The Ninth Circuit Bankruptcy Appellate Panel castigated Wells Fargo for a practice that has been the bane of many debtors and their counsel. Wells Fargo has a procedure whereby it automatically freezes any debtor’s bank account where the total bank balances at the bank exceed $5,000. The bank’s stated purpose is to make sure those funds are available to the Chapter 7 Trustee. The case name is In re Mwangi, No. 09-1408 (9th Cir. BAP June 30, 2010).
The Ninth Circuit BAP, however, has found the practice violates the automatic stay because it is an act to control property of the estate. Furthermore, the BAP found that debtors who have been injured by such an action may seek damages from Wells Fargo for such a violation. 11 U.S.C. Sec. 362(a)(3) prohibits “any act . . . to exercise control over property of the estate.” The court noted that Sec. 362(a)(3) proscribes “the mere knowing retention of estate property.” The court went on to find that
Wells Fargo asserts it did not exercise control over property of the estate. We disagree. Wells Fargo could have paid the account funds to the trustee; it did not. Wells Fargo could have released the account funds claimed exempt to the Appellants when demand was made; it did not. Wells Fargo could have sought direction from the bankruptcy court, by way of a motion for relief from stay or otherwise, regarding the account funds; it did not. Instead, it chose to hold the funds until a demand was made for payment that it alone deemed appropriate. If that is not "exercising control over" the funds, we don't know what is.
The court went on to note that the automatic stay and turnover provisions are self-executing and that Wells Fargo turned the self-executing nature of those provisions on their head by requiring the debtors to take affirmative action to get access to their funds.
It will be interesting to see if Wells Fargo appeals this case.