Most people probably know that filing for bankruptcy is often the most effective way of getting out from under a judgment garnishment of their bank account. That continues to be true.  What my office has seen in recent times, though, is a trend towards making things more difficult for Debtors — such as Wells Fargo’s policy of freezing the account of a Chapter 7 debtor pending “instructions from the trustee.”  

 It just sounds wrong, doesn’t it?  If the purpose of filing for bankruptcy is to get some breathing room and, eventually, a fresh start, how can a bank punish you by freezing your account?

Intuitively, it does seem wrong.  Legally, the question is somewhat complex.  In fact, courts across the country are somewhat divided in their treatment of this issue.

I guess there is no real reason to mince words here.  The only bank engaging in this practice is Wells Fargo (and, perhaps, the wholly-owned Union Bank).  Wells Fargo is a national bank, so that means different circuit courts have to consider the question of whether the practice is permissible.

Favorable Case Precedent

 My firm has offices in Florida, California and New York, so this article will focus on those jurisdictions.  As for California and New York, there is good news.  There is case precedent out of both the 9th Circuit (California) and the 2nd Circuit (New York) that is favorable to debtors.  Specifically, the courts have largely held that Wells Fargo’s practice is a violation of the bankruptcy code’s automatic stay provision.

As for Florida, there is some bad new . . . though it’s not time to totally throw in the towel.  The court in In re Young, 2010 WL 3965698 (Bankr. M.D. Fla. 2010) upheld Wells Fargo’s practice, finding that the account funds belong to the bankruptcy trustee after the case is filed.  As a result, (i) the Debtor is not entitled to the automatic stay, and (ii) the Debtor does not even have standing to challenge the bank’s actions.

Well, okay, that is not good, but it is not the end of the analysis.  First, the decision was in the Middle District of Florida only, so the Northern and Southern districts are not bound by the ruling and could certainly go a different direction.  Also, even in the Middle District, not all courts judges are bound by the decision.

Responsive Letter to Wells Fargo

If this situation applies to you and you are wondering what to do about it, here is a suggestion.

Our firm tends to take an aggressive stance when it comes to dealing with creditors.  Generally speaking, we find there is not a whole lot to be gained from being too soft-handed.  In this situation, the bank has already drawn first blood and demonstrated it is going to be antagonistic, so it does not seem you have much to loss by pushing back.

Here is a template letter you can use:

Via Fax & US Mail

[ Name of Bank Employee ]

[ Name of Bank ]

[ Address ]

RE: NOTICE OF VIOLATION OF AUTOMATIC STAY, PER 11 USC 362, THROUGH FREEZING OF DEBTOR’S BANK ACCOUNT

Debtor:

Case No.:

Dear Mr./Ms. _____________:

Please note this law firm represents the above-referenced debtor (the “Debtor”) such that future communications should be directed to my attention per the contact information below.

Our office recently received your correspondence, date February 26, 2015, indicating your bank has frozen the Debtor’s bank account pending instructions from the Chapter 7 Trustee. The purpose of this letter is to advice your office of its violation of the Automatic Stay imposed pursuant 11 USC 362 and provide you an opportunity to release the Debtor’s funds without costly motion practice.

While there has been some disagreement amoung the circuits as to the propriety of your company’s policy to freezing debtor accounts, the weight of the authority is on the side of finding your conduct to be a violation of the Bankruptcy Code worthy of sanctions.

Perhaps the Court in In re Weidenbenner, 521 B.R. 74 (Bankr. SDNY 2014) said it best:

After the bankruptcy case was filed, Wells Fargo did not create new deposit accounts in the trustee’s name. Instead, it placed a hold on a tangible amount of money in Debtors’ bank accounts. As Ms. Tafoya’s testimony at the evidentiary hearing demonstrates, Wells Fargo, by itself, made the determination to only place a freeze on accounts of $5,000 or more. The freezing of deposit accounts was not mandated by the Bankruptcy Code, ordered by the Court, or requested by the chapter 7 trustee. Wells Fargo simply decided to place a freeze on property of the estate and unilaterally determined who was allowed to access it. The Court cannot think of a better example of “control over property of the estate.”11 U.S.C. § 362(a)(3); seeIn re Mwangi, 432 B.R. 812 (B.A.P. 9th Cir. 2010)  (“Wells Fargo asserts it did not exercise control over property of the estate. We disagree. 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, by way of a motion for relief from stay or otherwise, regarding the account funds; it did not. Instead, it chose to holdthe 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.”); see also In re Kessler, 2011 Bankr. LEXIS 994, 2011 WL 1042617, at *2 (Bankr. S.D. Cal. Mar. 4, 2011) (“[T]he Court agrees it necessarily follows that the Estate Funds are protected by the automatic stay.”).

Accordingly, your office is hereby advised of its violation of the Bankruptcy Code and demands immediate release of the frozen funds. Should your office fail to say release said funds within 48 hours, our office will be obliged to bring the matter before the judge and ask that (I) the Court enter an order requiring release of the funds, (II) the Court sanction your bank as a punitive measure, and (III) the Court award costs and fees for the action against your office.

Thank you for you prompt and positive response to this notification. For any questions or concerns, please feel free to contact me by the information below.

Best regards,

Naturally, the letter will not carry the same weight coming from the Debtor as it would from a lawyer’s office.  Nonetheless, it is worth a try.  You have nothing to lose, right?

If the letter does not do the trick, let us know.  We cannot say for sure what your judge will do about the bank’s conduct, but we think Wells Fargo is treading on thin ice.

~ Jeff Harrington, Esq.