A recent decision from the United States District Court for the Southern District of New York upheld the “Administrative Pledge Policy” of Wells Fargo Bank N.A. This decision echoed earlier court decisions, including from the 9th Circuit Court of Appeals, and the 1995 U.S. Supreme Court decision in Citizens Bank of Maryland v. Strumpf. It reflects a good outcome for depositary institutions dealing with depositors who file bankruptcy.
Wells Fargo maintains a policy it calls the Administrative Pledge Policy. Under this policy, when an individual with a balance at Wells Fargo files for bankruptcy, Wells Fargo freezes funds in that debtor’s accounts if they exceed $5,000.00 in the aggregate. At the time that Wells Fargo learns of such bankruptcies, it places the accounts on “bankruptcy status” and freezes the debtor’s ability to access the funds. At the same time, it writes to the Trustee in bankruptcy advising of the existence of the accounts, and putting the funds at the Trustee’s disposal.
In Weidenbenner v. Wells Fargo, the Weidenbenners brought an action against Wells Fargo asserting that this policy constituted a willful violation of the automatic stay. One of the strongest protections for a debtor in bankruptcy is that creditors are not allowed to take steps to control or seek to obtain the property of the debtor or of the bankruptcy estate once the bankruptcy is filed. The bankruptcy estate, generally speaking, consists of all of the property belonging to the debtor at the moment the bankruptcy case begins.
Here, the Weidenbenners took the position that Wells Fargo’s conduct in freezing their accounts was a violation of the automatic stay. The court found that it was not, because Wells Fargo was merely providing the funds to the Trustee, to be released at the Trustee’s direction.
The Weidenbenner Court determined that Wells Fargo’s refusal to release debtors’ funds at debtors’ direction post-bankruptcy was not an attempt to exercise control over property of the bankruptcy estate. Following the reasoning of Strumpf, it recognized that the bank’s temporary refusal to allow withdrawals from an account can be consistent with the automatic stay. The same principle enables banks and credit unions with set-off rights to place an administrative freeze on debtors’ accounts while at the same time seeking relief from the automatic stay from the bankruptcy court.
To be clear, Wells Fargo’s policy does not involve the bank seizing funds in the debtors’ accounts. It only involves refusing to pay such funds at debtors’ direction and requesting direction from the Bankruptcy Trustee. It is frequently the case that debtors’ property is “claimed as exempt” and subsequently re-vests in the debtor. However, there is a thirty-day period in which the Trustee can object to exemptions, during which time such accounts may be payable on the order of the Trustee pursuant to 11 U.S.C. §542(b). Any creditor, as well as the Bankruptcy Trustee, may file objections to a Debtors’ list of property claimed as exempt.
For banks which do not maintain a policy like that of Wells Fargo, there may be no immediate implication of this decision on your activities. That being said, this case represents a helpful precedent for a depositary institution’s right to temporarily freeze accounts pursuant to the bankruptcy code.