By Ryan C. Wood
If you bank with Wells Fargo Bank and you file for bankruptcy protection you need to be aware Wells Fargo Bank can now legally freeze your bank accounts after you file for bankruptcy if you live in the 9th Circuit. For those of you living in California, this applies to you. For years now this case has been going up the chain of courts for a holding as to whether Wells Fargo Bank could freeze bank accounts, the use of the money in the bank accounts, of bankruptcy filer. For now we have an answer.
In a recent decision by the U.S. Court of Appeals for the Ninth Circuit, In the Matter of Mwangi (No. 12-16087, August 26, 2014) the court held that Wells Fargo’s act of freezing consumer’s bank accounts upon the filing of the bankruptcy case did not violate the automatic stay. In this case, Mr. Mwangi and Ms. Mwicharo (collectively, “Mwangis”) had over $17,000 spread out over various Wells Fargo Bank bank accounts at the time they filed for Chapter 7 bankruptcy. California has a generous wild card exemption currently totaling $26,925. At the time the Mwangi’s filed there case the wild card exemption was a little less, but still enough to protect and exempt all of their $17,000. Wells Fargo Bank has a computer program, or subscribes to a services, that runs a nightly check to see if their account holders filed for bankruptcy protection under Chapter 7. It does not appear Wells Fargo Bank freezes bank accounts of the debtor/bankruptcy filer when filing under Chapter 11 or Chapter 13.
So when: (1) filing bankruptcy under Chapter 7 of the Bankruptcy Code; (2) have one or more bank accounts with Wells Fargo Bank at the time of filing for Chapter 7; (3) the cumulative total of all the account(s) with Wells Fargo Bank is over a certain amount; (4) no debt need be owed to Wells Fargo Bank (Yes, even no debt is owed to Wells Fargo Bank and have no interest in the bankruptcy filing they will still freeze the bank accounts); (5) it does not matter if you owe them no money and a customer for 20 years, Wells Fargo Bank will still freeze the bank accounts according to (1) – (4).
A “temporary administrative pledge” on the bank accounts, effectively freezing the account holder from using the bank accounts. Wells Fargo Bank then forwards a letter to the Chapter 7 trustee assigned in the bankruptcy case, and bankruptcy attorney, requesting instructions on how to proceed with the funds now frozen. Keep in mind these frozen funds usually represent food, utilities and rent money for a single person of married couple with three children. Wells Fargo Bank indicated they would continue to have the bank accounts on freeze until they receive instructions from the trustee or until 31 days have passed after the 11 U.S.C. §341 meeting of creditors. I am sure you can imagine the panic the Mwangis must have felt when all of their money was frozen and they could not use the funds to pay their bills including rent, utilities, food, or any other reasonable and necessary expenses.
9th Circuit Court of Appeals held Wells Fargo can freeze bank accounts if the account holder files bankruptcy.
The Mwangis’ bankruptcy attorney filed a motion in their bankruptcy case to seek sanctions alleging Wells Fargo Bank violated the automatic stay by freezing the bank accounts. This motion was denied and the Mwangis appealed to the Bankruptcy Appellate Panel which reversed the bankruptcy court’s decision in Mwangi v. Wells Fargo Bank, N.A., 432 B.R. 812 (9th Cir. BAP 2010). The BAP remanded the case to bankruptcy court to determine whether the Mwangis suffered damages. When the case was remanded to bankruptcy court, the bankruptcy court once again denied the motion for sanctions. The Mwangis then filed an adversary proceeding against Wells Fargo for violating the automatic stay. The bankruptcy court dismissed the adversary proceeding for lack of standing since only the trustee has standing to protect estate property. The Mwangis appealed the decision to the district court and received the same result. They appealed this decision all the way to the 9th Circuit appellate court.
The Ninth Circuit appellate court had several holdings. The first one was that exempt property immediately revests in the debtor (except for some exceptions). In determining when the account funds are revested in the Mwangis, the court analyzed the case as follows: the Mwangis filed for bankruptcy protection on August 3, 2009, and the bankruptcy lawyers filed an Amended Schedule C on August 11, 2009. Since any party in interest could object to the claimed exemptions within 30 days after the meeting of creditors, the funds revested in the Mwangis after October 18, 2009, since the meeting of creditors was held on September 18, 2009.
The Ninth Circuit Court also held that there was no injury to the Mwangis because during this holding period until October 19, 2009, the Mwangis had no right to possess or access the funds in the account since the funds were still property of the bankruptcy estate. The Court also indicated that when the account funds passed out of the bankruptcy estate on October 19, 2009, Wells Fargo was not subject to violations of the automatic stay at that time either since they were no longer holding on to estate funds and the automatic stay did not apply. The court also held that the Mwangis could have done something in order to have the funds released, such as contacting the trustee or filing a motion with the court to turn over exempt assets.
Finally the Court denied the district court made any errors in dismissing the Mwangi’s 11 U.S.C. §105(a) claim. This section authorizes a bankruptcy court to “issue an order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” Since Wells Fargo Bank was found not to have violated the automatic stay provisions the Mwangis could not claim a §105(a) claim.
This ruling is very concerning especially for people looking to file for bankruptcy while they have Wells Fargo Bank bank accounts. I have spoken with some Wells Fargo Bank representatives and they say they freeze accounts which have over $5,000 cumulative in all the bank accounts. Each jurisdiction may have a different amount so you should always check and retain local bankruptcy attorneys. The uncertainty surrounding this issue unfortunately was decided not in debtors favor. This ruling may also lead the way for other banks to start freezing bank accounts when the account holder files for bankruptcy protection. Time will tell.
