Administrative Pledge of Funds Placed Post-Bankruptcy is Not a Willful Violation of the Stay Because Debtors Had No Rights to Possession or Control of Such Funds

In Mwangi v. Wells Fargo Bank, N.A., Case No. 12-16087, published on August 26, 2014 by the Ninth Circuit Court of Appeals ("Court"), the Court upheld the dismissal of the debtors' adversary proceedings against Wells Fargo Bank ("WFB") for placing a "temporary administrative pledge" on the debtors' accounts post-bankruptcy. The Court held that there was no willful violation of the automatic stay because (1) the account funds were property of the estate and thus, (2) the debtors had no right to possession or control of the funds and (3) that after the funds revested in the debtors, the funds were no longer estate property. Thus, the funds were "no longer subject to the protections of ยง362(a)(3)'s automatic stay provision." 

WFB held the funds in four separate accounts, only 2 of which were initially scheduled by the debtors and none of which were initially claimed exempt. After WFB informed the trustee and the debtors of the hold on the funds, the debtors amended their schedules to include all 4 accounts and to claim an exemption as to 75% of the funds. The debtors requested the hold on the funds be lifted but WFB refused to do so without the consent of the trustee. The bankruptcy court denied a motion of the debtors seeking sanctions against WFB on the grounds that the automatic stay only applies to property of the estate and exempt property is not property of the estate. The BAP reversed, finding that the debtors had an inchoate interest in the funds which were part of the estate, that a right to claim exemptions bestows standing on debtors to pursue sanctions for violation of the stay and that WFB had exercised control over estate property.

The debtors then filed an adversary proceeding against WFB that the bankruptcy court dismissed on the grounds that only the trustee has standing to protect estate property and that the debtors could not allege injury to any inchoate interest they might have because they had no right to possess estate property. On appeal to the district court, the district court held that exempt property, upon expiration of the 30 day objection period, immediately passes to the debtor unless that statute permitting an exemption only allows an exemption in a certain portion of the interest, in which case, the asset remains estate property. The district court found that the Nevada statute at issue here allows the debtors to exempt the entire interest. So, during the 30 day objection period, WFB could not violate the stay because the funds were estate property and the debtors had no right to possess or control those funds. After the objection period ran, the funds passed out of the estate at which time WFB could not have violated Section 362(a)(3) which only applies to estate property. The Court affirmed the district court's findings on essentially the same grounds.

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