Per 9th Circuit’s Mwangi Decision, Bank Cannot Freeze Exempt Bank Account Funds

November 15, 2011

By: David M. Serafin

Although issued well over a year ago, the Mwangi v. Wells Fargo Bank decision still seemingly applies every day in my Denver and Aurora based consumer bankruptcy practice. Mwangi stands for the premise that a bank (think major bank like Wells Fargo, Chase, Bank of America or Citi which can instantaneously run a daily computerized search matching new chapter 7 bankruptcy filings with current account holders) violates the automatic stay – arising immediately when a bankruptcy is filed – by administratively freezing bank account funds protected by the Colorado state law exemption.

In Mwangi, Wells Fargo froze the chapter 7 debtors’ bank accounts and mailed a letter to the chapter 7 trustee requesting guidance as to disposition of the funds. (It was undisputed that all funds in the bank account were directly traceable to wages earned which are 75% exempt from the claims of creditors and that the bank account funds were also 75% exempt.) After Wells Fargo refused to turn over the funds, the debtors requested sanctions under Section 362 of the Bankruptcy Code for an automatic stay violation.

Wells Fargo conceded that the funds were property of the bankruptcy estate as the administrative freeze occurred after the bankruptcy was filed. Instead, Wells Fargo argued that debtors had no right to compel turnover of funds belonging to the bankruptcy estate, despite the existence of an exemption, because Section 542(b) does not specifically address this issue. Wells Fargo further argued that only the chapter 7 trustee has standing to claim these funds as part of the Bankruptcy Estate under Section 323.

The 9th Circuit disagreed as, under Wells Fargo’s reasoning, bankruptcy debtors would never have the right to pursue an automatic stay violation and subsequent sanctions under Section 362 (a)(3) for unlawful creditor collection activity. The court distinguished automatic stay related issues from that involving turnover of exempt property. It reasoned that the issue was whether the creditor exercised dominion over property belonging to the bankruptcy estate by retaining possession over the bank account funds. The 9th Circuit further reasoned that the Bankruptcy Code turnover provisions are self effectuating and that a creditor such as Wells Fargo, once the stay goes into effect, determines at its own risk whether to abide by Section 362. Further, the court rejected Wells Fargo’s claim that it did not control property of the Bankruptcy Estate and emphasized that it could have paid over the funds to the chapter 7 trustee when demand for turnover was made and did not. Finally, the 9th Circuit found that Wells Fargo did not make any attempt to seek guidance from the Bankruptcy Court and file a Motion for Relief from Automatic Stay as to disposition of the funds.

As a personal bankruptcy lawyer in Denver and Aurora, Colorado, I frequently see situations where the big banks attempt to immediately seize my client’s bank account funds. If need bankruptcy help, it’s best to remove all funds from a bank which is also a creditor prior to filing the case so that the bank does not seize the funds. If this is not possible, we can file a motion under Section 362 and request sanctions for willful violation of the bankruptcy automatic stay rules.