laws that protect him from creditors. The bank, trying to enforce its loan agreement, froze $3,500 in Mr. Strumpf's accounts. It then asked the court in October 1991 for permission to maintain its hold to cover his outstanding loan balance.
Mr. Strumpf challenged the freeze, saying it violated his rights under the Bankruptcy Code. The court agreed, permitting Mr. Strumpf to withdraw all the funds.
The bank appealed to the U.S. district court in Baltimore, which overturned the bankruptcy judge. By that time, however, the money was gone.
Mr. Strumpf then appealed to the federal appeals court in Richmond, which found that banks cannot freeze a bankrupt borrower's accounts.
The Supreme Court is likely to issue its decision in Citizens Bank of Maryland v. Strumpf early this winter.