An Accelerating Thaw: Revisiting the Legality of Administrative Bank Freezes

September 2012Articles American Bankruptcy Institute Journal

An article in the November 2010 Journal addressed the policy of certain financial institutions, most notably Wells Fargo, of automatically freezing the bank accounts of consumer debtors. While banks such as Wells Fargo had employed the policy for years, likely consternating countless debtors, case law had been sparse until the Ninth Circuit Bankruptcy Appellate Panel (BAP) issued its opinion in In re Mwangi in June 2010. Mwangi spurred a series of decisions from various courts, largely repudiating the Ninth Circuit BAP’s logic in Mwangi. Consequently, any comfort that consumer debtors may have drawn from Mwangi has been greatly disquieted. Given the stream of post-Mwangi opinions, this article takes an updated look at the issue of administrative freezes, including in a chapter 11 context.

A Look Back

To refresh (or for those unfamiliar), certain financial institutions have implemented policies whereby they automatically freeze a debtor’s bank accounts upon learning of that debtor’s bankruptcy filing, irrespective of whether a debtor has claimed any exemptions in the funds. In instances involving Wells Fargo, the bank typically issues a letter to the debtor explaining that the accounts have been frozen in accordance with §§ 541 and 542 of the Bankruptcy Code, and another letter to the debtor’s trustee requesting direction as to the disposition of the impounded funds. The funds will lie in stasis until the trustee instructs otherwise, potentially remaining frozen for weeks until the trustee has had opportunity to question the debtor at the meeting of creditors.

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