by Adrian Lapas, Eastern North Carolina Bankruptcy Attorney on July 6, 2010 · Posted in *Chapter 7 Bankruptcy, Bankruptcy Cases & Legislation on BankruptcyLawNetwork.com
Last week, the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit decided Mwangi v. Wells Fargo Bank, N.A. At issue was Wells Fargo’s national procedure of running a computerized comparison of all newly filed chapter 7 bankruptcy cases against Wells Fargo’s list of account holders. If one of Wells Fargo’s account holders had also filed a chapter 7, then Wells Fargo would immediately “freeze” the account so that the debtor would not have access to his or her money. Wells Fargo would then send a letter to the chapter 7 trustee seeking instructions for disbursement of the money.
In the Mwangis’ case, the chapter 7 trustee did not instruct Wells Fargo as to what it should do, that is, to pay the money to the trustee, release the money to the debtor, or do something else. The debtors claimed that 75% of the money in their account was exempt under the applicable exemption scheme and demanded that Wells Fargo return the money to them. Wells Fargo refused to release the funds to the debtors. The debtors then filed a motion for sanctions under 11 U.S.C. § 362 alleging a violation of the automatic stay.
The BAP concluded that Wells Fargo’s policy of placing an administrative hold or “freeze” on the account constituted “exercising control” over property of the bankruptcy estate. It further stated that the knowing retention of estate property violates the automatic stay subjecting the creditor to potential liability. Though Wells Fargo argued that it merely held such funds pending directions from the trustee, the court stated that, since no instructions were forthcoming, Wells Fargo was under an obligation to do something–either release the funds to the trustee; release the funds to the debtors after demand was made by the debtors or seek direction from the bankruptcy court. Wells Fargo did none of those things.
The BAP held that Wells Fargo’s national policy of freezing accounts violates the automatic stay. However, a further issue to consider on remand will be whether Wells Fargo’s administrative freeze on the account after receiving no instructions from the trustee was reasonable in light of the debtors’ demand that the funds be released to them. If Wells Fargo’s continued freeze on the funds was unreasoanble then debtors are entitled to recover damages, if any, under § 362(k)(1).
As bankruptcy lawyers, we are generally aware of creditors’ policies regarding various issues. However, we have no control over a creditor changing their policy–even when it turns out to be completely at odds with the Bankruptcy Code.