Any first-year law student could attest that understanding what the law is can be a difficult task, in part because the law is not always applied consistently by courts.  This problem gives rise to a maxim law professors often invoke (sometimes citing Justice Oliver Wendell Holmes, a proponent of this maxim) when questioned about the law’s occasional incoherence: “hard cases make bad law.”[1]  The idea is that courts are sometimes tempted to skirt the proper application of the law when the result seems harsh or unfair.  Typically, this happens when a court is faced with a particularly sympathetic party who happens to be on the wrong side of the dispute.  Although the court’s desire to avoid a harsh outcome is laudable, if the court allows this desire to distort its interpretation of the law it allows other (often less sympathetic) parties to avoid proper application of the law as well.  At a minimum, when the law is applied inconsistently it creates confusion and ambiguity, for which future parties will need to spend time and money litigating simply to figure out their legal rights .

In the recent case of In re Kunkel, 17-5781-SWD, 2018 WL 735929 (W.D. Mich. Feb. 5, 2018), one bankruptcy court prudently upheld the integrity of the judicial system by faithfully applying the letter of the law in an important legal area (contractual setoff rights), even though doing so may have deprived two young children of their life savings.  Ms. Kunkel was a member of the Michigan State University Federal Credit Union (the “Credit Union”), with whom she maintained a VISA credit card account.  Ms. Kunkel’s two minor children were also members of the Credit Union, having opened “Lil’ Sweet Pea” savings accounts in 2006.  The Credit Union’s decision to offer such accounts to children under the age of five was undertaken to teach children a lesson about saving for the future.  (As the kids aged, they could move up to the Credit Union’s “Dollar Dog” accounts, and then as teenagers, could enroll in “Cha-Ching” accounts – we are not kidding, check out these promos here.)  Sadly, the lesson learned by Ms. Kunkel’s children in this case was not a positive one.

On December 20, 2017, Ms. Kunkel and her husband found themselves in financial trouble, and filed chapter 13 bankruptcy cases.  Before doing so, Ms. Kunkel had racked up $11,068 in credit card debt using her Credit Union VISA account.  Unfortunately for the Kunkel children, who were less than five years old when their accounts were first opened, their mother was named as a joint owner on their Lil’ Sweet Pea savings accounts.  By the time of their mother’s bankruptcy, the children were between the ages of ten and sixteen, and had saved about $11,000 between their accounts.  Because their mother was a joint owner, the Credit Union sought to apply the children’s money against their mother’s credit card debt, citing a provision in Ms. Kunkel’s membership agreement which gave the Credit Union a setoff right against any account in which Kunkel was a joint owner, notwithstanding the source of the funds in that account.

When the Credit Union moved the bankruptcy court for relief from the automatic stay to apply its setoff right, the law was clearly on the Credit Union’s side.  Ms. Kunkel’s failure to timely pay her credit card bills and the Credit Union’s contractual rights were legally sufficient to establish “cause” to lift the stay.  Even assuming that the money represented eleven years’ worth of birthday card money and lemonade stand revenue, because it was held in a joint account, the law treats the children as non-recourse guarantors, having in effect pledged their interest in that money as collateral for their mother’s debt.

Despite its recognition that the law required it to rule in favor of the Credit Union, the court made no effort to hide its views of the “unseemliness of shucking the ‘Lil’ Sweet Pea’ accounts to pay the debts of the Children’s mother.”  The court emphasized that it would not rule on the merits “or advisability” of the proposed setoff, requiring the parties to “pursue their state court rights, or not, as they see fit.”  The court also hinted its apparent preference that Ms. Kunkel and the Credit Union instead negotiate a new chapter 13 plan “to accommodate the needs of all interested parties, including the Children.”  With its final expression of disapproval, the court refused to make its decision effective immediately, allowing the stay to remain effective for 14 additional days under Bankruptcy Rule 4001(a)(3) despite having little basis to believe that Ms. Kunkel could justifiably seek post-judgment relief from the court’s order.  In the end, however, the court commendably recognized its duty to “be guided by statute and case law, rather than any visceral reaction to the harshness of a creditor’s proposed action.”  Despite the tremendous sympathy that one must feel for the children in this case, the court’s steadfast adherence to the law gives reassurance to financial institutions (and their lawyers) that they can depend on well-settled legal principles to determine their legal rights when offering credit or other financial services to consumers.

[1]   Northern Securities Co. v. United States, 193 U.S. 197, 400 (1904) (Holmes, J. dissenting)

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