by Like a ray of sunshine through a storm of obfuscation and false compliance, the Bankruptcy Court for the Southern District of New York found that Wells Fargo’s administrative freeze on bankruptcy debtors’ accounts violates the automatic stay, and debtors injured by the violation have standing to seek damages. In re Weidenbenner, No. 14-35443, 2014 Bankr. LEXIS 5009 (Bankr. S.D. N.Y. Dec. 12, 2014).
In an all-too familiar scenario, the debtors filed for chapter 7 bankruptcy protection and Wells Fargo immediately placed an administrative freeze on all four of their Wells Fargo accounts. As a result of the freeze, a pre-petition check to Kohl’s bounced and the debtors incurred an insufficient-funds penalty. The debtors filed a motion seeking damages for violation of the automatic stay.
After a hearing in which the court demanded the attendance of a “high ranking” Wells Fargo employee to explain the purpose of the policy, Chief Judge Cecelia G. Morris began her analysis with the plain language of section 362(a)(3). That section prohibits any act to obtain possession of, or exercise control over, property of the estate. Wells Fargo argued that, under language out of Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), its administrative freeze merely transferred a debt owed to the debtor to a debt owed to the trustee. The court was unimpressed. It found that, even if that argument were a correct interpretation of Strumpf, it did not change the fact that, under the plain meaning of section 362(a), Wells Fargo exercised control over by the accounts by preventing access to the funds. Agreeing with the appellate panel in In re Mwangi, 432 B.R. 812 (B.A.P. 9th Cir. 2010), the court stated: “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.’”
The court found Wells Fargo’s “grandstanding” that its policy is merely its humble attempt to comply with its obligations under section 542(b) [rather than a gratuitous swift kick to the ribs of the financially distressed debtor] not credible. That Wells Fargo freezes accounts only when the amount involved meets the $5,000 threshold demonstrates the arbitrary nature of the policy and defeats its own justification. If the turnover provision requires a freeze, it requires a freeze of all debtor accounts regardless of amount involved. But more importantly, the court found that Strumpf does not give license to banks to freeze debtor accounts. Strumpf was limited to set-off rights and the Court specifically warned against expanding its holding beyond the facts of that case. Strumpf, therefore, should not be read to add to the 28 exceptions to the automatic stay listed in section 362(b).
As to the question of standing, the court found that the debtors, who were penalized for a pre-petition check that bounced due to the freeze, were injured by the automatic stay violation under section 362(k). The court rejected the holding by other courts, i.e. In re Mwangi, 764 F.3d 1168, 1179 (9th Cir. 2014), that because the debtor has no right to the funds, the trustee is the only party with standing to assert an injury based on Wells Fargo’s administrative freeze, finding that “[t]his approach is not consistent with the Code and the practical realities of debtors’ lives.” Noting that the Code imposes a duty upon debtors to surrender assets to the bankruptcy estate, the court found that by listing the accounts on schedule B on the bankruptcy petition, the debtors complied with their obligation. After that, it is the trustee’s burden to police debtors’ use of estate assets, and any misuse by the debtors does not negate Wells Fargo’s violation of the stay. Because the debtors in this case suffered an actual injury by incurring an insufficient-funds penalty, they had standing under section 362(k) to seek an award of damages. Under the mandatory language of that section the court awarded actual damages in the amount of $25.00, plus attorney’s fees and costs.
Weidenbenner Bankr SD NY opinion