Tysons National Bank v. Lennan ( 1997 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: DENNIS LENNAN, t/a Lennan's
Maytag Home Appliance Center,
Debtor.
TYSONS NATIONAL BANK,
No. 96-1911
Plaintiff-Appellee,
v.
DENNIS LENNAN, t/a Lennan's
Maytag Home Appliance Center,
Defendant-Appellant.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Albert V. Bryan Jr., Senior District Judge.
(CA-96-338-A, BK-95-15345-SSM)
Argued: May 6, 1997
Decided: October 9, 1997
Before WILKINSON, Chief Judge, WILKINS, Circuit Judge,
and TRAXLER, United States District Judge for the
District of South Carolina, sitting by designation.
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Affirmed by unpublished per curiam opinion.
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COUNSEL
ARGUED: Konstantinos Alexakis, Alexandria, Virginia, for Appel-
lant. Henry F. Brandenstein, Jr., REES, BROOME & DIAZ, P.C.,
Vienna, Virginia, for Appellee. ON BRIEF: Michael L. O'Reilly,
REES, BROOME & DIAZ, P.C., Vienna, Virginia, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
In this bankruptcy suit, Appellant Dennis Lennan, trading as Len-
nan's Maytag Home Appliance Center ("Lennan"), appeals various
holdings by the district court, but the gravamen of his appeal is that
Tysons National Bank ("Tysons") violated the automatic stay trig-
gered by Lennan's bankruptcy in that Tysons placed an administrative
hold on Lennan's accounts at Tysons. Additionally, Lennan contends
that the district court erred in affirming the bankruptcy court's award-
ing attorneys' fees to Tysons in excess of Tysons's offset rights and
denying attorneys' fees to Lennan. We affirm.
I.
In connection with operating his appliance repair operations, in
September 1994, Lennan established an irrevocable letter of credit
with Suburban Bank of Virginia ("Suburban") for $15,000 in favor of
Maytag Corporation d/b/a Maytag and Admiral Products ("Maytag").
This letter of credit was valid for one year and automatically renewed
for one year unless Lennan notified Suburban at least sixty days prior
to renewal. Simultaneous with establishing the letter of credit, Lennan
executed a promissory note in favor of Suburban that provided the
terms under which Lennan must satisfy his obligation to Suburban if
Maytag drew on the letter of credit. Also in conjunction with estab-
lishing the letter of credit, Lennan purchased a certificate of deposit
for $15,000 from Suburban to secure the indebtedness under the
promissory note were Maytag to draw on the letter of credit; thus, the
certificate of deposit served as collateral for Lennan's indebtedness to
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Suburban. Material for purposes of this appeal, Tysons represents in
its brief, and Lennan does not dispute, that the promissory note and
the certificate of deposit provided that Suburban would recover attor-
neys' fees and costs in the event of litigation regarding these instru-
ments.
Subsequently, Lennan borrowed an additional $71,000 from Subur-
ban, which loan was guaranteed by the Small Business Administra-
tion ("SBA"). To secure this loan, Lennan executed a second deed of
trust on his home and a lien on all other accounts Lennan held at Sub-
urban. Payments on this SBA-guaranteed loan were automatically
withdrawn from Lennan's checking account at Suburban. Following
this loan, Tysons acquired all rights and interests of Suburban;
accordingly, Lennan became indebted to Tysons based on his transac-
tions with Suburban.
On November 29, 1995, confronted with unpaid invoices of
approximately $38,000, Maytag drew $15,000 on the letter of credit,
which Tysons honored on December 1, 1995; hence, Lennan became
indebted to Tysons for $15,000, plus interest, but Tysons continued
to hold the certificate of deposit as collateral for that obligation. On
November 30, 1995, Lennan filed for bankruptcy reorganization
under Chapter 11 of the Bankruptcy Code, see 11 U.S.C.A. §§ 1101-
1146 (West 1993 & Supp. 1997), thereby triggering the automatic
stay of 11 U.S.C.A. § 362(a) (West 1993 & Supp. 1997). Realizing
Lennan's precarious financial health, Tysons unsuccessfully sought to
gain Lennan's permission to liquidate the certificate of deposit to sat-
isfy the $15,000 plus interest. Stymied by Lennan's refusal to liqui-
date the certificate of deposit, on December 8, 1995, Tysons issued
an administrative hold respecting Lennan's accounts, which, com-
bined with the $15,000 plus interest on the letter of credit, resulted in
Tysons's holding approximately $23,000 of Lennan's funds. As con-
sequences of this administrative hold, six of Lennan's checks were
returned for insufficient funds, resulting in $150 in penalties, and his
SBA-guaranteed loan could not be amortized, resulting in default.
On December 15, 1995, Tysons moved the bankruptcy court to lift
the automatic stay so that Tysons could liquidate the certificate of
deposit and offset against Lennan's accounts debts owed to Tysons in
excess of the amount of the certificate of deposit. Opposing Tysons's
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motion, Lennan moved to have Tysons adjudged in contempt for vio-
lating the automatic stay by placing the administrative hold on his
accounts; moreover, Lennan moved the bankruptcy court to order
Tysons to release funds under the administrative hold, including the
certificate of deposit. The bankruptcy court lifted the automatic stay
so that Tysons could offset $16,872, which represented the $15,000
indebtedness and interest under the letter of credit. Concluding that
Tysons violated the automatic stay via the administrative hold, which
applied to funds in excess of Tysons's offset rights, the bankruptcy
court ruled that Tysons reimburse Lennan the $150 in penalties, dis-
solve the administrative hold, refrain from considering the SBA-
guaranteed loan in default, and pay Lennan $500 for violating the
automatic stay. In addition, the bankruptcy court granted Tysons
$2703.69 in attorneys' fees, which, likewise, were offset against Len-
nan's accounts.
Lennan appealed to the district court, which affirmed all of the
bankruptcy court's rulings, save the $500 payment by Tysons to Len-
nan for allegedly violating the automatic stay. According to the dis-
trict court, the administrative hold, despite the fact that Tysons
applied it in excess of funds then owed, was proper given that interest
was accruing and Tysons acted in a timely manner in seeking to lift
the automatic stay. The district court, therefore, reversed the ruling
that Tysons pay Lennan $500.
Appealing to us, Lennan challenges the district court's judgment on
a variety of grounds. First, Lennan posits that Tysons violated the
automatic stay by placing the administrative hold on his accounts,
specifically arguing that Tysons possessed no prepetition right to off-
set the funds in his accounts. Second, Lennan asserts that he is enti-
tled to the $500 in recompense for Tysons's violating the automatic
stay. Third, Lennan contends that Tysons is not entitled to attorneys'
fees in excess of the certificate of deposit. Finally, Lennan maintains
that he is entitled to attorneys' fees.
II.
We first state our standard of review. In the instant appeal, the
bankruptcy court made findings of fact and conclusions of law. In
such a procedural posture, like the district court, we review the bank-
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ruptcy court's method of fact finding for clear error, but we exercise
plenary review over its legal conclusions. See Cooper v. Ashley Com-
munications, Inc. (In re Morris Communications NC, Inc.), 914 F.2d
458, 467 (4th Cir. 1990). Lennan's persuading us that the bankruptcy
court erred in its fact-finding method is a weighty burden indeed
because "[i]n reviewing factual findings, our scope of review is par-
ticularly circumscribed, being limited to determining whether the
facts as found by the [trial] court are clearly erroneous." See Jiminez
v. Mary Washington College, 57 F.3d 369, 378 (4th Cir.), cert.
denied, 116 S. Ct. 380 (1995). Thus, "[f]acts are conclusive on appeal
. . . unless they are plainly wrong." Id. at 378-79. Precedent prohibits
our substituting our judgment for that of the bankruptcy court, and the
force of this precept precludes reversal here unless we are "`left with
the definite and firm conviction that a mistake has been committed.'"
Id. at 379 (quoting United States v. United States Gypsum Co., 333
U.S. 364, 395 (1948)). Of course, as a successive court, we freely
review the bankruptcy court's legal conclusions. See Chmil v. Rulisa
Operating Co. (In re Tudor Assocs. II), 20 F.3d 115, 119 (4th Cir.
1994). Guided by this procedural standard, we address Lennan's argu-
ments seriatim.
A.
Lennan first contends that the district court erred in concluding that
Tysons's placing an administrative hold on the certificate of deposit
did not violate the automatic stay of § 362(a), which prohibits institu-
tion or continuation of proceedings against the debtor or the bank-
ruptcy estate without first petitioning the bankruptcy court to lift the
automatic stay. Indeed, § 362(a)(7) specifically provides that the auto-
matic stay applies to "setoff of any debt owing to the debtor that arose
before the commencement of the case . . . against any claim against
the debtor[.]" 11 U.S.C.A. § 362(a)(7) (West 1993). Balanced against
the automatic stay provision, however, is 11 U.S.C.A. § 553(a) (West
1993 & Supp. 1997), which preserves the common law right to offset
prepetition mutual debt. We conclude that Citizens Bank of Maryland
v. Strumpf, 116 S. Ct. 286 (1995), forecloses Lennan's first conten-
tion.
The Strumpf Court construed the interplay between the automatic
stay of § 362(a) and the right to offset under§ 553(a) and concluded
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that a bank's placing an administrative hold on funds in a debtor's
account pending disposition of the bank's offset right did not violate
the automatic stay. In Strumpf, Strumpf maintained a bank account
with a bank to which he owed approximately $5000 as a result of a
default on a loan. See id. at 288. Subsequent to Strumpf's filing bank-
ruptcy, the bank placed an administrative hold on Strumpf's account
in an amount that the bank asserted it was entitled to as offset; conse-
quently, the bank refused to honor drafts that would diminish the bal-
ance in Strumpf's account below the bank's asserted right of offset
and moved the bankruptcy court to lift the automatic stay. See id. Dis-
pleased with the bank's administrative hold, Strumpf moved to have
the bank held in contempt for violating the automatic stay. See id. The
bankruptcy court ruled in favor of Strumpf, but the district court
reversed. On further appeal, however, we reversed the district court,
concluding that the administrative hold effectuated a right of offset
thereby violating the automatic stay. See id.
The Supreme Court concluded that the administrative hold did not
violate the automatic stay. First, the Court explained that § 553(a)
preserved a state-created right of prepetition offset as to mutual debts,
and in so explaining, observed that the bank possessed the right to
offset the defaulted loan vis a vis Strumpf's account. See id. at 289.
Second, the Court held that the bank's placing an administrative hold
on Strumpf's account did not constitute a setoff because the bank had
not permanently refused to honor Strumpf's debts, but only temporar-
ily so refused while it sought relief from the automatic stay. See id.
Given the transitory nature of the bank's refusal, the requisite intent
to constitute an offset was lacking; consequently, the bank's conduct
did not violate the automatic stay. According to the Court, therefore,
§ 553(a) permits a bank the temporary right to refuse to honor a debt-
or's obligations that were subject to offset as against a debt the debtor
owed the bank. In rendering its judgment, the Court specifically
rejected the contention that the administrative hold violated the auto-
matic stay, concluding that the administrative hold was not a device
for exercising dominion over Strumpf's account, but merely consti-
tuted a transient refusal to perform a promise. See id. at 290.
Applying Strumpf, we conclude that Tysons's conduct was permis-
sible. Like the Strumpf bank, Tysons placed an administrative hold on
Lennan's account and expeditiously moved the bankruptcy court for
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relief from the automatic stay to liquidate the certificate of deposit.
Lennan's accounts at Tysons constituted a debt owed by Tysons to
Lennan, see Elsinore Shore Assocs. v. First Fidelity Bank, N.A. (In re
Elsinore Shore Assocs.), 67 B.R. 926, 936 (Bankr. D.N.J. 1986), so
Tysons could appropriate funds in Lennan's accounts by offsetting
them against the balance due on Lennan's debt to Tysons, see
Armstrong v. Dakota Bank & Trust Co. (In re Knudson), 929 F.2d
1280, 1284-85 (8th Cir. 1991). In this respect, Lennan is simply
incorrect in contending that there was no prepetition debt for Tysons
to offset. Specifically, Lennan established the letter of credit and exe-
cuted a promissory note obligating him for any drafts made against
the letter of credit; moreover, he advanced the certificate of deposit
as collateral, and all of these transactions occurred prepetition. We
hold, therefore, that Lennan's debt was prepetition debt. See
Stephenson v. Salisbury (In re Cordland Corp.), 967 F.2d 1069, 1078
(5th Cir. 1992) (explaining that "debt" is liability on a claim and sign-
ing a guaranty on a note results in immediate liability, even if the con-
tingency is unmatured). As a consequence, Tysons could issue an
administrative hold on Lennan's accounts while seeking relief from
the automatic stay to exercise its offset rights.* Our conclusion spares
Tysons a Hobson's choice: The administrative hold preserves Len-
nan's accounts by freezing them, but simultaneously is not an attempt
to improve the bank's right to distribution of assets. Thus, Tysons is
not caught between the Scylla and Charybdis of desiring to maintain
Lennan's accounts in satisfaction of its debt while risking violating
the automatic stay.
B.
Next, Lennan posits that the district court erred in reversing the
$500 award of compensatory damages that the bankruptcy court
granted him for Tysons's allegedly violating the automatic stay. The
gravamen of this position is that Tysons violated the stay by freezing
funds in excess of its offset. Again, we conclude that Strumpf fore-
closes this position. As the Strumpf Court made clear, Lennan's
accounts at Tysons did not constitute property of the bankruptcy
_________________________________________________________________
*Like the Strumpf Court, we do not address the issue of whether
Tysons's temporary refusal was otherwise improper. See Strumpf, 116 S.
Ct. at 289.
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estate, but were debts owed to the bankruptcy estate. In this connec-
tion, the administrative hold did not "t[ake] something from [Lennan],
or exercise[ ] dominion over property that belonged to [Lennan]." See
Strumpf, 116 S. Ct. at 290. Because Tysons's conduct did not deprive
Lennan of his funds, particularly given the transitory nature of the
administrative hold, he lacks injury requiring recompense. Hence,
Lennan is not entitled to the $500 in compensatory damages. We
therefore affirm the district court's reversing the award of $500 com-
pensatory damages.
C.
Lennan asserts that Tysons is not entitled to attorneys' fees in
excess of the certificate of deposit. We disagree. Respecting attor-
neys' fees, the Bankruptcy Code provides in pertinent part:
To the extent that an allowed secured claim is secured by
property the value of which, . . . is greater than the amount
of such claim, there shall be allowed to the holder of such
claim, interest on such claim, and any reasonable fees, costs,
or charges provided for under the agreement under which
such claim arose.
11 U.S.C.A. § 506(b) (West 1993). Thus, the Bankruptcy Code pro-
vides that if the value of the collateral Tysons holds exceeds the
amount of Lennan's debt to Tysons at the time the bankruptcy peti-
tion was filed, Tysons possesses a secured claim in any postpetition
expenses provided by the contract between the parties, as well as the
original debt.
Although the parties have not favored us with copies of the instru-
ments they wish us to apply, and Tysons wholly failed to respond to
this argument in its brief, as we read the record and Lennan's brief,
we conclude that the promissory note granted to Tysons a lien not
only on the certificate of deposit but also on Lennan's checking and
savings accounts. In this respect, we observe that the bankruptcy
court's order awarding attorneys' fees refers to"cash collateral,"
which we read as referring to the funds in Lennan's checking and sav-
ings accounts. The claimed excess that Lennan urges does not exist
because the cash collateral encompasses not only the $15,000 certifi-
8
cate of deposit, but also funds in Lennan's checking and savings
accounts at Tysons. Consequently, we conclude that the award of
attorneys' fees was proper. See Unsecured Creditors' Committee 82-
00261c-11A v. Walter E. Heller & Co. Southeast, Inc. (In re K.H. Ste-
phenson Supply Co.), 768 F.2d 580, 585 (4th Cir. 1985) (discussing
oversecured creditor's attorneys' fees award); In re Nordmann, 56
B.R. 634, 636 (Bankr. D.S.D. 1986) (same).
D.
Finally, Lennan maintains that he is entitled to attorneys' fees pur-
suant to 11 U.S.C.A. § 362(h) (West 1993), which provides that "[a]n
individual injured by any willful violation of a stay provided by this
section shall recover actual damages, including costs and attorneys'
fees, and, in appropriate circumstances, may recover punitive dam-
ages." The flaw with this argument is that it presumes there was a
willful violation of the automatic stay of § 362. As we explained,
Strumpf precludes finding a violation, much less a willful one.
Tysons's placing the administrative hold on Lennan's accounts did
not violate the automatic stay. Accordingly, with no violation, Lennan
is not entitled to attorneys' fees. Thus, we affirm the denial of attor-
neys' fees to Lennan.
III.
We conclude that Tysons's placing the administrative hold on Len-
nan's accounts was permissible under Strumpf and that Lennan is not
entitled to the $500 in compensatory damages. Moreover, we con-
clude that Tysons was properly awarded attorneys' fees in excess of
the certificate of deposit and that Lennan was properly denied them.
The judgment of the district court is affirmed.
AFFIRMED
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