Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi)
| Decision Date | 26 August 2014 |
| Docket Number | No. 12–16087.,12–16087. |
| Citation | 764 F.3d 1168 |
| Parties | In the Matter of Eric Njau MWANGI; Pauline Muthoni Mwicharo, Debtors. Eric Njau Mwangi; Pauline Muthoni Mwicharo, Appellants, v. Wells Fargo Bank, N.A., Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
OPINION TEXT STARTS HERE
Christopher P. Burke (argued), Las Vegas, NV, for Plaintiffs–Appellants.
M. David Minnick (argued), Kevin M. Fong, and Daniel Lamb, Pillsbury Winthrop Shaw Pittman LLP, San Francisco, CA; Lance Earl and Lars K. Evensen, Holland & Hart LLP, Las Vegas, NV, for Defendant–Appellee.
Appeal from the United States District Court for the District of Nevada, Philip M. Pro, Senior District Judge, Presiding. D.C. No. 2:11–cv–01753–PMP–GWF.
Before: BARRY G. SILVERMAN, WILLIAM A. FLETCHER, and JAY S. BYBEE, Circuit Judges.
Eric Mwangi and Pauline Mwicharo (collectively “the Debtors”) were account holders at Wells Fargo Bank, N.A. When Wells Fargo discovered that the Debtors had filed a voluntary Chapter 7 bankruptcy petition, it placed a “temporary administrative pledge” on the Debtors' accounts. Wells Fargo then requested instructions from the Chapter 7 trustee regarding the distribution of account funds, a portion of which the Debtors claimed as exempt under Nevada Revised Statutes § 21.090(1)(g).
In this case, we must decide whether the Debtors can state a claim for a willful violation of 11 U.S.C. § 362(a)(3)—which proscribes “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate”—based on the operation of Wells Fargo's administrative pledge. We hold that they cannot state such a claim. Before the account funds revested in the Debtors, they remained estate property, and the Debtors had no right to possess or control them. Accordingly, the operation of the administrative pledge could cause the Debtors no injury before the account funds revested. After the account funds revested in the Debtors, they lost their status as estate property and thus were no longer subject to § 362(a)(3). We therefore affirm the district court's order affirming the bankruptcy court's judgment of dismissal with prejudice.
The Debtors filed a voluntary Chapter 7 bankruptcy petition on August 3, 2009. At that time, the Debtors held four accounts at Wells Fargo, with an aggregate balance of $17,075.06. The Debtors did not list two of the four accounts in their original Schedule B, nor did they claim an exemption for any account funds in their original Schedule C. But the Debtors did list Wells Fargo as an unsecured creditor for two debts totaling $52,000. Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi II), 473 B.R. 802, 804 (D.Nev.2012).
Each night, Wells Fargo runs a computerized comparison of all newly filed Chapter 7 bankruptcy petitions against its list of account holders. When Wells Fargo discovered the Debtors' bankruptcy filing, it placed a “temporary administrative pledge” on all four of their accounts. Id. Wells Fargo then sent a letter dated August 6, 2009, to the Chapter 7 trustee, requesting instructions as to how Wells Fargo should dispose of the account funds. In the letter to the trustee, Wells Fargo stated that upon the filing of the bankruptcy petition, the account funds became property of the bankruptcy estate, payable only to the trustee or upon the trustee's order. Wells Fargo advised the trustee that it would maintain a hold on the account funds until it received direction from the trustee regarding their disposition or until thirty-one days after the scheduled 11 U.S.C. § 341 meeting of creditors.
Also on August 6, 2009, Wells Fargo sent letters to the Debtors' counsel, stating that the account funds had become estate property and that, as such, the account funds were no longer available to the Debtors. The letters further stated that Wells Fargo had requested instruction from the trustee, and suggested that the Debtors might be able to expedite a decision regarding the account funds' distribution by contacting the trustee directly.
On August 11, 2009, the Debtors filed an Amended Schedule B in which they included all four of their Wells Fargo accounts. The Debtors also filed an Amended Schedule C in which they claimed an exemption in seventy-five percent of the value of each of their Wells Fargo accounts, relying on Nevada Revised Statutes § 21.090(1)(g), which provides an exemption for seventy-five percent of a debtor's disposable earnings. No party ever objected to the exemption claimed by the Debtors in the account funds.
On August 18, 2009, the Debtors' counsel contacted Wells Fargo to request that the hold be lifted because the Debtors claimed an exemption in a portion of the funds. Wells Fargo refused to lift the hold without the trustee's agreement.
On August 27, 2009, the Debtors filed a motion in the bankruptcy court seeking sanctions pursuant to 11 U.S.C. § 362(k) against Wells Fargo, based on Wells Fargo's alleged intentional violation of the automatic stay provisions in §§ 362(a)(3) and (a)(6). The bankruptcy court denied this motion, concluding that Wells Fargo could not have violated the automatic stay because (1) the automatic stay applies only to property of the bankruptcy estate, and exempt property never becomes estate property; and (2) Wells Fargo took no action to collect, assess, or recover any prepetition claim against the Debtors.
The Debtors appealed to the Bankruptcy Appellate Panel (“BAP”), which reversed the bankruptcy court. Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi I), 432 B.R. 812, 816 (9th Cir. BAP 2010). First, the BAP rejected Wells Fargo's argument that the Supreme Court's decision in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995), authorizes Wells Fargo's policy of “temporary administrative pledges.” According to the BAP, Strumpf authorizes a bank to impose a temporary administrative hold only to preserve setoff rights, and in this case, Wells Fargo denied any intent to protect setoff rights. In re Mwangi I, 432 B.R. at 820. Second, the BAP found that the Debtors had an inchoate interest in the account funds, which remained part of the bankruptcy estate. Id. at 820–21. Third, the BAP held that 11 U.S.C. § 522's right to claim exemptions in estate property bestows standing on debtors to pursue sanctions for violations of § 362's automatic stay provisions. Id. at 822–23. Fourth, the BAP held that Wells Fargo had violated 11 U.S.C. § 362(a)(3) by exercising control over estate property. Id. at 823–24. The BAP reasoned that the turnover provisions of the Bankruptcy Code are self-effectuating and that the Debtors were not required to take any action to ripen their interest in the account funds before asserting a violation of § 362's automatic stay provisions. Id. at 824. Finally, the BAP remanded the case to the bankruptcy court to determine whether Wells Fargo's retention of the account funds was reasonable and, if not, whether the Debtors had suffered damages. Id. at 825.
On remand, the bankruptcy court denied the motion for sanctions. 1 The Debtors then filed an adversary class action against Wells Fargo, alleging violations of § 362(a)(3)'s automatic stay provision. Wells Fargo moved to dismiss for failure to state a claim, and the bankruptcy court eventually dismissed the adversary class action with prejudice. The bankruptcy court concluded that the Debtors lacked standing to pursue any alleged violations of § 362(a)(3)'s automatic stay provision with respect to the account funds because the trustee alone has standing to protect estate property. In addition, the bankruptcy court concluded that the Debtors could not allege any injury to their inchoate interest in the account funds because they had no right to possess estate property.
The Debtors then appealed the bankruptcy court's decision to the district court. Relying principally on this court's intervening decision in Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206 (9th Cir.2010), the district court first set out its analytical framework. In the district court's view, if there is no objection to a debtor's claimed exemption, the property is exempt from the property of the estate and passes immediately to the debtor upon expiration of Federal Rule of Bankruptcy Procedure 4003(b)(1)'s thirty-day objections period. In re Mwangi II, 473 B.R. at 809. There is an exception to this general rule, however, if
the statute permitting the debtor to claim a particular exemption does not allow the debtor to exempt the entire property interest, but instead permits exemption of an interest in the property up to a particular dollar amount, “what is removed from the estate is an interest in the property equal to the value of the exemption claimed at filing.”Id. at 810 (quoting In re Gebhart, 621 F.3d at 1210) (internal quotation marks omitted). In such cases, the asset remains estate property, “and the estate does not relinquish the property until it is administered in the bankruptcy, the trustee abandons the property, or the bankruptcy case is closed.” Id.
Applying this analytical framework, the district court found that the statute at issue here permits a debtor to exempt the entire property interest. Id. at 811. Accordingly, before the objections period ran, the account funds remained in the bankruptcy estate. Id. at 810. The district court found that Wells Fargo could not violate § 362(a)(3)'s automatic stay provision during this period because the Debtors had no right to possess or control the account funds. Id. After the objections period ran, however, the property that the Debtors claimed as exempt passed out of the bankruptcy estate. During this second period, Wells Fargo could not violate § 362(a)(3)'s automatic stay provision because that provision applies only to estate property. Id. Therefore, because Wells Fargo's administrative hold did not...
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