Chapter 7 Debtors- WELLS FARGO FREEZING BANK ACCOUNTS!

Here is the scenario:

On the date of filing bankruptcy, the Debtor has checking and savings accounts with Wells Fargo Bank, N.A. The Debtor claimed the Accounts as exempt in his Schedule C filed with the petition. Immediately upon learning of the Debtor’s bankruptcy filing, Wells Fargo Bank placed an administrative freeze (hold) on the debtor’s accounts; they were awaiting directions from the chapter 7 trustee.

In response, the Debtor has filed a motion seeking sanctions against the Bank for

violation of the automatic stay [11 U.S.C. § 362(a)(3)] and requesting a court order directing the Bank to immediately release the accounts to the debtors

Seems like an easy decision, you would think the money is the debtor’s money in his own bank account, and therefore they should release the account and get rid of the administrative hold…

HOWEVER, here is the outcome:

On August 26, 2014, the Court (9th Circuit Bankruptcy Appellate Panel) concludes that the accounts were property of the estate on the date of filing (meaning part of the bankruptcy assets subject to claims of the Trustee and creditors), the administrative freeze placed by the Bank on the Accounts did NOT violate the automatic stay, and the Debtor does not have standing to seek sanctions for violation of the stay as to the bank accounts. This was the decision even after the debtor appealed.

DEBTOR LOSES!  But, how can this be?

As the original court put it, “in this case, we must decide whether the Debtors can state a claim for a willful violation of 11 U.S.C. § 362(a)(3)—which proscribes “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate”—based on the operation of Wells Fargo’s administrative pledge. We hold that they cannot state such a claim. Before the account funds revested in the Debtors, they remained estate property, and the Debtors had no right to possess or control them. Accordingly, the operation of the administrative pledge could cause the Debtors no injury before the account funds revested.”  (Emphasis Added)  In Re Mwangi, 432 B.R. 812 (9th Cir. BAP 2010)

The lesson here is clear, it is best to advise you to move your accounts out of Wells Fargo before you file bankruptcy and place your money in an account with another bank or credit union where you don’t owe any money.  Even though we are not part of the 9th Circuit (we are in the 8th Circuit), and no case on this topic has been decided the same here, our goal is to protect our debtors and their assets by all legal means. 

It is yet to be seen if other banks will follow in Wells Fargo’s tracks, or if our Court’s will come to the same conclusion, but it is something that you can be sure the attorneys at Pollak, Hicks & Alhejaj can provide the proper advice.

© Roxanne Alhejaj

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