Ninth Circuit BAP Gives Cold Treatment to Blanket Account Freeze

By: Amanda L. Lewis
St. John's Law Student
American Bankruptcy Institute Law Review

In Mwangi v. Wells Fargo Bank, N.A., (In re Mwangi)[1] the Ninth Circuit BAP recently held that an automatic freeze of the bankruptcy debtors’ accounts, which was unrelated to a right of setoff, constituted an exercise of control over estate property in violation of the automatic stay.[2] The chapter 7 debtors had four bank accounts at Wells Fargo, which was also a creditor of the debtors.[3] Upon learning of the debtors’ bankruptcy filing, Wells Fargo froze the debtors’ accounts.[4] The freeze was implemented, not to assert any right of setoff that Wells Fargo had, but rather pursuant to the bank’s policy to freeze accounts of all customers that file a bankruptcy petition.[5] Wells Fargo refused to release 75% of the funds, the portion that debtors had claimed as exempt.[6] 

In holding that Wells Fargo’s automatic freeze constituted an exercise of control over estate property, the Ninth Circuit BAP distinguished this case from the Supreme Court’s decision in Strumpf.[7] In Strumpf, the Court held that the bank’s temporary freeze of debtor’s accounts, instituted as a means of preserving its right of setoff, was acceptable because the accounts constituted a promise to pay rather than property of the debtors, so the freeze could not be an exercise of control over estate property.[8] This finding was consistent with section 553 of the Bankruptcy Code, which generally preserves the right of a creditor to offset a mutual debt that arose prior to the debtor’s bankruptcy filing.[9] Accordingly, the Ninth Circuit BAP in Mwangi interpreted the holding in Strumpf as limited to those cases in which the bank was asserting a right of setoff under section 553 and instituted a temporary freeze of accounts as a means of alerting the debtor of this assertion.[10] This view differs from the holding of other bankruptcy courts, which have interpreted Strumpf much more broadly as holding that an administrative freeze of a debtor’s accounts is not an exercise of control over property in violation of the automatic stay.[11] Mwangi limits this general proposition to a far narrower circumstance, stating that funds may only be held temporarily and only by a creditor asserting a right of setoff.[12]

This case is significant because it limits the circumstances in which banks may institute freezes of customer accounts. It prohibits the use of a blanket automatic freeze, as employed by Wells Fargo, in which all customers that have filed bankruptcy are subject to an automatic freeze of their funds, regardless of any rights the bank may or may not have. Now a freeze is only appropriate in those cases where the creditor is attempting to preserve a prior right to setoff against the particular debtor. Bankruptcy debtors will likely view this decision in a positive light, since it places restrictions on automatic freezes and requires justification for such action by a bank.