Ashraf S. Badour

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: 	)
)
ASHRAF S. BADOUR, 	) 	Case No. 5:08-bk-196
)
Debtor. 	) 	Chapter 7
)
MEMORANDUM OPINION
WesBanco seeks to offset $12,760 in two general deposit accounts belonging to Ashraf
Badour (the “Debtor”) against the $12,760.31 pre-petition liability he owes to WesBanco on a
note secured by the Debtor’s deposit accounts. 	The Debtor objects to the motion on two
grounds: (1) the deposit accounts contain funds traceable to a special, Keogh account, which
funds are not subject to WesBanco’s setoff rights, and (2) a portion of the funds in one of the
accounts are claimed exempt in his bankruptcy case.
For the reasons stated herein, the court will grant WesBanco’s request to exercise its
setoff rights in the Debtor’s deposit accounts.
I. BACKGROUND
On February 27, 2001, the Debtor and WesBanco executed a promissory note (the
“Note”) that established a $35,000 line of credit. 	The Note includes a security agreement
granting WesBanco a security interest in—and setoff rights against—the Debtor’s deposit
accounts. The Note expressly excludes any Keogh accounts from WesBanco’s security interest
and setoff rights. The Note further provides that the Debtor’s deposit accounts secure any future
advances by WesBanco to the Debtor. Thus, when the Debtor obtained a second, $30,000 line of
credit (the “Credit Card”) from WesBanco on May 2, 2007, the Credit Card debt was also
secured by the Debtor’s deposit accounts. 	When the Debtor filed his bankruptcy petition, he
owed $12,760.31 to WesBanco on the Credit Card.
Dated: Friday, March 13, 2009 11:25:30 AM
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The Debtor maintains three accounts at WesBanco: (1) the Ashraf S. Badour M.D. Profit
Sharing Plan (the “Keogh Account”) with a balance of approximately $430,000, (2) a deposit
account with a current balance of $849.80 and petition-date balance of $1,676.77, and (3) a
deposit with a current balance of $11,910.20 and a petition-date balance of $17,040.51.
When the Debtor filed his bankruptcy petition, he claimed a $2,629.27 exemption in his
deposit accounts as permitted under West Virginia Code § 38-10-4. 	In addition to the deposit
account exemption, the Debtor also claimed the entire Keogh Account as exempt under 11
U.S.C. § 522(b)(3)(C). 	After the Debtor filed bankruptcy, WesBanco placed an administrative
hold on his deposit accounts to preserve its setoff rights.
II. DISCUSSION
The Debtor asserts WesBanco should not be allowed to exercise its setoff rights against
his deposit accounts to the extent that funds in those accounts are traceable to transfers from his
special, Keogh account. Also, the Debtor asserts that his claim of a $2,629.27 exemption in his
deposit accounts prohibits WesBanco from offsetting that amount.
WesBanco contends that its setoff rights prevail regardless of the Debtor’s claim of
exemption. 	In WesBanco’s view, by depositing the funds into the deposit accounts, the funds,
from whatever source, became part of a general account subject to WesBanco’s consensual
security interest. 	Because bankruptcy exemptions generally do not affect consensual security
interests, WesBanco requests permission to exercise its contractual rights in its collateral. 	The
court agrees with WesBanco.
A. WesBanco’s Setoff Rights.
WesBanco asserts that it has the right to obtain the $12,760 in the Debtor’s accounts
under § 553(a) of the Bankruptcy Code, which provides that “this title does not affect any right
of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the
commencement of the [bankruptcy case] against a claim of such creditor against the debtor that
arose before the commencement of the [bankruptcy case]. 	“Section 553 does not create a right
of setoff…. It merely preserves any right of setoff accorded by state law….” Alexander & Jones
v. Sovran Bank, et al. (In re Nat Warren Contracting Co., Inc.), 905 F.2d 716, 718 (4th Cir. 1990)
(citations omitted). 	Therefore, West Virginia law must provide the substantive basis for
WesBanco’s right to offset the funds remaining in the deposit accounts.
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The Supreme Court of Appeals of West Virginia has recognized that “the right to setoff
may be provided for in a contract between the depositor and bank.” Southern Electrical Supply
Co. v. Raleigh County National Bank, 320 S.E. 2d 515, 519 n.7 (W. Va. 1984). 	To exercise
contractual setoff rights the following three prerequisites must be established: 1) existence of a
debtor-creditor relationship between bank and customer, 2) the customer’s ownership of a
general deposit account in the bank, and 3) mutuality of matured indebtedness. Id.
Here, the Note expressly grants WesBanco setoff rights against the Debtor’s deposit
accounts. 	Nevertheless, the three requirements for enforcing a setoff agreement must be met.
The first and third prerequisites are not in dispute in this case. The Debtor’s creation of a deposit
account at WesBanco and the execution of the Credit Card and Note establish the contractual
creditor-debtor relationship. E.g., id. (“A bank account creates a contractual debtor-creditor
relationship between bank and depositor.”). Together with the WesBanco deposit accounts, the
Credit Card and Note establish a mutuality of indebtedness, because the Debtor owes the bank a
matured debt while the bank owes the depositor money based on the deposit. Id.
B. The Relevance of Tracing.
According to the Debtor, the remaining requirement for setoff—that the offset account be
a general deposit account—cannot be met on the basis that funds in the general account were
drawn from a special account, and, thus, according to the principles of tracing, the deposits have
retained their special nature. 	Because WesBanco’s security interest does not attach to the
special, Keogh Account, the Debtor asserts that tracing his deposit account funds from the Keogh
Account will exclude a portion of the funds in the deposit accounts from WesBanco’s security
interest.
“A special account is segregated for a specific purpose, and a bank may not set off a
depositor’s indebtedness against such an account.” Southern Electrical Supply, 320 S.E. 2d at
519. 	“A bank must have knowledge or reason to believe that an account is a special account
before it can be deprived of its setoff rights.” Id. at 520. 	Absent a contrary agreement or the
bank’s knowledge of a deposit’s specific purpose, the deposit is treated as a general deposit. See
Zinn v. Mendel, 9 W. Va. 580 (W. Va. 1876) (“When money has been deposited with a bank, and
there has been no contract that a different rule should prevail, the bank where the deposit is
made, ordinarily, becomes the owner of the money, and consequently a debtor for the amount,
and under obligation to pay on demand, not the identical money received, but a sum equal in
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legal value.”) (emphasis in original); 1 Michie’s Jurisprudence of Virginia & West Virginia § 50
(Matthew Bender & Co. eds., 2007) (“An account is a special account and thus exempt from
setoff if (1) funds are deposited in the account for a special purpose and (2) the bank has notice
of the special purpose.”).
Special 	account 	funds 	generally 	lose 	their 	special 	purpose 	status 	when 	they 	are
commingled with general account funds. In re Nat Warren, 905 F.2d at 718; see also Feliciano
v. McClung, 556 S.E.2d 807 (W.Va. 2001) (holding that a tortfeasor lost statutory protection of
his workers’ compensation benefits when he changed the character of those funds by purchasing
a certificate of deposit with the funds). 	A narrow exception exists where an account holder
directs the account trustee to segregate a special deposit but the account trustee fails to earmark
special account funds and segregate them from general deposits. See State ex rel. Ins. Comm’r v.
Blue Cross & Blue Shield of W. Va., Inc., 638 S.E.2d 144, 154 (W.Va. 2006) (holding that
commingling will not impair the nature of special account funds where commingling is the result
of an account trustee’s breach of duty).
In this case, the Debtor, not WesBanco, commingled funds from his special, Keogh
Account into his general deposit accounts. 	The Debtor did not notify WesBanco of the special
nature of his transfer from his Keogh Account into his general deposit accounts. 	Thus, the
general rule applies and the Debtor’s act of depositing special account funds in general accounts
without notifying WesBanco of a special purpose for the deposits destroyed the special nature of
the funds. Even if the Debtor could establish that the deposits into the general deposit accounts
originated from the exempted Keogh Account, the funds would nevertheless become part of the
general account under the general rule of commingling. Therefore, the Debtor’s ability to trace
the transfer of special account funds into his general accounts is irrelevant to WesBanco’s ability
to exercise its setoff rights.
C. The Debtor’s Exemptions Vis-à-vis WesBanco’s Security Interest.
The Debtor’s second argument to prevent WesBanco from exercising its setoff rights is
that the $2,629.27 exemption claimed in the general accounts causes that amount to be immune
from WesBanco’s setoff rights.
Bankruptcy Code § 522 governs the exemption of property from the bankruptcy estate.
Subparagraph 522(c)(2)(A)(i) provides that exempted property is not liable for pre-petition debts,
“except…a debt secured by a lien that is…not avoided under subsection (f)….” 	Subsection
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522(f) sets forth the exclusive rules for avoiding the fixing of liens, and does not allow the
avoidance of the kind of consensual security interest presented in this case.
Importantly, the Debtor does not dispute the validity of the Note or WesBanco’s security
interest in his deposit accounts. WesBanco’s setoff rights, are, therefore, based on contract and
not common law. 	As subparagraph 522(c)(2)(A)(i) recognizes, exemptions cannot defeat a
consensual security interest. E.g., In re Trevino, 96 B.R. 608 (Bankr. E.D.N.C. 1989) (“When a
debtor voluntarily grants a security interest in property or makes an absolute transfer, he gives up
his exemption rights with respect to that property and he cannot recover those rights simply
because the bankruptcy trustee can acquire rights superior to the transferee.”); In re Cabrillo, 101
B.R. 443, 449 (Bankr. E.D. Pa. 1989) (“The Debtors' claim of exemption, even though
unobjected to, would not eliminate a valid lien or security interest in their property claimed as
exempt.”). 	Therefore, under § 522(c)(2)(A)(i), the Debtor’s exemptions can have no affect on
WesBanco’s rights in the deposit accounts, because the deposit accounts are its collateral.
III. CONCLUSION
WesBanco’s motion to exercise its setoff rights shall be granted. Bankruptcy Code § 553
permits WesBanco to exercise its setoff rights against the total amount of the deposit accounts as
provided under non-bankruptcy law because the deposit accounts constitute commingled funds
in a general account. 	The Debtor’s claimed exemption against the deposit accounts does not
affect WesBanco’s setoff rights because the Debtor’s deposit accounts are WesBanco’s collateral
for the Credit Card debt under a valid security agreement.
The court will enter a separate order pursuant to Fed. R. Bankr. P. 9021.
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