ISSUES REGARDING FUNDS IN A BANK ACCOUNT PRIOR TO FILING BANKRUPTCY

Under the 1995 Strumpf decision, (Citizen Bank of Maryland v. Strumpft, 516 U.S. 16) the Supreme Court ruled that a bank may freeze any money that is in a debtor’s account at the time it learns of the debtor’s bankruptcy case, if the debtor owes the bank money. This would result in the debtor not having access to those funds. The bank may then file a motion with the bankruptcy court for permission to sefoff the funds in the account with the amount the debtor owes the bank. The Supreme Court held that this freeze did not violate the automatic stay provisions of the Bankruptcy Code, which normally prohibit creditors from taking any actions to collect its debt. As a result of this ruling, I have always advised my clients to remove any funds they have in a bank before filing the case if they owe the bank money.

Wells Fargo Bank took this one step further. It believed it had the right to freeze money in a debtor’s bank account even if the debtor does not owe it money. In re Mwangi, 432 B.R. 812 (9th Cir. B.A.P. 2010); Calvin v. Wells Fargo Bank NA, 329 B.R. 589 (2005). Its national policy provided that if the debtor had more than $5,000 in an account with Wells Fargo, it would put an administrative hold on the account once it found out about the debtor’s bankruptcy. It would then send the debtor a letter notifying him or her about the freeze. Another letter would be sent to the trustee appointed in the case notifying the trustee about the account and asking the trustee what it should do with the frozen funds. Even if the debtor had exempted the funds on his bankruptcy schedules, he would have no access to the funds until the trustee to informed Wells Fargo to release the funds. This could result in a wait of more than 30 days. The Mwangi decision will hopefully put an end to this practice. The 9th Circuit ruled that because the bank was not attempting to protect setoff rights, the “exception” to turnover of funds in a deposit account recognized by the Supreme Court in Strumpf did not apply in this case. The funds in the debtor’s accounts, even those claimed as exempt, were property of the estate and therefore the debtors had standing to pursue sanctions for bank's stay violation. Finally it held that by placing a hold on the account funds, the bank exercised control over property of the estate in violation of the automatic stay.

Now that Wells Fargo has acquired Wachovia, more people would have been subject to this freeze. Until it is clear that Wells Fargo will no longer put their account holders’ funds on hold upon learning of their bankruptcy cases, I would advise potential bankruptcy clients not to leave funds in their Wells Fargo account.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.