By Ryan C. Wood

There are NOT several banks that choose to freeze their customer’s bank accounts if their customers file for Chapter 7 bankruptcy.  There is only one and that nefarious bank is Wells Fargo Bank.  Why would Wells Fargo Bank freeze the money their customer needs to feed their children or pay their rent when filing for Chapter 7 bankruptcy?  How can that be good for business?  It should not be good for business yet people still choose to do business with Wells Fargo Bank.  It is like Walmart.  Walmart receives all kinds of government tax breaks and subsidies yet Walmart does not pay their employees well in light of billions of dollars in quarterly profits.  So many people complain about how Walmart pays their employees yet still shop at Walmart perpetuating the harm and encouraging it.  Same is true of Wells Fargo Bank.

Why Freeze Bank Accounts When Filing Chapter 7 Bankruptcy?

The bank’s reasoning is that they are freezing the bank accounts to preserve the bankruptcy estate, and will release the funds once the trustee authorizes the turnover of the funds back to the bank customer.  The problem is, the trustees have huge caseloads, and they may not be able to send a letter to the banks immediately to release the funds.  Also certain trustees choose to not get involved at all.  Until the trustee sends a letter of release to a bank, the customers’ bank accounts remain frozen.  This is a huge problem, especially if that is your only bank account, and you have bills that need to be paid, like mortgage payments and utility bills.  The bills will remain unpaid until the bank account is released, and in the meantime, you may end up being evicted or have your power turned off.

The bank’s method of freezing their customer’s accounts was challenged in Mwangi v. Wells Fargo Bank, N.A.  In Mwangi, the Mwangis’ had several bank accounts with Wells Fargo, and Wells Fargo was also a creditor in the Mwangi bankruptcy case.  Wells Fargo placed an administrative freeze on Mwangi’s bank accounts after it found out the Mwangis filed for bankruptcy.  Mwangi demanded that the exempted portion of the funds in their bank accounts be released, but Wells Fargo refused.  The bankruptcy court concluded that Wells Fargo’s policy did not violate the automatic stay because the funds were part of the bankruptcy estate and Wells Fargo was not attempting to collect a debt; they were only placing an administrative freeze on the bank account to preserve the bankruptcy estate until further notice.  Well, as most bankruptcy lawyers can attest to, most bank account money is exempted/protected so teh bankruptcy filer keeps the funds and can use the funds to eat and live.  

The case then went to the 9^th Circuit Bankruptcy Appellate Panel (BAP).  The BAP consists of a group of judges under the supervision of the US Court of Appeals who are appointed to hear appeals from bankruptcy cases.  The BAP disagreed with the lower bankruptcy court’s decision.  It distinguished the Mwangi case from Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  In Strumpf, the Supreme Court held that banks may place administrative freezes on a debtor’s bank account while the bank pursues relief from the automatic stay to exercise its right of setoff against the account.  In Mwangi, the freeze was not held to assert any right to a setoff that Wells Fargo had; it was a blanket policy that froze the accounts of all customers that filed for bankruptcy.  The BAP held that the administrative freeze Wells Fargo placed on Mwangi’s accounts was considered a violation of the automatic stay pursuant to 11. U.S.C §362(a)(3), which provides “…a petition filed under section §301, 302, 303 of this title… operates as a stay, applicable to all entities, of…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…”  By holding an administrative freeze on Mwangi’s account, Wells Fargo was exercising control over Mwangi’s property, despite Wells Fargo’s objections otherwise.  The BAP said, “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….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.”  Mwangi v. Wells Fargo Bank, N.A., BAP No. NV-09-1408-DHPa, 09-24057-BAM 2010 WL 2723204 (9^th Cir. BAP. June 30, 2010).  The BAP reversed the bankruptcy court’s decision and remanded the case back to the bankruptcy court.

Wells Fargo then tried to appeal the case to the 9^th Circuit Court of Appeals.  However, on December 10, 2010, the 9^th Circuit Court of Appeals dismissed the case due to lack of jurisdiction.

Hopefully you will retain an experienced bankruptcy attorney that properly advised you about your bank accounts and filing for bankruptcy.  The moral of the story:  do not have your bank accounts at bank you also owe money with credit cards, vehicle loans or home mortgages.  There are no shortages of banks for you to choose from in your area that would be convenient for you to bank with – just choose one where you don’t owe any money to.  Always keep your bank account accounts separate from your debts.