The Weidenbenners (aka the “Debtors”) had four accounts with Wells Fargo that held $6,923.54 when they filed for chapter 7 protection on March 7, 2014.  At the time they filed their petition, they claimed as exempt all of these funds.  Upon learning of the bankruptcy filing on March 12, 2014, Wells Fargo placed an administrative freeze on the funds in the accounts as of the filing date, which caused certain checks issued by the Debtors to bounce and the Debtors to incur a $25.00 penalty during the post-petition period.

On March 12, the same day as it placed the administrative freeze on the Debtors’ accounts, Wells Fargo sent a notice to the chapter 7 trustee in which Wells Fargo advised the trustee of the freeze and requested directions as to what should be done with the funds.  On March 17, the trustee directed Wells Fargo to release the entire amount of the funds to the Debtors.  On that same day, Wells Fargo released the funds to the Debtors.

It is axiomatic that, at the time of a filing, property of the debtor becomes property of the estate and the chapter 7 trustee steps into the debtor’s shoes as the estate’s fiduciary.  It is also clear that property claimed as exempt remains property of the estate until it revests with the debtor.  Neither the Weidenbenners nor Wells Fargo disputed that the $6,923.54 became property of the Weidenbenners’ estate on March 7, 2014.  Nor was there any suggestion that, at any time on or after March 7, 2014, Wells Fargo prevented the chapter 7 trustee from accessing the funds in the Weidenbenners’ deposit accounts.  Further, funds in excess of $6,923.54 deposited in any of the accounts during the post-petition period remained available to the Weidenbenners at all times.

The facts appear relatively innocuous.  In effect, the bank placed an administrative freeze on a portion of the Debtors’ funds that clearly constituted property of the estate and that belonged exclusively to the chapter 7 trustee absent directions to the contrary by the trustee.  However, in a decision earlier this month in In re Weidenbenners, the Bankruptcy Court for the Southern District of New York  ruled that Wells Fargo violated the automatic stay by placing the administrative freeze on the accounts, because doing so was exercising control over property of the estate in contravention of section 362(a)(3).

At its core, the Bankruptcy Court’s ruling relied on the plain meaning of “to exercise control”.  The Bankruptcy Court held that to prohibit from a debtor the beneficial use of property of the estate—even where it did not have the right to use the property—fit within the plain meaning of “to exercise control.”

Wells Fargo argued that its control over the Debtors’ bank accounts was nothing more than its control over a debt owed to the Debtors that, upon the filing, became owed to the chapter 7 trustee.  The Bankruptcy Court’s decision does not appear to seriously entertain this argument because it ruled that even if this was the case, the administrative freeze amounted to an exercise of control over the Debtors’ deposits, which were property of the estate.

Four aspects of the Bankruptcy Court’s ruling are troublesome.  First, its reliance on the plain meaning of “to exercise control” would render any action by Wells Fargo, including inaction, to be a violation of the automatic stay.  After all, the funds are in bank accounts at Wells Fargo.

Second, the ruling suggests that the turnover provision in section 542 does not cabin, in any way, section 362(a)(3).  It’s hard to see how an action in furtherance of the automatic stay, and in the spirit of section 542, violates the automatic stay.

Third, the Bankruptcy Court’s dismissal of the relevance of Wells Fargo’s argument that the bank accounts equated to a promise to pay is fundamentally flawed.  A promise to pay is an asset that is contractual in nature.  A breach of that promise gives rise to a claim that belongs to the estate.  This is a far cry from exercising control over estate property.  In short, for the Bankruptcy Court to get to the outcome it got to, it would need to dismiss this argument outright.  It didn’t.

And fourth, the Bankruptcy Court’s ruling that the Debtors had standing to seek damages appears to hinge wholly on whether the estate property is exempt or non-exempt, and ignores the fact that the funds were under the exclusive control of the chapter 7 trustee at the time that the injury occurred.

Stay tuned for whether an appeal is coming.  At the very least, this case is a good reminder that counterparties must be treated with the kindest of gloves upon their filing a bankruptcy petition.  The automatic stay is deep, wide and long.