OPINION ORDER GRANTING PLAINTIFFS' MOTION TO FILE AMENDED COMPLAINT
SEAN COX, District Judge
This matter is currently before the Court on Plaintiffs' motion to file an amended complaint. The Court finds that the issues have been adequately presented in the parties' briefs and that oral argument would not significantly aid the decisional process. See Local Rule 7.1(e)(2), U.S. District Court, Eastern District of Michigan. The Court therefore orders that the motion will be decided upon the briefs. For the reasons that follow, the Court shall GRANT the motion,
Acting pro se, on June 22, 2010, Plaintiffs Labeed Nouri and Rouwaida Nouri ("Plaintiffs") filed this action against Defendants TCF Bank, Sandra Altoon ("Altoon"), Rose Bakow ("Bakow"), Rolanda Bussey (Bussey"), Scott Pardon ("Pardon"), Gary Fineman ("Fineman"), Bob Borksman ("Borksman"), Hala Jarbou ("Jarbou"), Krystal Kirma ("Kirma") and Oakland County Prosecutor.
On July 23, 2010, TCF Bank, Bakow, Bob Borgstrom, Bussey, Fineman, and Pardon filed an Answer to the complaint.
On or about August 13, 2010, Plaintiffs filed a motion seeking to file an amended complaint.
On August 27, 2010, Defendants TCF Bank, Bakow, Bob Borgstrom, Bussey, Fineman, and Pardon filed a brief opposing Plaintiffs' motion to amend. Defendants assert that Plaintiffs' motion to amend is untimely and asserts that Plaintiffs have set forth no justification as to why they did not include the new defendants or new counts in their original complaint and assert that Plaintiffs have "not pointed to any newly discovered evidence or other reason that led to the need for an amendment." (Docket Entry No. 6 at 2).
As Defendants note, leave to amend is be freely given when justice so requires. FED. R. CIV. P. 15(a)(2). In opposing Plaintiffs' motion to amend, Defendants do not assert that amendment would be futile, nor do they identify any prejudice that Defendants would face if the amendment is granted. Moreover, Plaintiffs are proceeding pro se and have requested the amendment at a very early stage in the litigation. Indeed, this Court has not yet even held the initial scheduling conference in this action.
Accordingly, IT IS ORDERED that Plaintiffs' motion to file an amended complaint is GRANTED. Plaintiffs shall file their Amended Complaint within fourteen (14) days of the date of this order.
IT IS SO ORDERED.
Dated: September 29, 2010
in the district court.
See 28 U.S.C. § 1334(a) and (b) (vesting bankruptcy jurisdiction in the district courts). The district court is an Article III court. Bankruptcy courts are an adjunct of the district court.
28 U.S.C. § 151(a). Under
28 U.S.C. § 157(a), district courts may refer the exercise of bankruptcy jurisdiction to bankruptcy judges subject to the limitations set forth in
28 U.S.C. § 157(b), (c) and (d). Under
28 U.S.C. § 157(d), the district court may withdraw in whole or in part any case or proceeding referred to the bankruptcy court. Since the bankruptcy court's jurisdiction is derived from the jurisdiction vested in the districts courts, a bankruptcy court's exercise of such jurisdiction necessarily is subject to any constitutional limitations on the exercise of such jurisdiction by a district court. "The district court cannot delegate to the bankruptcy court for hearing and determination that which the district court itself cannot hear and determine."
Kilen, 129 B.R. at 542. Moreover, the district court would be unable to withdraw its referral of the exercise of bankruptcy jurisdiction to the bankruptcy court, as expressly permitted by
11 U.S.C. § 157(d), if the bankruptcy court were to exercise jurisdiction not vested in an Article III court.
See, e.g., Sprint Communications Co., L.P. v. APCC Services, Inc., 554 U.S. 269, 128 S.Ct. 2531, 2535, 171 L.Ed.2d 424 (2008) ("And in order to have Article III standing, a plaintiff must adequately establish: (1) an injury in fact ( i.e., a `concrete and particularized' invasion of a `legally protected interest'); (2) causation ( i.e., a `fairly . . . trace[able]' connection between the alleged injury in fact and the alleged conduct of the defendant); and (3) redressability ( i.e., it is `likely' and not `merely speculative' that the plaintiff's injury will be remedied by the relief plaintiff seeks in bringing suit") (citation and some internal quotation marks omitted); Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 2136, 119 L.Ed.2d 351 (1992) (standing requires 1) "an invasion of a legally protected interest" which is "concrete and particularized", and "actual or imminent, not conjectural or hypothetical"; 2) that is "fairly traceable to the challenged action of the defendant"; and 3) that is likely to be "redressed by a favorable decision") (citations and internal quotation marks omitted); The Wilderness Society v. Kane County, Utah, 581 F.3d 1198, 1209-1210 (10th Cir. 2009) ("Constitutional standing requires: (1) an injury in fact, (2) causation, and (3) redressability. To satisfy the injury in fact prong, a plaintiff must show an invasion of a legally protected interest, which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical. Causation requires that the injury is fairly traceable to the challenged action of the defendant. Lastly, the redressability prong is met when it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.") (internal citations and quotation marks omitted). Because the Court finds that Plaintiffs do not satisfy the requirements for constitutional standing, it need not consider whether Plaintiffs meet the requirements of prudential standing. See Board of County Commissioners of Sweetwater County v. Geringer, 297 F.3d 1108, 1112 (10th Cir. 2002) (explaining that "a party that has satisfied the requirements of constitutional standing may nonetheless be barred from invoking a federal court's jurisdiction" by failing to meet the requirements of prudential standing.) (citation omitted).
necessarily be an economic interest. In addition, in response to a summary judgment motion, the Plaintiffs "must `set forth' by affidavit or other evidence `specific facts'" to demonstrate standing. Courts are split regarding whether a chapter 7 debtor has standing to pursue a claim for violation of the automatic stay under 11 U.S.C. § 362(a)(3) when a bank that does not have an offset right places an administrative freeze on a bank account. For the reasons explained below, the Court finds that Plaintiffs lack standing to pursue their claim.
See Kane County, 581 F.3d at 1229-1230 (acknowledging that "statutes granting parties with aesthetic interests statutory rights [can confer standing] to challenge agency action" but finding that standing for purposes of the case at bar was "not predicated on any statutes creating judicially enforceable rights of an aesthetic or environmental nature.")
See Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 2136 (1992) (explaining that because the requirements for standing are "an indispensable part of plaintiff's case, each element must be supported in the same way as any other matter on which the plaintiff bears the burden of proof . . .") (citation omitted).
Courts that have determined that the debtor has standing in this situation include: In re Mwangi, 432 B.R. 812 (9th Cir. BAP 2010) and Jimenez I, 335 B.R. 450, rev'd, Jimenez II, 406 B.R. 935. Cf. Moreira v. Digital Employees Federal Credit Union (In re Moreira), 173 B.R. 965, 973 (Bankr. D.Mass. 1994 (holding that debtor has standing to challenge setoff of an account that the debtor claimed exempt).
Several courts, including the United States District Court for the District of New Mexico, have held that a chapter 7 debtor lacks standing to pursue a claim for violation of the automatic stay under 11 U.S.C. § 362(a)(3) when the property constitutes property of the estate for which a claim of exemption has not yet been allowed. See Jimenez II, 406 B.R. 935; In re Calvin, 329 B.R. 589, 601 (Bankr. S.D.Tex. 2005) (holding that the debtor had no standing to assert that a freeze of a bank account that is property of the estate violates the automatic stay; "any cause of action for improper handling of the funds belonged to the Trustee, not the Debtors."); In re Laux, 181 B.R. 60, 61 (Bankr. S.D. Ill. 1995) (finding that the debtor has no standing to allege that a freeze of a bank account that is property of the estate violates the automatic stay because "the only party with standing to raise a violation of § 362(a)(3) is the trustee."); In re Briggs, 143 B.R. 438, 447 (Bankr. E.D.Mich. 1992) (reasoning that while the asset at issue is property of the estate, the debtor lacked standing to assert violation of § 362(a)(7) for the same reason that the debtor lacked standing to assert a violation under § 362(a)(3) or (4)).
This Court is not bound by Jimenez II, the decision of the United States District Court for the District of New Mexico. See In re Romano, 350 B.R. 276, 281 (Bankr. E.D.La. 2005) (holding "that a single decision of a district court in this multi-judge district is not binding upon this [bankruptcy] court."); In re Barakat, 173 B.R. 672, 678-679 (Bankr. C.D.Cal. 1994), aff'd, 99 F.3d 1520 (9th Cir. 1996) (explaining that because "most appellate decisions of the district court are not decisions of the district court en banc, but are decisions of a given district judge and are not binding on other district judges of that district, they should not be seen as binding on the bankruptcy judges of that district.") (citing In re Gaylor, 123 B.R. 236, 241-43 (Bankr.E.D.Mich. 1991)). But see In re Shunnarah, 273 B.R. 671, 672-673 (M.D.Fla. 2001) (finding that the bankruptcy court is bound to follow a published opinion of the District Court unless an opinion that contains a different holding is published.") (citing In re Phipps, 217 B.R. 427 (Bankr.W.D.N.Y. 1998)); Rand Energy Co. v. Strata Directional Technology, Inc. (In re Rand Energy Co.), 259 B.R. 274, 276 (Bankr.N.D.Tex. 2001) (finding that under the federal hierarchical judicial structure, a decision of the district court is binding precedent for the bankruptcy court); Bryant v. Smith, 165 B.R. 176, 180 (W.D.Va. 1994) (reasoning that because bankruptcy courts are not Article III courts, the bankruptcy court is not "free to ignore the clear precedent of the district court . . .").
A. Exempt property is not exempt unless and until a claim of exemption is allowed.
Plaintiffs premise their argument for standing in part on the proposition that property claimed as exempt is exempt, and that a debtor has the right to exercise possession and control over such property unless and until an objection to the claim of exemption is sustained. That premise is flawed.
Property of the estate is not exempt unless and until the time to object to the claim of exemption expires or a timely objection is overruled. Upon allowance of a debtor's claim of exemption, exempt property that a trustee may not administer revests in the debtor and is consequently excluded from the bankruptcy estate. Thus the right to payment of funds on demand from a bank account in which the debtor claims an exemption is excluded from the estate and revests in the debtor only when the time to object to the claim of exemption expires or a timely objection is overruled. Here, because the time to object to Plaintiffs' claim of exemption had not expired at the time Wells Fargo placed the Bank Accounts in "bankruptcy status," the Plaintiffs' property interest in the Bank Accounts was not exempt and remained property of the bankruptcy estate.
See In re Brayshaw, 912 F.2d 1255, 1256 (10th Cir. 1990) ("Under [ 11 U.S.C. § 522(1)], property claimed as exempt automatically becomes exempt [upon expiration of the objection period] unless a party objects."). See also In re Luongo, 259 F.3d 323, 340 n. 3 (5th Cir. 2001) ("property declared exempt on the debtor's schedules becomes exempt if there are no objections"); Mercer v. Monzack, 53 F. 3d 1, 3 (1st Cir. 1995) (property claimed as exempt becomes exempt by operation of law in the absence of a timely objection); In re Allan, 431 B.R. 580, 583 (Bank. M.D.Pa. 2010) (if no timely objection to a claim of exemption made, "the claimed property becomes exempt."); In re Marriott, 427 B.R. 887, 895 (Bankr. D.Idaho 2010) ("Property claimed as exempt by a debtor is not deemed exempt until either the time for filing objections to the debtor's claim of exemption expires under Rule 4003(b), or if an objection is filed, until the bankruptcy court allows the challenged exemption."). Cf. Schwab v. Reilly, 130 S.Ct. 2652, 2661 n. 9, 177 L.Ed.2d 234 (2010). (recognizing bankruptcy court decisions holding that where a debtor claims an exemption in property, the debtor is permitted to exclude from the estate only interests in property that become exempt absent objection).
See Schwab v. Reilly, 130 S.Ct. at 2658 ("If an interested party fails to object within the time allowed, a claimed exemption will exclude the subject property from the estate even if the exemption's value exceeds what the Code permits."); In re Campbell, 313 B.R. 313, 321 (10th Cir. BAP 2004) ("Property claimed as exempt is property of the estate on a debtor's petition date. It revests in the debtor when the exemption is allowed, either by court order or because of the lack of a timely objection.") (citations omitted). See also In re Scrivner, 535 F.3d 1258, 1264 (10th Cir. 2008) ("Generally, if the debtor claims property as exempt and `a party in interest' does not object, that property is exempt from property of the estate.") (citations omitted); Luongo, 259 F.3d at 338 n. 1 ("exempt property leaves the estate and vests in the debtor") (citation omitted); In re Bell, 225 F.3d 203, 215 (2nd Cir. 2000) (the effect of property becoming exempt is "to remove [the] property from the estate and to vest it in the debtor") (citing Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991)); Gamble v. Brown (In re Gamble), 168 F.3d. 442, 443 (11th Cir. 1999) ("exempt property is not part of the bankruptcy estate"). However, if an interest in an asset is exempted from the estate but not the entire asset, such as a vehicle which the trustee may sell for the benefit of creditors, "title to the asset will remain with the estate pursuant to [11 U.S.C.] § 541, and the debtor will be guaranteed a payment in the dollar amount of the exemption." Schwab v. Reilly, 130 S.Ct. at 2667.
B. The Plaintiffs did not suffer injury in fact sufficient to confer standing.
Plaintiffs suffered no injury in fact fairly traceable to Wells Fargo's actions and, therefore, do not have standing to assert a claim under 11 U.S.C. § 362(k)(1). That section provides:
Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.
11 U.S.C. § 362(k)(1).
Similar to the injury-in-fact requirement for constitutional standing, under 11 U.S.C. § 362(k)(1) injury likewise is a requisite to recovery on a claim for willful violation of the automatic stay.
As stated by the Supreme Court in Lujan v. Defenders of Wildlife, "`the injury required by Article III for constitutional standing may exist solely by virtue of `statutes creating legal rights, the invasion of which creates standing.'" Lujan, 504 U.S. at 578, 112 S.Ct. at 2145 (quoting Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)); Kane County, 581 F.3d at 1230 (same). Accord Zivotofsky ex rel. Ari. Z v. Secretary of State, 444 F.3d 614, 617 (D.C. Cir. 2006). However, Congress cannot by statute confer standing to sue on a class of citizens who suffer no distinctive concrete harm. Lujan, 504 U.S. at 576-77, 112 S.Ct. at 2145.
Plaintiffs cannot show an invasion of a legally protected interest during the period they were denied access to the Accounts. The only legally protected interest Plaintiffs identify is their claim of exemption in the Bank Accounts. However, Wells Fargo's actions did not invade that interest because such actions did not impair the Plaintiffs' exemption rights. Wells Fargo neither deprived Plaintiffs access to property during a time that Plaintiffs had a right to access such property, nor did Wells Fargo jeopardize Plaintiffs' full realization of their interest in any exempt property upon allowance of Plaintiffs' claim of exemption.
In re Mwangi, 432 B.R. 812, 821 (9th Cir. BAP 2010), the Ninth Circuit Bankruptcy Appellate Panel found that the debtor's claim of exemption in bank account funds was sufficient to confer standing on the debtor to assert a violation of the automatic stay as a result of Wells Fargo Bank's denial to them of the right to obtain funds by making a demand on Wells to make payment on the Accounts. The Mwangi Court based its finding of standing on its determination that the debtor who claims a bank account exempt has an inchoate interest in the account pending allowance or disallowance of the claim of exemption. The Court does not explain how the debtor's right to claim an account as exempt, coupled with the inchoate interest pending allowance or disallowance of the exemption, results in an injury in fact to the debtor fairly traceable to the conduct of the bank.
Plaintiffs had no legal entitlement to draw and spend funds from the Bank Accounts during the time Wells Fargo denied them access to funds. Upon the commencement of their bankruptcy case, the Plaintiffs' legal and equitable interests in the Bank Accounts became property of the estate in accordance with 11 U.S.C. § 541(a)(1). The Bank Accounts remained property of the estate even though subject to a claim of exemption. Plaintiffs retained an inchoate interest in the Accounts to the extent claimed exempt pending allowance or disallowance of their claim of exemption. "An inchoate interest is an interest that has not fully developed, matured, or vested." Until the Plaintiffs' property interest in the Accounts was deemed or determined to be exempt, any funds obtained by making a demand on Wells Fargo to make payment from the Accounts likewise would be property of the estate, meaning that the
11 U.S.C. § 541(a)(1) provides: "except as provided in subsections (b) and (c)(2) of this section," which are not applicable here, property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." See also In re Pimental, 142 B.R. 26, 28 (Bankr.D.R.I. 1992) (noting that "upon filing a Chapter 7 petition, the debtor is automatically `divested of virtually all property interests held as of the commencement of the case, and in turn, these interests immediately vest in the estate.'") (quoting Commercial Credit Business Loans, Inc. v. Northbrook Lumber Co., 22 B.R. 992 (N.D.Ill. 1982))
Campbell, 313 B.R. at 321 (stating that "[p]roperty claimed as exempt is property of the estate on a debtor's petition date. It revests in the debtor when the exemption is allowed, either by court order or because of the lack of a timely objection.").
See In re Mwangi, 432 B.R. at 821 (a debtor has an inchoate interest in a bank account claimed as exemption prior to allowance or disallowance of the claim of exemption).
Id.
funds would belong to the bankruptcy estate subject to the claim of exemption. A debtor has no right to spend funds that belong to the estate even if subject to a claim of exemption. Such funds do not belong to the debtors. Moreover, the debtors' duty pursuant to 11 U.S.C. § 521(a)(4) to surrender to the chapter 7 trustee their rights in bank accounts and estate funds claimed exempt, at least when their claim of exemption is denied, creates a corresponding duty not to draw and spend funds from the accounts prior to allowance or disallowance of the claim of exemption in derogation of that duty.
See Figueira, 163 B.R. at 194 (stating that "[u]nquestionably, the debtors' bank account and any balance in it became property of the estate upon the filing of their petition.").
11 U.S.C. § 521(a)(4), provides:
The debtor shall —
If a trustee is serving in the case . . . surrender to the trustee all property of the estate. . . .
11 U.S.C. § 521(a)(4).
Courts are split regarding when property claimed as exempt must be surrendered under 11 U.S.C. § 521(a)(4). Compare In re Rains, 428 F.3d 893, 907 (9th Cir. 2005) (noting that once the debtor's exemption was denied, the debtor "became legally obligated to deliver the funds to the trustee.") (citing 11 U.S.C. § 524) and In re Garrett, 225 B.R. 301, 302-303 (Bankr. W.D.N.Y. 1998) ("The fundamental precept of 11 U.S.C.A. § 521 is that a debtor must surrender all property of the estate, unless it is the subject of an exemption.") with In re Fleming, 424 B.R. 795, 806 (Bankr. W.D.Mich. 2010) (acknowledging that "the debtor is under a statutory duty to surrender what now becomes the estate's property immediately upon the commencement of the case regardless of what might be the debtor's intention concerning its exemption.").
See Fleming, 424 B.R. at 806 (stating that from the duty to turnover property of the estate "comes the debtor's corresponding obligation not to spend or otherwise dissipate the targeted property unless and until its exemption is finally allowed."). See also, In re Vann, 113 B.R. 704, 708 (Bankr. D.Colo. 1990) (debtor has no authority to spend funds claimed as exempt that are property of the estate until the claim of exemption is allowed).
Wells Fargo's actions did not create any risk to the Plaintiffs that funds on deposit in the Bank Accounts would be unavailable to them on demand if and when they obtained the right to use funds drawn from the Accounts. Wells Fargo did not setoff any funds, or exercise control over the Accounts after allowance of a claim of exemption in the Accounts, or fail to comply with a directive of the Chapter 7 Trustee.
A debtor would have standing to assert that a setoff of the funds claimed as exempt violated the automatic stay because the setoff would render the funds unavailable to the debtor if and when the funds became exempt.
Accordingly, the Plaintiffs' suffered no injury to a legally protected interest fairly traceable to Wells Fargo's actions. Consequently, the Plaintiffs have no standing to assert their claim against Wells Fargo under 11 U.S.C. § 362(k). In these circumstances, only the Chapter 7 Trustee, who is charged with administering property of the estate, has standing to assert that Wells Fargo impermissibly exercised control over property of the estate by placing a hold on the Accounts resulting in the denial of access to funds.
See Jimenez II, 406 B.R. at 943 (a debtor without legal entitlement to access funds claimed as exempt has no standing to complaint about being denied access to the funds); Calvin, 329 B.R. at 601 (only the trustee may assert a cause of action for improper handling of funds that are property of the estate). See also, Briggs, 143 B.R. at 445 and 448 (reasoning that because § 362(a)(3) relates solely to property of the estate, the credit union's refusal "to release property of the estate to the Debtor (as opposed to the trustee) clearly is not a stay violation []" and finding that the debtor lacked standing to assert a violation of § 362(a)(3), (4), or (7) (emphasis in original)).
The Court is not unsympathetic to the Plaintiffs. As a practical matter, individual chapter 7 debtors who claim funds on deposit in a bank account as exempt often use those funds when there is no reasonable basis to object to the exemption in order to pay ordinary and necessary living expenses despite the fact that such funds constitute property of the estate until the time to object to the claim of exemption expires. Use of funds claimed as exempt in the debtor's bank account prior to that time often can be critical to a debtor making a mortgage or car payment, buying food or medicine, or paying a utility bill, and is consistent with the historical purpose of exemption laws:
Unless extended by the court, the period to object to a claim of exemption is 30 days after conclusion of the meeting of creditors conducted pursuant to 11 U.S.C. § 341(a). Rule 4003(b)(1), Fed.R.Bankr.P. In a typical individual chapter 7 consumer case, where the § 341(a) creditors meeting is held and concluded on the date when it is first set, the 30-day period expires 51 to 70 days after commencement of the bankruptcy case. See Rule 2003(a), Fed.R.Bankr.P. (requiring that in a chapter 7 case the "meeting of creditors is be held no fewer than 21 and no more than 40 days after the order for relief.").
The historical purpose of these exemption laws has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property, the debtor will not be left destitute and a public charge. [This] purpose has not changed. . . .
House Report on the Bankruptcy Reform Act of 1978, H.R. Rep. No. 95-595, at 126 (1977).
Because the value of the funds in a bank account is readily quantifiable, and funds can be claimed exempt up to specified dollar limits, usually no party in interest, including the Chapter 7 Trustee, objects to the claimed exemption or to the debtor's use of the funds before they are exempt. No harm results to the estate from the debtor's use of funds prior to the allowance of the claimed exemption because the exemption is nearly always allowed as a result of the expiration of the time to object to the claim of exemption. However, the Court cannot find that a debtor has suffered an injury sufficient to confer standing as a result of being prevented access to funds on deposit in a bank account before the account is exempt when the debtor is not legally entitled to use the funds and the debtor's ultimate realization of rights in such property claimed as exempt is not put in jeopardy. The real harm to debtors that can occur by blocking their access to bank accounts claimed as exempt does not invade a legally protected interest notwithstanding the practical reality that chapter 7 individual debtors routinely use funds from bank accounts claimed as exempt to pay ordinary and necessary living expenses in circumstances similar to the instant case. Consequently, this Court concludes that the Plaintiffs lack standing to pursue a claim of stay violation under 11 U.S.C. § 362(a)(3) based on Wells Fargo's action in barring the Plaintiffs from obtaining funds from the Bank Accounts during the period prior to the allowance of Plaintiffs' claimed exemption. 2. Stay Violation
If the claim of exemption is reasonably susceptible to dispute, the debtor has a strong incentive not to spend funds or otherwise transfer or waste property claimed as exempt before the exemption is allowed because doing can result in denial of the debtor's discharge. See, e.g., Menotte v. Cutaia (In re Cutaia), 410 B.R. 733, 738 (Bankr. S.D.Fla. 2008) (the debtor sold a Rolex watch post-petition that he claimed as exempt before the exemption was allowed; the court sustained the trustee's objection to the claim of exemption on the ground that the debtor substantially undervalued the watch, and under 11 U.S.C. § 727(a)(2)(B) denied the debtor a discharge based on his transfer of estate property); Dzikowski v. Gauthier (In re Gauthier), 2007 WL 1580100, *3-4 (Bankr. S.D.Fla. May 30, 2007) (the debtor's claim of exemption was disallowed, and the debtor was denied a discharge for knowingly and fraudulently transferring estate property claimed as exempt before the exemption was allowed).
A lingering question is why Wells Fargo has instituted a policy of informing itself when its customers commence a bankruptcy case. Although the Court finds that the Plaintiffs have not suffered an injury sufficient to confer standing to assert their claims, the Court recognizes the harm to debtors that Wells Fargo's policy can cause as a practical matter. Wells Fargo justifies its policy by reference to its turnover obligation under 11 U.S.C. § 542 and its desire to protect itself from liability for failing to discharge that obligation. However, "Wells Fargo is not a creditor and would have no reason to expect to receive notice of the bankruptcy filing from this Bankruptcy Court or from the Plaintiff. Instead, Wells Fargo states that it had actual knowledge of the bankruptcy from the electronic docket system. In gaining actual knowledge with regard to Chapter 7 bankruptcy filings by account holders, Wells Fargo has removed itself from the [safe harbor] protection of § 542(c)." Jimenez I, 335 B.R. at 462. See 11 U.S.C. § 542(c) (providing that "an entity that has no notice nor actual knowledge of the commencement of the case concerning the debtor may transfer property of the estate, or pay a debt owing to the debtor, in good faith . . ."). Similarly, absent knowledge of a debtor's bankruptcy case, a party whose actions constitute a technical violation of the automatic stay cannot be held liable for damages. See, Kline v. Tiedemann (In re Kline), 424 B.R. 516, 523 (Bankr.D.N.M. 2010) ("Actions taken without notice or knowledge . . . of the commencement or pendency of the bankruptcy case nevertheless violate the stay, but the violation is merely `technical' and no damages are to be awarded.") (citations omitted). Wells Fargo appears to have voluntarily subjected itself to turnover obligations and potential liability by informing itself of a depositor's bankruptcy filing when it has no obligation to do so, and relies on the turnover obligation and potential liability to justify its actions.
Even if the Court were to accept that the Plaintiffs have standing based on their claim of exemption in the amount of $100.00 with respect to the funds in the Bank of Accounts, the undisputed facts do not support a finding that Plaintiffs are entitled to damages for willful violation of the automatic stay. Plaintiffs assert that under Mwangi, Wells Fargo's action in placing an administrative freeze on a debtor's bank account violates the automatic stay.
Section 362(k)(1) provides, in relevant part:
an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages
11 U.S.C. § 362(k)(1).
In Mwangi, Wells Fargo barred the debtors access to bank accounts claimed as exempt, and notified the chapter 7 trustee in accordance with its policy that it would pay on the accounts at the trustee's request or order, but took no action after it did not receive any instructions from the chapter 7 trustee. The Mwangi court found that the turnover obligation of a depository bank with respect to a demand deposit account is self-executing, and not dependant on receipt of demand from the chapter 7 trustee. Mwangi, 432 B.R. at 823. The Court determined that Wells Fargo's actions constituted an exercise of control over property of the estate in violation of the automatic stay because the bank refused to release the funds claimed exempt upon receiving a demand from the debtors, and did not seek further instruction from the bankruptcy court, but instead "chose to hold the funds until a demand was made for payment that it alone deemed appropriate." Id. at 824. The Mwangi court remanded the case for a determination of whether Wells Fargo's actions constituted a willful violation of the automatic stay, directing the bankruptcy court to consider whether Wells Fargo's continued "administrative freeze and retention of the account funds claimed exempt, in the absence of instructions from the trustee, was reasonable in light of [debtors'] demand that the subject account funds be released for their use." Id. at 825.
This Court finds that Wells Fargo's actions in the instant case did not violate the stay. Pursuant to 11 U.S.C. § 323(a) and 11 U.S.C. § 541(a)(1), the Chapter 7 Trustee as representative of the bankruptcy estate succeeded to the Plaintiffs' rights as payees on demand with respect to the Bank Accounts. Wells Fargo barred Plaintiffs access to the Bank Accounts, but its action in placing the Accounts in "bankruptcy status" did not deny access to the Chapter 7 Trustee. To the contrary, Well Fargo promptly and without demand affirmatively gave notice that it would immediately honor a demand by the Chapter 7 Trustee for payment on the Bank Accounts, thereby, in effect, substituting the Chapter 7 Trustee for the depositors as the promisee of Wells Fargo's obligation to pay on demand. The Chapter 7 Trustee promptly instructed Wells Fargo to give the Plaintiffs access to the funds in the Bank Accounts, and Wells Fargo, in fact, promptly restored access to the Accounts to the Plaintiffs upon receiving those instructions. Plaintiffs' own Affidavit recites that access to the Bank Accounts was restored within one day after Plaintiffs were barred access to draw funds from the Accounts. Wells Fargo's actions substituting the Chapter 7 Trustee for the Plaintiffs as the promisee of the pay on demand rights associated with the Bank Accounts, coupled with its immediate honor of the Trustee's prompt
Section § 323(a) provides that "[t]he trustee in a case under this title is the representative of the estate." 11 U.S.C. § 323(a). As discussed above, under 11 U.S.C. § 541(a)(1), Plaintiffs' legal and equitable interests in the Bank Accounts became property of the estate upon commencement of the Plaintiffs' bankruptcy case.
demand on the Accounts, did not constitute an exercise of control over property of the estate contrary to 11 U.S.C. § 362(a)(3). Thus, no stay violation occurred.
CONCLUSION
Based on the foregoing, the Court concludes that Plaintiffs lack standing to assert a claim for willful violation of the automatic stay under 11 U.S.C. § 363(k)(1) based on an alleged violation of the automatic stay under 11 U.S.C. § 362(a)(3). Even if Plaintiffs had standing, Wells Fargo's actions under the circumstances of this case do not violate 11 U.S.C. § 362(a)(3). The Court will, therefore, grant Wells Fargo's motion for summary judgment. Wells Fargo's request for attorneys' fees and sanctions against Plaintiffs and their counsel is denied. A judgment and order consistent with this Memorandum Opinion will be entered.
While this Court has found that Plaintiffs do not have standing, and Wells Fargo's actions did not violate the stay, the law is not settled in this area. Plaintiffs should not be penalized for filing this adversary proceeding seeking a different result.
Date entered on docket: September 29, 2010