Automatic Bank Account Freezes: Can They Do That?

As many chapter 7 debtors and their attorneys are finding out, Wells Fargo has a national policy of freezing chapter 7 debtor’s bank accounts immediately after the bankruptcy filing. As it turns out, Wells Fargo receives a daily update of all customer bankruptcy filings from the federal court’s CM/ECF system. Once Wells Fargo becomes aware that their customer filed a chapter 7 bankruptcy, and the customer has account balances in excess of $5,000.00, Wells Fargo notifies the debtor and the bankruptcy trustee that the account(s) are in “bankruptcy status.” Once a case is in “bankruptcy status,” the funds are frozen and then only payable pending direction from the bankruptcy trustee.

If your chapter 7 bankruptcy client’s bank account gets frozen, you will surely get an anxious call demanding the release of their desperately needed money. The following questions then arise . . . Did the bank violate the automatic stay? Can I file an emergency motion to compel the release of the funds? Is this a sanctionable offense by the bank? The Bankruptcy Court for the Middle District of Florida recently answered these questions in the case In re Young, 2010 WL 3965698 (Bankr. M.D. Fla. 2010). In In re Young, Wells Fargo froze three of the debtor’s accounts. Although the trustee instructed the bank to remove the freeze on two of the debtor’s accounts, the trustee was unable to determine the exempt status of the third account. Accordingly, the third account remained frozen pending the trustee’s further instructions. In response to the account freeze, the Debtor filed a motion seeking sanctions against the bank for violation of the automatic stay and requested an order directing the bank to immediately release the account to the debtor. Id. at 2.

In the debtor’s motion, he argued that the bank’s procedure violates the automatic stay set forth in 11 U.S.C. §362(a)(3) by “exercise[ing] control over property of the estate.” Id. In ruling against the debtor, the Court first determined that pursuant to 11 U.S.C. §541, the accounts were property of the bankruptcy estate, as the debtor had a legal or equitable interest in the accounts as of the commencement of the case. Id. Although the debtor claimed the accounts as exempt in his Schedule C, the mere claim of exemption did not cause it to cease being property of the estate until the exemption was allowed or the deadline to object to the exemption under Bankruptcy Rule 4003 expired. Id. at 4.

As a result of the Court’s determination that the accounts were property of the bankruptcy estate, the debtor had an obligation to surrender the accounts to the trustee, pursuant to 11 U.S.C. § 521(a)(4) which requires the debtor to surrender all property of the estate to the trustee. Id. at 3. The bank, on the other hand, also had an obligation to turn over the accounts to the trustee, pursuant to the turn over provisions of 11 U.S.C. §542. Id.

In determining that the bank did not violate the automatic stay, the Court found that the hold was merely the bank’s refusal to perform its promise to pay to the debtor, who had absolutely no authority to direct the disposition of estate property after the case was filed. Thus, the Court ruled, the bank’s refusal to turn over the account to the debtor could in no way give rise to a violation of the automatic stay. Id. at 4.

Finally, the Court ruled that the debtor did not have standing to seek sanctions for bank’s alleged violation of the automatic stay as it was trustee to whom the obligation to turn over such property ran, and it was trustee who had right to use, collect and administer estate property, not the debtor. Id. at 5.

Although Wells Fargo appears to be the only bank freezing chapter 7 debtor’s bank accounts, other banks may follow suit. Accordingly, it is incumbent upon chapter 7 debtor’s attorneys to explain to their clients the potential risks that their accounts may be frozen for a period of time following the filing of their bankruptcy.