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Administrative Freeze of Bank Accounts Does Not Entitle Chapter 7 Debtors to Sanctions for Automatic Stay Violation, According to Ninth Circuit

Fotocitizen [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe Ninth Circuit Court of Appeals recently issued a series of rulings addressing the rights of Chapter 7 debtors to the funds in their bank accounts. In re Mwangi (“Mwangi I”), 764 F.3d 1168 (9th Cir. 2014); In re Mwangi (“Mwangi II”), No. 14-15265, slip op. (9th Cir., Oct. 21, 2014). The debtors, a married couple, claimed exemptions on several bank accounts and sought sanctions against the bank when it refused to lift an administrative freeze. The appellate court held that the accounts remained part of the bankruptcy estate until the deadline for creditors to object to the debtors’ claimed exemptions had passed, and then the accounts re-vested in the debtors. Since the alleged automatic stay violation occurred before re-vesting, the court held that the debtors lacked standing. Only the trustee has standing to bring claims to protect assets in the bankruptcy estate.

The debtors filed for Chapter 7 bankruptcy in August 2009. They held four accounts at Wells Fargo Bank at the time with a total balance of about $17,000, which they did not claim as exempt in their original Schedule C. Wells Fargo runs an automated computer program that compares the names of new Chapter 7 cases to those of account holders. It put an administrative freeze on all four accounts shortly after the debtors filed their petition and notified them by mail. It also notified the trustee, who instructed it to hold the funds until further instructions, or until 31 days after the creditors’ meeting.

About a week after the filing date, the debtors filed an amended Schedule C that claimed exemptions in 75 percent of the value of the four accounts, citing a state law that exempts that amount of disposable earnings. Nev. Rev. Stat. § 21.090(1)(g). They asked Wells Fargo to lift the freeze on the accounts, which it refused to do without the trustee’s agreement.

The debtors filed a motion for sanctions against Wells Fargo. After an initial denial by the bankruptcy court, followed by reversal and remand by the Bankruptcy Appellate Panel, the bankruptcy court denied the motion for lack of standing and lack of injury. The debtors filed an adversary proceeding, which the bankruptcy court also dismissed for lack of standing. They appealed both rulings to the district court, and then to the Ninth Circuit.

In Mwangi I, the Ninth Circuit affirmed the dismissal of the adversary proceeding, ruling that the debtors lack standing to claim violations of the automatic stay with regard to estate property under 11 U.S.C. § 362(a). In addressing the question of whether the bank accounts were part of the estate, it cited Schwab v. Reilly, 560 U.S. 770 (2010), which draws a distinction between an exemption of the value of an asset and an exemption of an asset itself. If only the value is exempt, the property remains in the bankruptcy estate.

The court, citing Nevada law, found that the exemption applied to the accounts themselves, but that they did not re-vest in the debtors until after the deadline for objections. It also found that the debtors were not entitled to a damages award because they had no right of possession in the funds when the alleged violation occurred. The court considered the motion for sanctions in Mwangi II and held that the Mwangi I decision made it moot.

Bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 cases since 1997. To schedule a free and confidential consultation with an experienced and skilled financial advocate, contact us today online or at (310) 475-939. Let us help you repair your finances with dignity and respect.

More Blog Posts:

Debtors Allowed to Sue Loan Servicer for Charging Unapproved Fees During Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, December 23, 2014

Ninth Circuit Considers Whether Debtor’s Attorney’s Fees Are “Actual Damages” when Creditor Violates Automatic Stay, Los Angeles Bankruptcy Lawyer Blawg, September 19, 2014

Automatic Stay Does Not Prevent an Eviction Authorized in an Earlier Bankruptcy Case, Los Angeles Bankruptcy Lawyer Blawg, March 7, 2014

Photo credit: Fotocitizen [Public domain, CC0 1.0], via Pixabay.