In the world of bankruptcy, debtors are protected from collections initiated by their creditors. Under the current bankruptcy code, debtors are required to list all available assets and liabilities. A trustee is assigned to the case in order to observe and enforce the will of the bankruptcy court. An automatic stay is granted for the debtor against claims of creditors until the case is dismissed.
Many debtors develop multiple layers of relationship with their creditors. Most bankruptcy filers maintain a checking or savings account with the same financial institutions that issues them credit cards and other forms of financial products. Thus, some financial institutions developed an internal mechanism allowing them to setoff debtors' assets against outstanding debts. This process is often identified as Administrative Freeze.
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Instead of resolving the problem, this expanded banker's dilemma, legal problems resulting from financial institutions making claims against personal accounts of debtors who file bankruptcy. Courts have battled over the exact meaning and implication of Administrative Freeze. In 1983, The Third Circuit held that Administrative Freeze violated the automatic stay (United States v. Norton). The Ninth Circuit upheld Administrative Freeze as a legal process to protect rights of the creditors (Bank of National Trust and Savings Assoc. v. Edgins, 1984).
In 1995, the U.S. Supreme Court ruled in support of this (citizens Bank of Maryland v. David Strumpf). Justice Scalia delivered the unanimous court opinion. The high court found that this Freeze did not violate automatic stay granted to debtors under bankruptcy laws. Justice Scalia stated that bank accounts are promises to pay conditioned on terms of contractual agreement which existed prior to bankruptcy filing. The actual physical account becomes part of the bankruptcy estate. Banks' actions - denying debtors access to their accounts upon filing of bankruptcy - protected the estate formed by the bankruptcy filing (first), and it constitute refusal to perform due to legal changes.
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