When I conduct an initial consultation with a client, I’m always careful when I hear that client has a bank account with Wells Fargo. That’s because if a person files a Chapter 7 case, and if they have more than $5,000 in Wells Fargo bank accounts at the time of filing, Wells Fargo “freezes“ those bank accounts until otherwise instructed by the Chapter 7 trustee.
Needless to say, these freezes are very frustrating to deal with, and a nuisance to have to avoid by such methods as cashing out the accounts prior to filing. Unfortunately, in California the practice is likely to continue for the time being: In October, the Ninth Circuit Court of Appeals (in the case of In re Mwangi, 764 F.3d 1168, 1179 (9th Cir. 2014)) affirmed its earlier holding that only the Chapter 7 Trustee has the standing to assert an injury based on such freezes.
However, in a more recent case (In re Weidenbenner, No. 14-35443, 2014 Bankr. LEXIS 5009 (Bankr. S.D. N.Y. Dec. 12, 2014)), the Bankruptcy Court for the Southern District of New York has reached the opposite conclusion. There, the Court held that such freezes are indeed an “exercise of control over property of the estate”; they are not “mandated by the Bankruptcy Code, ordered by the Court, or requested by the chapter 7 trustee.” It also rejected Wells Fargo’s argument that the freezes were required under § 452(b) as a misreading of prior caselaw (specifically, Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995)). Finally, as to the standing issue, the Court held that the holdings in cases such as Mwangi are “not consistent with the Code and the practical realities of debtors’ lives.”
It is probably wishful thinking to hope that because the practice is now outlawed in New York, Wells Fargo will voluntarily abandon it in other parts of the country. Perhaps the opinion will persuade other courts to come to the same conclusion, until the Ninth Circuit sees its mistake and changes its mind. In the meantime, Chapter 7 debtors in California will just have to continue moving their money out of Wells Fargo accounts before filing.