Banks Are Held Liable For Failing To Release Bank Account Restraints
January 19, 2007
Chapter 7 debtor, Syrria Adomah brought a motion for damages on Bank of America for an alleged violation of the automatic stay of § 362 of the Bankruptcy Code in the US Bankruptcy Court for the Southern District of New York. The key facts were that Bank of America failed to release a restraint on the debtor’s bank account after being notified of the automatic stay. Though the bank did eventually release the restraint, it did so only after nearly one month had passed.
Bank of America defended by stating that the Debtor did not have standing to bring this motion. Bank of America also contended that even if the Debtor did have standing, the Court could hold Bank of America liable for violating the automatic stay because the Bank, as a passive garnishee in receipt of a restraining notice, was not authorized to release the restraint under applicable State law.
The Court disposed of the standing issue, holding that “a party seeking to pursue a cause of action belonging to a bankruptcy trustee can only do so with the court’s permission. Yet there is no question that permission can be granted nunc pro tunc.” (citing, In re Am. Hobby Ctr., Inc., 223 B.R. 275, 281 (Bankr. S.D.N.Y. 1998)). The Court granted standing to the Debtor here, nunc pro tunc, because (i) the funds were the Debtor’s exempt property, a fact the Chapter 7 trustee has confirmed; and (ii) there is no unfairness to Bank of America, which always treated the funds in the Accounts as the Debtor’s property.
On Bank of America’s second defense - that it was merely abiding by the restraining notice - the court followed the holding of Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527 (2d Cir. 1994) that “the stay is effective immediately upon the filing of the petition, … and any proceedings or actions described in section 362(a)(1) are void and without vitality if they occur after the automatic stay takes effect.” As such, it held that “upon the filing of the petition, the restraining notice became void and of no effect.” Citing 48th St. Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427, 431 (2d Cir. 1987), cert. denied, 485 U.S. 1035 (1988). As such, as of the Petition Date, Bank of America had no legal obligation to abide by the restraining notice.
By using the precedent of In LNC Invs., Inc. v. First Fid. Bank, 2000 WL 1072460 (S.D.N.Y. Aug. 3, 2000), wherein the court held that although a bank may withhold return of a deposit temporarily, it “must move as quickly as possible in the bankruptcy court for more permanent relief.” (citing Eastern Airlines, Inc. v. Chem. Banks, Inc., 1997 WL 282264, at *1 (S.D.N.Y. May 28, 1997)). By failing to release the restraint quickly, Bank of America violated the automatic stay.
In re Adomah, Chapter 7 Case No. 05-16994 (ALG) (SDNY March 31, 2006).
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