Bankruptcy Debtors scored a big win last week when the Ninth Circuit Bankruptcy

Appellate Panel held that Wells Fargo's national policy of placing an administrative freeze on Debtors' bank accounts when they file a bankruptcy petition violates the automatic stay by exercising control over property of the Debtor's bankruptcy estate in violation of Bankruptcy Code section 362(a)(3).

The automatic stay is a protection that activates upon the fling of a bankruptcy petition. Once a bankruptcy petition is filed, no person or entity can take any action against the Debtor to recover money, property, wages, bank accounts, conduct foreclosures or repossessions, or conduct any other collection activity against the Debtor without first receiving bankruptcy Court permission to do so. This permission, however, typically applies only to certain creditors such as mortgage or car loan companies. Even then, the lender can only seek recovery of the property at issue and cannot seek repayment for whatever loss occurs.

What happened in this case was that Wells Fargo would discover that one of their account holders filed a bankruptcy case. Once they were aware that one of their customers had filed a bankruptcy case, Wells Fargo's bank branches including Wachovia (remember, Wells Fargo bought Wachovia after the meltdown) would freeze their customers' bank accounts and would not release any funds to their customers until the bankruptcy trustee abandoned his interest in the bank accounts. What is seemingly illogical, however, is the fact that even in the situation where Debtors' bank accounts were exempt and not part of the bankruptcy estate, Wells still refused to release the accounts pending bankruptcy trustee approval. This abandonment typically takes months to accomplish. As a result, Debtors on fixed income, such as Social Security, Civil Service Pensions, etc.., that also had their income direct deposited, lost access to their funds for a significant amount of time, long enough to fall behind on their rent or electric bill. But beware that the control exercised over these bank accounts by Wells Fargo did not apply in the situation where Wells retained a right to set-off, meaning bank account funds could be seized to set off a debt that was owed by the Debtor to their particular banking institution, even though the Debtor did file bankruptcy (that's why it's always a good idea to close a bank account before filing, if you owe money to the bank where your funds reside). In the case decided by the 9^th Circuit Court of Appeals, the Debtors had owed Wells no money whatsoever. But Wells still exercised control and dominion over the bank accounts. The Court ruled that this was illegal!

The 9^th Circuit Court of Appeals was blistering in its opinion: "Wells Fargo asserts it did not exercise control over property of the estate. We disagree. Wells Fargo could have paid the account funds to the trustee; it did not. Wells Fargo could have released the account funds claimed exempt to the [debtors] when demand was made; it did not. Wells Fargo could have sought direction from the bankruptcy court, by way of a motion for relief from stay or otherwise, regarding the account funds; it did not. Instead, it chose to hold the funds until a demand was made for payment that it alone deemed appropriate. If that is not exercising control over the funds, we don't know what is." The Decision came from a three Judge Panel called the Bankruptcy Appellate Panel.

Bankruptcy Appellate Panels (BAP) are three judge panels of the United States bankruptcy courts who are appointed to hear appeals of bankruptcy court decisions under the supervision of the United States Courts of Appeals. BAP's were established under the Bankruptcy Reform Acts of 1978 and 1994. 28 U.S.C. §§158 sets forth the jurisdiction for appeals of bankruptcy decisions and authorizes the establishment of BAP's upon the order of the Circuit Judicial Councils. Not every Circuit has a BAP. But in each of the Judicial Circuits the BAP's have its own local rules of practice, in addition to the Federal Rules of Bankruptcy Procedure and the Federal Rules of Appellate Procedure. BAP Judges continue to serve as active bankruptcy judges in addition to their duties on the appellate panel. So far in the United States only the First, Sixth, Eighth, Ninth and Tenth Circuits have established these Panels'.

For those of you interested the case is called In re Mwangi, Case No. 09-1408 (9th Cir. B.A.P., June 30, 2010)