On August 26, 2014, the Ninth Circuit Court of Appeals held that Wells Fargo (the “Bank”) did not violate the automatic stay by placing a temporary administrative hold on a chapter 7 debtor’s bank accounts.  See In re Mwangi, 2014 WL 4194057 (9th Cir. 2014).  Holland & Hart represented the Bank in this significant victory.

The United States Supreme Court long ago held that a bank may impose an administrative hold on a debtor’s bank account to preserve the bank’s setoff rights.  See Citizen’s Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  The Ninth Circuit’sMwangi decision builds on the Strumpf holding and establishes that an administrative hold may be proper even if its purpose is not to preserve setoff rights.

Facts

The Mwangis, chapter 7 debtors, held four accounts at the Bank with an aggregate balance of $52,000.  When the Bank became aware of the Mwangis’ bankruptcy filing, it placed an administrative hold on all four accounts, and sent two letters: one to the chapter 7 trustee requesting instructions as to how to dispose of the account funds, and one to the Mwangis’ counsel informing him of the administrative hold that would last until the Bank received instructions from the Trustee or until 31 days after the meeting of creditors.

The Mwangis requested that the Bank lift the administrative hold.  The Bank refused to do so without the chapter 7 trustee’s consent.  The Mwangis then moved for sanctions, alleging that the Bank willfully violated the automatic stay, which motion the bankruptcy court denied.  The Mwangis then filed a class action adversary proceeding on the same basis.  The bankruptcy court dismissed the adversary action with prejudice, and the district court affirmed. 

Statutory Background

The filing of a bankruptcy petition gives rise to an automatic stay that prohibits, among other things, “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.”  SeeBankruptcy Code § 362(a)(3).  It also automatically creates an estate that includes all legal or equitable interests of the debtor.  See Bankruptcy Code § 541(a).  On the petition date, a chapter 7 debtor is required to turn over to the chapter 7 trustee all of the debtor’s property.  See Bankruptcy Code § 521(a)(4).  Pursuant to Bankruptcy Code § 522, the Debtor may claim certain property as exempt from the estate, and if no party objects to the exemption, the property becomes exempt, in most cases, 30 days after the meeting of creditors.  See Fed. R. Bankr. P. 4003(b)(1).  A Nevada statute exempts from a debtor’s estate 75% of the debtor’s weekly disposable earnings.  See Nevada Revised Statutes § 21.090(1)(g). 

The Ninth Circuit’s Holding

The Mwangis argued that they were injured by the administrative hold during two periods: (1) after the Debtor claimed the property as exempt, but before the exemption became effective; and (2) after the exemption became effective. 

The Ninth Circuit held that the Mwangis could not allege a plausible injury relating to either period.  After a debtor claims property as exempt, but before the objection period expires, the allegedly exempt property remains property of the estate. Mwangi at *7.  Thus, during that period, the Mwangis had no right to possess or control the accounts funds, and could allege no plausible injury.

When the objection period expires (typically 30 days after the meeting of creditors), exempt property revests in the debtor and ceases to be property of the estate.  The Mwangis alleged a violation of § 362(a)(4), which notably refers only to property of “the estate,” not property of the debtor.  Thus, once the exempt account funds revested in the Mwangis, the Bank’s administrative hold could not violate § 362(a)(4) because it did not affect estate property.  Id.

Conclusion

The Mwangi decision, like the Supreme Court’s 1995 Strumpfdecision, should comfort banks that seek to impose administrative holds on debtors’ bank accounts.  This is particularly true where, as in Mwangi, the bank’s motivation for the administrative hold is to comply with the Bankruptcy Code and Rules.