Memorandum of Decision Re: Bank Setoff

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re PACIFIC NATIONAL BANCSHARES,                                       No. 1-87-00262      Debtor. ___________________________/ PACIFIC NATIONAL BANCSHARES,      Plaintiff,    v.                                                                                                  A.P. No. 1-87-0077 FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of First National Bank, Willows,      Defendant. ___________________________/
Memorandum of Decision
     The facts in this matter are simple and undisputed. Plaintiff Pacific National Bancshares had $26,039.00 on deposit with First National Bank - Willows when that bank was declared insolvent and taken over by defendant FDIC. At that time, plaintiff owed the bank over $500,000.00, unsecured.      Plaintiff filed its Chapter 11 petition a few months after the bank failure. By this adversary proceeding, it seeks turnover of the funds it had on deposit and alleges that failure to turn over the funds is a violation of the automatic stay.      There is some uncertainty as to whether the plaintiff's deposit qualified as an insured deposit, and whether the purchaser of the defunct bank's assets assumed the liability to plaintiff. However, these issues need not be decided in order to resolve the case.      Where a debtor having a deposit in a bank also owes money to the bank, the bank is for most purposes treated as a creditor with a security interest in the debtor's account, which is cash collateral. While the bank's ability to effect a setoff is stayed, the debtor is entitled to use of the funds only if it complies with the requirements governing use of cash collateral as set forth in section 363 of the Bankruptcy Code. Rosenberg, et al., Collier Lending Institutions and the Bankruptcy Code, para. 304[1]. For this reason, the mere failure to turn over the funds is not a violation of the automatic stay. In re Edgins (9th Cir.B.A.P. 1984) 36 B.R. 480, 483.      The distiction between a setoff and a "freeze" is not a meaningless one, as some have suggested. If a setoff is allowed, the cash deposit disappears and is no longer available to help the debtor survive while it attempts to reorganize. If the account is merely frozen, the door remains open for the debtor to obtain the use of the funds if the bank can be adequately protected by, for instance, a replacement lien on other property of the estate.      Since the plaintiff has demonstrated no grounds which entitle it to turnover of the funds, it can take nothing by its complaint and this adversary proceeding shall accordingly be dismissed. The Court does not find sanctions appropriate.      Pursuant to Bankruptcy Rule 9021, a separate order will be entered.
Dated: January 27, 1988                                                                              _______________________                                                                                                                      ALAN JAROSLOVSKY                                                                                                                      U.S. BANKRUPTCY