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In re Mwangi

June 30, 2010

IN RE: ERIC MWANGI AND PAULINE MWICHARO, DEBTORS.
ERIC MWANGI; PAULINE MWICHARO, APPELLANTS,
v.
WELLS FARGO BANK, N.A., APPELLEE.



Appeal from the United States Bankruptcy Court for the District of Nevada Hon. Bruce A. Markell, Bankruptcy Judge, Presiding. Bk. No. 09-24057-BAM.

The opinion of the court was delivered by: Dunn, Bankruptcy Judge

ORDERED PUBLISHED

OPINION

Argued and Submitted on June 16, 2010 at Reno, Nevada

Before: DUNN, HOLLOWELL and PAPPAS, Bankruptcy Judges.

As part of its standard, national procedures, each night Wells Fargo Bank, N.A. ("Wells Fargo") runs a computerized comparison of all newly filed Chapter 7*fn1 bankruptcy cases against its list of account holders. Upon discovering that Appellants had filed a chapter 7 petition, Wells Fargo "froze" Appellants' accounts and sent a letter to the chapter 7 trustee, seeking instructions as to disbursement of the funds. No directions were forthcoming from the trustee. The debtors, claiming 75% of the funds in the accounts exempt, demanded that Wells Fargo release funds to them. When Wells Fargo refused, Appellants sought sanctions for willful violation of the automatic stay. The bankruptcy court held that the exempt funds in the accounts were not property of the bankruptcy estate. As a consequence, it determined that Wells Fargo's failure to release the funds did not constitute a violation of the automatic stay where the record did not establish that Wells Fargo was attempting to "collect, assess or recover" a prepetition claim it had against Appellants.

We REVERSE and REMAND for further proceedings.

I. FACTS

Appellants Eric Mwangi and Pauline Mwicharo filed a voluntary chapter 7 petition on August 3, 2009 ("Petition Date"). On the Petition Date, Appellants held four accounts at Wells Fargo with an aggregate balance of $17,075.06. Nevertheless, in their schedule of personal property ("Schedule B") filed on the Petition Date, the Appellants listed only two accounts at Wells Fargo: a checking account with a stated value of $500.00 and a savings account with a stated value of $800.00. The Appellants did not claim the amounts on deposit in either of these accounts as exempt in their schedule of claimed exemptions ("Schedule C").

The Appellants included Wells Fargo as a creditor in the case for two debts. Wells Fargo was scheduled as an unsecured creditor owed $50,000 for credit card debt incurred during the period 2006-2009. Wells Fargo also was listed as an unsecured creditor owed $2,000 based on an equity line of credit incurred in 2004.

When it learned of Appellants' chapter 7 bankruptcy filing, Wells Fargo placed a "temporary administrative pledge" on their accounts.*fn2 Wells Fargo states that in doing so, it was following an internal standard procedure implemented when notified that one of its depositors has filed a bankruptcy petition. After freezing Appellants' accounts, Wells Fargo sent a letter dated August 6, 2009, to the chapter 7 trustee requesting instructions as to whom Wells Fargo should distribute the account funds. In the letter to the trustee, Wells Fargo states that on the Petition Date:

$17,075.06 became property of the bankruptcy estate, known as the "Estate Funds." The Estate Funds are now in bankruptcy status, which means the funds are payable only to you or upon your order. . . . The Estate Funds will remain in bankruptcy status until we receive direction from you regarding their disposition or on October 12, 2009, which is 31 days afer the scheduled First Meeting of Creditors.

Also on August 6, 2009, Wells Fargo sent letters to Appellants' counsel, which stated that the aggregate funds in the total amount of $17,075.06 became property of the bankruptcy estate on the Petition Date. In its letters to Appellants' counsel, Wells Fargo states that the account funds "are no longer available to your client(s)." The letters state further that Wells Fargo is required by Bankruptcy Code sections 541 and 542 to preserve the Estate Funds and to follow the trustee's direction with regard to the Estate Funds. The letters disclose that Wells Fargo had requested instruction from the trustee with respect to the Estate Funds, but advised that the trustee had "30 days from the First Meeting to object to a claim of exemption for the Estate Funds." Finally, the letters described what, in Wells Fargo's view, Appellants' rights were with respect to the Estate Funds:

Ownership of claimed exempt property remains with the bankruptcy estate until [the time for objecting to claimed exemptions] elapses or the trustee directs otherwise. Wells Fargo is prepared to immediately follow the trustee's direction regarding the Estate Funds, and you may be able to expedite the trustee's decision.

On August 11, 2009, Appellants filed an amended Schedule B in which they now included four accounts at Wells Fargo: checking account #7070 listed with a value of $10,247.46; savings account #9955 listed with a value of $839.42; checking account #8658 listed with a value of $5,437.95, and savings account #0424 listed with a value of $550.23. More importantly for purposes of this appeal, Appellants also filed on August 11, 2009, an amended Schedule C through which they claimed an exemption in 75% of the value of each of the Wells Fargo accounts, relying on Nev. Rev. Stat. § 21.090(1)(g). Neither the trustee nor any other party,*fn3 including Wells Fargo, ever objected to the exemptions claimed by Appellants in the accounts.

On August 18, 2009, Appellants' counsel contacted Wells Fargo to request that the freeze be lifted on the basis that the Appellants claimed an exemption in a portion of the funds. Wells Fargo refused to lift the freeze without the trustee's agreement. On August 25, 2009, Appellants' counsel faxed a letter to Wells Fargo asserting that Appellants claimed an exemption in 75% of the account funds. The letter asserted the Appellants' position that failure to release the account funds to the Appellants was a violation of the automatic stay, and informed Wells Fargo of Appellants' intent to file a motion seeking attorney's fees, sanctions, and punitive damages for the violation.

On August 27, 2009, Appellants filed a motion ("Motion") seeking sanctions pursuant to § 362(k) against Wells Fargo based upon its alleged intentional violation of the automatic stay-- specifically, §§ 362(a)(3) and (a)(6).

The bankruptcy court held a hearing on the Motion on September 15, 2009, took the matter under submission at that time, and issued its Memorandum decision on December 10, 2009, denying the Motion.

The bankruptcy court's ruling was premised on its holding that exempt property never becomes property of the bankruptcy estate but remains at all times a debtor's property.

Accordingly, the bankruptcy court determined that no provision of § 362(a) covering property of the estate protected the account funds claimed exempt. Finally, the bankruptcy court determined that because Wells Fargo took no action to "collect, assess or recover" a prepetition claim it had against Appellants, it did not violate the automatic stay.

Appellants timely filed their notice of appeal on December 18, 2009.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUES

1. Whether the bankruptcy court erred when it concluded that exempt property never becomes property of the bankruptcy estate but remains at all times a debtor's property.

2. Whether the Appellants had standing to file and ...


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