In re MCB Financial Group, Inc., Case No. 10-11176-WHD, 2011 Bankr. LEXIS 5502 (Bankr. N.D. Ga. March 31, 2011) (click here for .pdf of order)

In 2008, Debtor MCB Financial (a bank holding company) refinanced a loan with Independent Banker’s Bank of Florida (“IBB”), and signed a demand note in the amount of $2,750,000. As part of the transaction, Debtor pledged stock and agreed that upon default IBB would have the right of setoff in all Debtor’s accounts with IBB. Several months later IBB was concerned about Debtor’s financial condition and asked Debtor to open a $1 million CD, which Debtor did. As of early 2010, Debtor had missed several payments and IBB sent a demand letter to get Debtor to pay the outstanding interest (but did not declare a default).

In March 2010, the FDIC seized Debtor’s subsidiary bank and two days later MCB filed a Chapter 7 petition. Debtor scheduled IBB as a secured creditor for the value of the CD, and an unsecured creditor for the remaining loan balance. The day after the petition was filed, IBB initiated a set off for the CD. When the Trustee objected, IBB filed a motion to terminate or annul the automatic stay.
The Court held that IBB had a valid pre-petition right to setoff under 11 U.S.C. §553 and granted IBB’s motion. The Court first addressed the Trustee’s argument that IBB did not have setoff righted because the debt had not matured.

The Court agrees with Movant that section 553 requires only the existence of a prepetition claim held by the creditor against the debtor and that, under bankruptcy principles, such a claim may include one that is contingent, unmatured, and unliquidated. This misses the point, however, that application of section 553 to preserve a right of setoff presupposes the existence of a valid, prepetition right of setoff, the source of which must be applicable nonbankruptcy law… Having considered the cases cited by the Trustee and Movant’s criticism thereof, the Court finds the state of Florida law on this issue to be as follows:

In the absence of express authority, a bank cannot apply the deposits of a solvent debtor to an unmatured indebtedness owing the bank. A bank, however, may apply the deposits of a debtor known to be in financial difficulty to satisfy a note which permits a setoff either before or after maturity, and as to which payment has been accelerated.

Florida Jurisprudence Banks and Lending Institutions, Second Edition, § 225… Movant is correct that the case law relied upon above recognizes the right of a bank to setoff an unmatured obligation against a deposit account when the contractual right to setoff so provides.

The Court is persuaded that, under Florida law and the terms of the Promissory Note, Movant would have been entitled to effectuate a setoff against Debtor’s accounts without making a formal demand for payment of the entire debt. Debtor was clearly in default under the terms of the Promissory Note. Movant had the right, upon default, to declare the entire debt "immediately due." It is undisputed that Movant did not take advantage of this and Debtor did not "then pay" the full amount of the debt owed. But Movant also had the separate right to exercise the right of set off against "all sums owing on the indebtedness." The Court agrees with Movant that the use of the phrase "all sums owing" indicates an intention to allow setoff of the entire amount of the debt, rather than simply amounts "due," amounts "due upon acceleration of the debt," or amounts "due after demand."

The Court also held that IBB’s right to setoff existed when the loan was made.

Further, the Court agrees with Movant’s alternative argument that, because the debt owed by Debtor arises from a demand note, the debt was immediately due and payable upon delivery of the Promissory Note. Therefore, this argument supports the conclusion that Movant had a right to setoff under Florida law prior to the filing of Debtor’s petition. While the parties have pointed to no Florida cases on this issue and the Court has found none, there is significant persuasive authority from other states holding that a demand note represents a matured debt upon delivery that is subject to a right of setoff from the inception of the loan.

Finally, the Court disagreed with the Trustee’s argument that setoff was barred by 11 U.S.C. §553(a)(3) because the CD was renewed within 90 days before the petition date.

The Court concludes that, as a matter of form and substance, Movant did not obtain the debt to Debtor when the CD renewed. It is undisputed that, even though the CD matured during the 90-day period, Debtor never redeemed the CD. Accordingly, Movant never paid its debt to Debtor. Movant owed Debtor $1 million before the CD matured, and, even if Movant moved the funds into a new account with a new account number before it funded a new CD, Movant continued, at all times, to owe Debtor $1 million. For this reason, the Court finds that section 553(a)(3) is inapplicable.

Based upon the above, the Court held that IBB had a valid right to setoff and annulled the automatic stay to allow IBB to obtain the funds in the CD.


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