Jimenez v. Wells Fargo Bank, N.A.

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
WELLS FARGO BANK, N.A.,
Appellant,
vs. 	No. 1:07-cv-0123 MCA/CEG
PILAR MERCEDES JIMENEZ,
Appellee.
MEMORANDUM OPINION AND ORDER
THIS MATTER comes before the Court on Appellant Wells Fargo Bank, N.A.’s
Notice of Appeal [Doc. 1-2], filed February 2, 2007, and upon Appellant’s objections filed
August 6, 2007 [Doc. 22] to the Proposed Findings and Recommendation of the United
States Magistrate Judge [Doc. 21], filed July 23, 2007. 	Appellant (“Bank”) appeals the
Bankruptcy Court’s Order Denying Defendant’s Motion for Summary Judgment and
Granting Plaintiff’s Cross Motion for Summary Judgment [Doc. 1-6; Doc. 15 in Adversary
Proceeding 05-01150-m], filed December 21, 2005. 	This Court has jurisdiction over the
appeal pursuant to 28 U.S.C. § 158(a), and, having reviewed the briefs of the parties and the
record on appeal, reverses the Bankruptcy Court and declines to accept the recommendation
of the Magistrate Judge.
I. 	BACKGROUND
Appellee Pilar Mercedes Jimenez (“Debtor”) filed a voluntary Chapter 7 bankruptcy
petition on July 5, 2005. As of the date of her petition, she maintained a checking account
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and a savings account at Bank. 	The checking account had a balance of $5,173.33 and the
savings account had a balance of $649.18. 	Debtor listed the checking account on her
Schedule B, but described it has having a balance of $4,000. On her Schedule C, she claimed
the checking account as exempt property under 11 U.S.C. §522(d)(5). 	Debtor did not
initially schedule the savings account.
On July 8, 2005, Bank learned that Debtor had filed for bankruptcy and immediately
placed an “administrative freeze” on her account balances. 	Bank is not a creditor of the
Debtor and did not receive notice from the Court. 	Rather, Bank has a policy whereby it
seeks out knowledge of bankruptcy filings and places an administrative freeze on accounts
held by customers who Bank ascertains have filed bankruptcy. 	Bank’s policy, which
apparently is in force nationwide, is facilitated by the federal courts’ CM/ECF system, which
provides subscribers with virtually instantaneous notice of court filings.
The same day Bank froze Debtor’s accounts, it sent letters regarding each account to
the Chapter 7 Trustee in Debtor’s case. The letters stated, in part:
[Bank] has received notification of [Debtor’s] bankruptcy petition. Sections 541 and
542 of the Bankruptcy Code require [Bank] to act in good faith to preserve the status
quo and to follow your directions with regard to property of the estate. When [Bank]
received notice, it checked the value of the debtor(s)’s account, less identifiable Social
Security payments, on the filing date and the notice date. [Bank] understands that the
smaller of these figures...became property of the bankruptcy estate (as such, the
“Estate Funds”). The Estate Funds are now in bankruptcy status, which means they
are payable only to or upon your order.
The Estate Funds will remain in bankruptcy status until the earlier of receipt of
direction from you on their disposition or September 12, 2005, which is 31 days after
the scheduled First Meeting of Creditors. If you wish [Bank] to take any other action
with the Estate Funds, please check the appropriate boxes below and return a signed
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copy of this letter to [the Bank’s Operations Manager].
Attached to Bank’s letters to the Trustee was a form listing four options from which the
Trustee could select. The form stated, in part:
[Trustee] hereby directs [Bank] to take the following action with regard to Estate
Funds:
G 	Release Estate Funds totaling $__________ to the customer.
G 	Turn over Estate Funds totaling $__________ to the Trustee.
G 	Take no action with the balance of the Estate Funds until such funds are not
part of the Bankruptcy Estate.
G 	Other (please give specific instructions: __________________
Signed: ___________________________, Bankruptcy Trustee
Bank also sent letters to Debtor’s counsel, which stated in part:
[Bank] has received notification of [Debtor’s] bankruptcy filing. 	When [Bank]
received notice, it checked the value of [Debtor’s] account, less identifiable Social
Security payments, on the filing date and the notice date. 	The smaller of these
figures...became property of the bankruptcy estate (the “Estate Funds”). The Estate
Funds are now in bankruptcy status, which means they are no longer available to
[Debtor].
[Bank] is required by operation of Sections 541 and 542 of the Bankruptcy Code to
act in good faith to preserve the status quo and so must follow the trustee’s direction
with regard to the Estate Funds. Accordingly, [Bank] has asked for instructions from
the trustee. As you know, the trustee has 30 days from the first meeting of creditors
to object to a claim of exemption for the Estate Funds and ownership of claimed
exempt property remains with the bankruptcy estate until such time passes or the
trustee directs otherwise.
[Bank] is prepared to immediately follow the trustee’s direction regarding the Estate
Funds and you may be able to expedite the trustee’s decision. Alternatively, please
provide [Bank] with a copy of [Debtor’s] claims exemptions for funds that should re-
vest in [Debtor] at the end of the objection period.
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1Meanwhile, the bankruptcy case marched on. The creditors’ meeting was held and concluded on
August 12, 2005. The Trustee reported on August 17, 2005, that no property was available for
distribution from the estate, other than exempt property, that she had abandoned all scheduled assets, and
that Debtor’s estate had been fully administered.
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Debtor initiated an adversary proceeding against Bank on July 11, 2005, after her
counsel was unsuccessful in persuading Bank to release the funds to her. Debtor amended
her schedules on July 14, 2005 to add the savings account and to claim exemptions for the
full value of both accounts.
Debtor’s Complaint for Turnover of Property and Damages alleged that Bank’s
administrative freeze and failure to honor checks drawn on the checking account violated the
automatic stay. Debtor petitioned the Bankruptcy Court to order Bank to turn over the funds
in the accounts to Debtor, and to award her compensatory and punitive damages, as well as
attorney’s fees. Bank moved for summary judgment on July 14, 2005.
On July 15, 2005, the Trustee authorized Bank to release $4,000 to Debtor. Bank
accordingly reduced its hold on the checking account to permit Debtor to access up to
$4,000. 	The parties nevertheless continued to litigate the propriety of the administrative
freeze, and Debtor filed a response to Bank’s motion, as well as her own cross motion for
summary judgment on July 23, 2005.1
On December 21, 2005, the Bankruptcy Judge issued a Memorandum Opinion and
an Order denying Bank’s motion for summary judgment and granting Debtor’s motion for
summary judgment. 	Though the Bankruptcy Court found in favor of Debtor regarding
Bank’s liability for violating the automatic stay, it subsequently dismissed her claim for
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2The Bankruptcy Court’s ruling regarding damages has not been appealed.
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damages. After holding an evidentiary hearing, the Bankruptcy Court found that there was
no evidence to support an award of actual damages and that punitive damages were
unwarranted.2 The Bankruptcy Court’s Final Order Dismissing Plaintiff’s Claims was
entered on January 22, 2007.
Bank appealed the Bankruptcy Court’s summary judgment ruling. This Court referred
the matter to the Magistrate Judge for recommended disposition. 	The Magistrate Judge
recommended affirming the decision of the Bankruptcy Judge. 	[Doc. 21.] 	Bank filed
objections to the Magistrate Judge’s proposed disposition. [Doc. 22.]
II. 	STANDARD OF REVIEW
Bank appeals from a grant of summary judgment in favor of the Debtor. Bank has
also filed timely objections to the Magistrate Judge’s Proposed Findings and Recommended
Disposition.
Timely and specific objections to a Magistrate Judge’s report trigger a de novo review
by the District Judge. 28 U.S.C. § 636(b)(1); In re Key Energy Res. Inc., 230 F.3d 1197,
1200 (10th Cir. 2000). In reviewing a bankruptcy court decision under 28 U.S.C. § 158(a),
the district court applies the same standards of review that govern appellate review in other
cases. In re Hodes, 402 F.3d 1005, 1008 (10th Cir. 2005). A grant of summary judgment
is reviewed de novo, applying the same legal standard as the court below. 	Byers v.
Albuquerque, 150 F.3d 1271, 1274 (10th Cir. 1998). Summary judgment is appropriate “if
the pleadings, depositions, answers to interrogatories, and admissions on file, together with
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the affidavits, if any, show that there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c).
This appeal presents a question of law: Did Bank’s imposition of an “administrative
freeze” that prevented Debtor from accessing the deposit accounts in question violate the
automatic stay? Whether a party’s actions violate the automatic stay is a question of law that
is reviewed de novo. 	In re Taumoepeau, 523 F.3d 1213, 1218 (10th Cir. 2008). 	Before
reaching this question, however, the Court must consider the matter of Debtor’s standing.
III. 	ANALYSIS
A. 	Does Debtor have standing to assert a violation of the automatic stay?
Debtor’s standing to assert a violation of the automatic stay is a threshold issue.
Standing is a component of the “Cases” or “Controversies” requirement for federal
jurisdiction and may be raised by any party at any time, including sua sponte by the Court.
New England Health Care Employees Pension Fund v. Woodruff, 512 F.3d 1283, 1288 (10th
Cir. 2008). Whether a plaintiff, Debtor in this case, has standing is a legal question upon
which Debtor bears the burden. Woodruff, 512 F.3d at 1288. The Bankruptcy Court held
that Debtor does have standing. The Magistrate Judge concluded that Bank had abandoned
the question of Debtor’s standing. For the reasons set forth below, this Court believes that
the Bankruptcy Court was in error and that Debtor does not have standing to assert a
violation of the automatic stay under the facts of this case.
To establish standing, the plaintiff must show: (1) she has suffered an “injury in fact”;
(2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely
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that the injury will be redressed by a favorable decision. 	Woodruff, 512 F.3d at 1288.
Debtor’s asserted injury is that Bank’s administrative freeze deprived her of the use of “her
property” until the deadline for objecting to exemptions expired. Debtor claims that, without
access to her accounts, she was without means to feed her family or pay bills after filing for
bankruptcy. According to Debtor, her claim that the bank accounts were exempt property
was to be presumed valid in the absence of any objection to the claim and that the freeze
deprived her of “her property” without due process of law.
The flaw in Debtor’s argument is in the premise that the bank accounts continued to
belong to her after she filed for bankruptcy. 	The filing of a bankruptcy creates an estate
comprised of “all legal or equitable interests of the debtor in property as of the
commencement of the case.” 	11 U.S.C. § 541(a)(1). 	Debtor’s bank accounts and any
balances therein “unquestionably” became property of the estate upon the filing of the
petition in bankruptcy. In re Figueira, 163 B.R. 192, 194 (Bankr. D. Kan. 1993) (citing 11
U.S.C. § 541(a)(1)); see also Sousa v. Bank of Newport, 170 B.R. 492, 494 (D. R.I. 1994).
Debtor had a duty to surrender the accounts to the trustee, if not physically, then
constructively. 11 U.S.C. § 521(a)(4) (stating that “debtor shall...surrender to the trustee all
property of the estate...”); In re Figueira, 163 B.R. at 194. The accounts were thus no longer
available for her personal use after she filed her petition.
At the time administrative freeze was imposed, the Trustee had not yet released the
funds in the accounts to Debtor, nor given Bank permission to pay Debtor. Because Debtor
could not have accessed the accounts without the Trustee’s permission—at least, not
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consistently with her obligation to surrender the accounts to the Trustee—the Court
concludes that she suffered no injury caused by the administrative freeze.
The Court’s conclusion that Debtor did not suffer an injury in fact is supported by the
United States Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116
S.Ct. 2886 (1995). In Strumpf, the Supreme Court described the nature of a bank account:
A bank account does not consist of “money belonging to the depositor and held by the bank.”
Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 21 (1995). Rather, a bank account “consists
of nothing more or less than a promise to pay, from the bank to the depositor.” Strumpf, 516
U.S. at 21. Thus, the debtor’s claim that a bank’s administrative hold on its account violated
the automatic stay “rests on the false premise that [bank’s] administrative hold took
something from [debtor], or exercised dominion over property that belonged to [debtor.]
Strumpf, 516 U.S. at 21. Likewise, Debtor’s claim of standing here rests on the false premise
that the bank accounts in question consisted of funds that belonged to her and that the
administrative freeze deprived her of them. In fact, the bank accounts consisted of a debt
owed by Bank to Debtor. After Debtor filed for bankruptcy, those debts became assets of
the bankruptcy estate.
Debtor does not dispute that the bank accounts were property of the bankruptcy estate.
She nevertheless contends that she has standing to prosecute the alleged automatic stay
violation because she claimed the accounts as exempt. 	The Bankruptcy Court agreed,
holding that “[w]hen [Bank] froze the accounts, [Debtor] had exercised her right to exempt
the account funds; therefore, [Debtor] had a direct economic interest in the funds, which was
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adversely affected by [Bank’s] administrative freeze.” 	In re Jimenez, 335 B.R. 450, 455
(Bankr. D.N.M. 2005). The Court does not agree that Debtor’s claim of exemption confers
standing in this case.
A debtor may prevent certain property from being distributed to creditors by claiming
it exempt. 11 U.S.C. §522; Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992). As the
Bankruptcy Court observed, an exemption “is an interest of the debtor carved out of the
bankruptcy estate for the benefit of the debtor and thereby shielded from creditors’ claims.”
In re Jimenez, 335 B.R. at 455 (quoting In re Hodes, 402 F.3d at 1010) (quotation marks
omitted).
However, property is not summarily removed from the bankruptcy estate immediately
upon the debtor’s claim of exemption. Property that is entitled to be exempted is initially
regarded as estate property until it is claimed and distributed as exempt. In re McLain, 516
F.3d 301, 315 (5th Cir. 2008); see also In re Barksdale, 281 B.R. 548, 551 (Bankr. D.N.J.
2002) (“At the commencement of the case, the property of the estate includes property that
the debtor may claim as exempt.”); In re Murray, 249 B.R. 223, 231 (Bankr. E.D.N.Y. 2000)
(“Property is not exempt by fiat of the debtor, but only through a process of compliance with
the statutory disclosures and then by order of the bankruptcy court[.]”). Thus, property that
the debtor claims is exempt does not cease being property of the estate until the exemption
is allowed or until the time for making objections expires. See In re Villegas, 364 B.R. 781,
785 (Bankr. D.N.M. 2007) (stating that, before time for making exemptions expired, property
debtor claimed was exempt was still part of the bankruptcy estate).
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Debtor has cited no persuasive authority for the proposition that she was entitled to
use estate property before it was distributed as exempt, merely because she had claimed an
exemption. Indeed, if such a proposition were allowed, it would defeat the procedure set
forth in the Bankruptcy Rules for the orderly determination of claims of exemption.
Bankruptcy Rule 4003 prescribes the procedure for making and resolving objections
to a debtor’s claimed exemptions:
(b) Objecting to a Claim of Exemptions. A party in interest may file an objection
to the list of property claimed as exempt only within 30 days after the meeting of
creditors held under § 341(a) is concluded or within 30 days after any amendment to
the list or supplemental schedules is filed, whichever is later. 	The court may, for
cause, extend the time for filing objections if, before the time to object expires, a party
in interest files a request for an extension. Copies of the objections shall be delivered
or mailed to the trustee, the person filing the list, and the attorney for that person.
(c) Burden of Proof. 	In any hearing under this rule, the objecting party has the
burden of proving that the exemptions are not properly claimed. After hearing on
notice, the court shall determine the issues presented by the objections.
Bankr. Rule 4003 (a), (b).
These provisions clearly contemplate judicial determination of a claim of exemption
in the event that there are objections. Before that time, the claim of exemption is exactly
that—a claim. 	If the debtor were permitted to use estate property before the claim of
exemption was allowed, either by order of the court or operation of law, the procedure for
determining exemptions could easily be thwarted. Debtors would have incentive to exhaust
the assets they claimed were exempt as quickly as possible before objections were lodged.
In this case, the time for objecting to Debtor’s claimed exemptions had not yet expired
when Bank imposed the administrative freeze. The bank accounts were still property of the
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3As far as the record reflects, no objections were made to Debtor’s claimed exemptions and no
hearing to determine the exemptions was held. Rather, before the time for making objections expired,
$4,000 was distributed from the checking account to Debtor upon the Trustee’s authorization.
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estate at that time, which Debtor was without legal entitlement to access. Debtor’s claim of
exemption alone, therefore, did not confer standing to challenge an alleged violation of the
automatic stay.
Despite recognizing that the accounts were property of the estate, the Bankruptcy
Court concluded, based upon Rule 4003(c), that Debtor’s claim of exemption was presumed
valid unless a party in interest objected. In re Jimenez, 335 B.R. at 455. However, Rule
4003(c) is simply a statement that the objecting party bears the burden of proof. Standing
is not conferred on Debtor in these circumstances merely because the objecting party would
bear the burden of proof at a hearing to determine the validity of her claimed exemptions.3
It is true that property claimed exempt becomes exempt by operation of law if no
timely objection is made. Taylor, 503 U.S. at 643–44; 11 U.S.C. § 522(l) (“Unless a party
in interest objects, the property claimed as exempt...is exempt.”). 	This does not occur,
however, until thirty days after the meeting of creditors. Bankr. Rule 4003(b); Debtor has
cited no authority for the proposition that property is exempt until an objection is made, and
the Court is not aware of any. To the contrary, property the debtor claims as exempt remains
part of the estate, and does not become exempt, until the time for objecting to exemptions
expires. In re Villegas, 364 B.R. at 785.
This does not mean, however, that a Chapter 7 debtor’s claim of exemption would
never be sufficient to confer standing. 	In In re Moreira, 173 B.R. 965 (Bankr. D. Mass.
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1994), for example, the bankruptcy court held that the debtor had standing to bring an
adversary proceeding against a credit union that froze accounts she claimed were exempt.
In re Moreira, 173 B.R. 965, 973 (Bankr. D. Mass. 1994). 	The Bankruptcy Court cited
Moreira as support for the conclusion that the Debtor has standing to pursue an alleged
violation of the automatic stay in this case. Moreira is distinguishable, however, because it
involved a fact that is not present here: the credit union claimed a right of setoff in the same
funds that the debtor claimed were exempt. 	Furthermore, it is not entirely clear that the
court’s conclusion regarding standing was specifically directed at the automatic stay. The
opinion is primarily concerned with the validity of the setoff. In re Moreira, 173 B.R. at
968–72. Under the Bankruptcy Code, a “debtor may...recover a setoff to the extent that the
debtor could have exempted such property...” 	11 U.S.C. 522(h). 	The Court in Moreira
apparently read this provision as grounds for the debtor to bring an adversary proceeding to
challenge the setoff and to assert a violation of the automatic stay against the credit union.
In re Moreira, 173 B.R. at 973. The credit union made a claim to the funds that was adverse
to the debtor’s claim to the same funds. The debtor in Moreira therefore had a colorable
claim of standing. By contrast, Bank here does not claim that it has any ownership interest
or claim of entitlement to the funds that Debtor claims are exempt.
In re Wright, 156 B.R. 549, 552 (Bankr. N.D.Ill. 1992), also cited below, does not
persuade this Court that Debtor here has standing. In that case, the court held that the debtor
did not have standing to seek damages for an alleged violation of the automatic stay resulting
from the Internal Revenue Service’s postpetition receipt of funds. In re Wright, 156 B.R.
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549, 552 (Bankr. N.D.Ill. 1992). The court reasoned that, if the money at issue had been
released by the IRS, as debtor claimed the IRS had a duty to do, the money still would not
have been at debtor’s disposal, but instead would have been part of the bankruptcy estate.
In re Wright, 156 B.R. at 553. The court conjectured in dicta that the debtor “might” have
standing if she were to claim an exemption in the funds. 	In re Wright, 156 B.R. at 554.
However, there was no occasion for the court to elaborate upon the circumstances under
which standing would arise.
Matter of Schwartz, 54 B.R. 321, 325 (Bankr. W.D.Wis. 1985), cited below, is also
inapposite. In Schwartz, the debtor had standing under section 362(h) because he alleged a
“financial injury to himself as a result of a violation of the automatic stay.” 	Matter of
Schwartz, 54 B.R. 321, 325 (Bankr. W.D.Wis. 1985). 	The financial injury arose from a
prepetition transfer of funds from the debtor’s business to the defendant judgment creditor.
Matter of Schwartz, 54 B.R. at 322–23. 	Sections 522(h) and (i) of the Bankruptcy
Code—provisions that are not implicated in this case—expressly vest the debtor with
avoidance and recovery powers. Matter of Schwartz, 54 B.R. at 325. By contrast, Debtor
here has pointed to no statutory provision that vests her with authority to pursue the alleged
violation of the stay. Furthermore, unlike the debtor in Wright, Debtor here has not suffered
a financial injury as a result of any alleged violation of the automatic stay. Debtor’s “injury”
is a result of the filing of her bankruptcy petition, an event that divested her of authority to
access the accounts in question.
The Bankruptcy Court below expressed concern that “under Wells Fargo’s view, the
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Debtor could lose access to account funds and the protection of the stay with respect to those
funds for a significant period of time [until the time for objecting to exemptions expired].”
In re Jimenez, 335 B.R. 456. As discussed above, however, Debtor was not entitled to access
those funds once she filed for bankruptcy. Funds in a debtor’s bank account at the filing of
the filing of a petition are subject to turnover to the trustee upon request. 11 U.S.C. 542(b);
In re Spencer, 362 B.R. 489, 493–94 (Bankr. D.Kan. 2006). A bank that receives notice that
an account holder has filed for bankruptcy is likely to freeze the account. See In re Spencer,
362 B.R. at 493. Debtors seeking to avoid the unpleasant results that may occur from a hold
on account funds should withdraw the funds prior to filing their petitions or be certain that
any checks written pre-petition have cleared before they file their case. See In re Spencer,
362 B.R. at 494.
The Bankruptcy Court also opined that failure to confer standing on Debtor would
result in a situation whereby the Chapter 7 trustee “could bring an action for stay violation
regarding the account funds before the expiration of the period for objections to exemptions,
and [Debtor] could bring an action for stay violation regarding the account funds after the
expiration of the period for objections to exemptions.” In re Jimenez, 335 B.R. at 456. I do
not accept the Bankruptcy Court’s reasoning because, first, it assumes its conclusion, which
is that a violation of the stay has occurred. Second, if a Chapter 7 debtor has no standing to
prosecute a freeze on her accounts, that is simply the result of having filed for bankruptcy,
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4The Bankruptcy Court also concluded that denying Debtor standing to pursue this case would
run contrary to the purpose of the automatic stay, which is to protect debtors. In re Jimenez, 335 B.R. at
456 (citing In re Patterson, 967 F.2d 505, 512 n.9 (11th Cir. 1992)). While it is true that an important
purpose of the automatic stay is to protect debtors from collection efforts and harassment, i.e., to give
them “breathing room,” this is only one aspect of the automatic stay. As discussed in more detail below,
the automatic stay also protects the estate and allows for liquidation to proceed in an orderly manner.
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not nefarious conduct by the bank.4 This Court agrees with the reasoning of the Bankruptcy
Court for the District of Columbia, which has stated: “Once debtor’s bank account rights
have become exempt property, the debtor can pursue enforcement of [Bank’s] contractual
obligation (instead of pursuing contempt). [The Bankruptcy Court] likely would lack subject
matter jurisdiction over such a proceeding under 28 U.S.C. § 1334(b) because the dispute
would not have any apparent impact on the administration of the estate.” In re Williams, 249
B.R. 222, 223 (Bankr. D.D.C. 2000).
In sum, the Court concludes that Debtor does not have standing to pursue an alleged
violation of the automatic stay under the facts of this case. When Debtor filed her petition
for bankruptcy, the accounts became property of the estate and she was required to relinquish
them to the Trustee. Debtor’s claim of exemption did not confer standing because, when the
administrative freeze was in force, the time for objecting to exemptions had not yet expired
and the accounts should have remained inaccessible to her in any event until her claim of
exemption was allowed.
B. 	Did a violation of the automatic stay occur?
For purposes of completeness, and because both the Bankruptcy Judge and the
Magistrate Judge reached the merits of the automatic stay violation issue, this Court will
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5This is not the first time that this practice by Bank has been challenged. See In re Calvin, 329
B.R. 589 (Bankr. S.D.Tex. 2005). In re Calvin was an action very similar to this one, in which a Chapter
7 debtor, who apparently was subjected to the same procedure as appellee in this case, attempted to have
Wells Fargo Bank, N.A. held in contempt and sought damages for an alleged violation of the automatic
stay. The court in In re Calvin held that the debtor did not have standing to pursue an alleged automatic
stay violation, and that Wells Fargo Bank, N.A.’s practice of freezing bank accounts did not violate the
automatic stay. In re Calvin, 329 B.R. 589.
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explain below why, even if Debtor has standing, no violation of the automatic stay occurred
under the facts of this case. The Bankruptcy Court and the Magistrate Judge both concluded
that Bank violated the automatic stay by placing an administrative freeze on the accounts.
The Bankruptcy Court reasoned that by denying Debtor access to her account funds, the
Bank exercised control over her property in express violation of 11 U.S.C. § 362(a)(3). In
re Jimenez, 335 B.R. at 460. This Court does not agree.
Debtor asserts that Bank violated section 362(a)(3) of the Bankruptcy Code. Section
362(a)(3) states that the filing of a petition in bankruptcy operates as a stay of:
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.
11 U.S.C. 362(a)(3). Bank admits that it “has procedures by which ‘administrative holds’
are placed on certain funds held in deposit accounts known to be part of a Chapter 7
bankruptcy proceeding.” 	[Doc. 13 at 14.] 	A hold was placed on Debtor’s accounts in
accordance with this procedure.5
In this Court’s view, Bank’s actions did not violate section 362(a)(3). The legislative
history explains the purpose of section 362(a)(3), which is:
to prevent dismemberment of the estate. 	Liquidation must proceed in an orderly
fashion. 	Any distribution of property must be by the trustee after he has had an
opportunity to familiarize himself with the property available for distribution.
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H.R. Rep. No. 95-595, at 341 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6298; S. Rep.
95-989, at 50, reprinted in 1978 U.S.C.C.A.N. 5787, 5836. In this case, Bank did not take
any action to interfere with the orderly liquidation of the estate, or to prevent the Trustee
from evaluating the available assets and determining proper distribution. Moreover, Bank
did not “obtain possession of property of the estate” or “exercise control over property of the
estate.” To the contrary, Bank relinquished control of the accounts to the Trustee. Although
the accounts were unavailable to the Debtor (and presumably unavailable to any one else that
may have attempted to access them, such as creditors or holders of checks written on the
checking account), they were not unavailable to the Trustee. 	It is undisputed that Bank
immediately 	contacted 	the 	Trustee 	upon 	receiving 	notification 	of 	the 	bankruptcy,
acknowledged that the funds represented by the accounts were property of the estate, and
indicated that it stood ready to follow the Trustee’s instructions regarding the funds. It is
also undisputed that Bank promptly complied with Trustee’s instructions regarding the
funds—it immediately released $4,000 to Debtor when instructed to do so by the Trustee.
The Court further finds that Strumpf lends additional support for the conclusion that
Bank’s actions did not run afoul of section 362(a)(3). In Strumpf, the United States Supreme
Court considered the question of whether an administrative freeze of a bank account violated
section 362(a)(3) and concluded that it did not. 	Strumpf, 516 U.S. at 21. 	As discussed
above, the Supreme Court first observed that a bank account consists not of money belonging
to the depositor and held by the bank, but rather a promise to pay, from the bank to the
depositor. Strumpf, 516 U.S. at 21. Thus, a bank’s “temporary refusal to pay was neither a
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taking of possession of respondent’s property nor an exercising of control over it, but merely
a refusal to perform its promise.” Strumpf, 516 U.S. at 21.
The Court believes that the reasoning of Strumpf is applicable. The bank accounts at
issue here constituted a promise to pay, from Bank to Debtor. 	The administrative freeze
amounted to a refusal to perform that promise to the Debtor—not an exercise of control over
Debtor’s property.
The Bankruptcy Court, as well as the Magistrate Judge, concluded that Strumpf is
inapplicable to this case because Strumpf involved a claim of setoff, and this case does not.
They also characterized as dicta the Supreme Court’s statements regarding the nature of a
bank account. This Court disagrees with both these conclusions for the following reasons.
First, the Supreme Court considered whether the administrative hold imposed by the bank
constituted a “setoff” within the meaning of section 362(a)(7), which stays actions to “setoff
any debt owing to the debtor that arose before commencement of the case.” Strumpf, 516
U.S. at 18–19. After concluding that the hold was not a setoff, and therefore did not violate
section 362(a)(7), the Supreme Court went on to consider the respondent’s “additional
contentions that the administrative hold violated §§ 362(a)(3) and 362(a)(6).” Strumpf, 516
U.S. at 21. The Supreme Court quoted the text of section 362(a)(3) and concluded that the
administrative hold imposed by the bank did not violate those automatic stay provisions,
either. Strumpf, 516 U.S. at 21. Thus, the Bankruptcy Court’s conclusion that “[s]ection
362(a)(3) was not at issue in Strumpf” is simply incorrect.
Second, the Supreme Court’s statement regarding the nature of bank accounts should
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6 Even if a statement by the United States Supreme Court could be characterized as dicta, courts
are not free to disregard it. The Court is bound by Supreme Court dicta almost as firmly as it is by
outright holdings. United States v. Nelson, 383 F.3d 1227, 1232 (10th Cir. 2004). Furthermore, dicta or
not, the statement that a bank account is a promise to pay, from the bank to the depositor, is a correct
statement of law. Bank of Marin v. England, 385 U.S. 99, 101 (1966) (collecting cases); see also Aspinall
v. United States, 984 F.2d 355, 358 (10th Cir. 1993) (under Colorado law, money deposited in account
becomes property of the bank, creating a chose in action in favor of the depositor); In re Bakersfield
Westar Ambulance, Inc., 123 F.3d 1243, 1246 (9th Cir. 1997) (same, California law). The Court is not
aware of any law to the contrary, from New Mexico or elsewhere.
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not be disregarded because it is perceived as dicta.6 The characterization of bank accounts
as promises to pay, rather than money, was integral to the Supreme Court’s holding that the
administrative hold did not violate the automatic stay. I note that Justice Scalia went so far
as to suggest that the result might be different if bank accounts consisted of money belonging
to the depositor. Strumpf, 516 U.S. at 21 (“[Debtor’s] view of things might be arguable if
a bank account consisted of money belonging to the depositor and held by the bank.”).
The Bankruptcy Court held that Bank could not rely on the turnover provision of
section 542 as “justification” for freezing the account. In re Jimenez, 335 B.R. at 461–62.
However, it is not a question of whether Bank is “justified” by section 542—section 542
requires Bank to make payment to the Trustee or to her order. 	11 U.S.C. 542(b); In re
Spencer, 362 B.R. at 493–94. Strumpf instructs that the automatic stay provisions should not
be given an interpretation that creates a conflict with other provisions in the Bankruptcy
Code. As explained in Strumpf, section 362(a)(7) makes it a violation of the automatic stay
to exercise a setoff against the debtor. Section 542(b), which concerns turnover of property
to the estate, requires a bankrupt’s debtors to pay to the trustee (or on her order) any “debt
that is matured, payable on demand, or payable on order...except to the extent that such debt
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may be offset under section 553 of this title against a claim against the debtor.” Strumpf, 516
U.S. at 20 (quoting 11 U.S.C. § 542(b)). Section 553(a), in turn sets forth a general rule, with
certain exceptions, that any right of setoff that a creditor possessed prior to the debtor’s filing
for bankruptcy is not affected by the Bankruptcy Code. As stated in Strumpf:
It would be an odd construction of §362(a)(7) that required a creditor with a right of
setoff to do immediately that which §542(b) specifically excuses it from doing as a
general matter: pay a claim to which a defense of setoff applies.
Strumpf, 516 U.S. at 20.
Although Strumpf was concerned with the exception of section 542(b), the reasoning
applies equally here. 	Section 542(b) requires Bank to pay debts to the Trustee or to her
order, except, as noted in Strumpf, to the extent the Bank claims a right of setoff. Strumpf,
516 U.S. at 20 (quoting 11 U.S.C. § 542(b)); see also In re Williams, 249 B.R. at 223 (even
where Chapter 7 debtor claims bank account is exempt, any turnover of account must be to
trustee, not to debtor). Thus Bank, which owed a debt to Debtor but did not claim a setoff,
was required to pay (turnover) the money represented by the accounts to the Trustee or to her
order. 	Section 542(b) does not authorize Bank to make payment to Debtor. 	Debtor
nevertheless asserts that Bank violated the automatic stay—section 362(a)(3) to be exact—by
refusing to allow her to access the accounts. Guided by the reasoning of Strumpf, this Court
declines to give section 362(a)(3) an interpretation that would place it in conflict with section
542(b). In other words, it would be an “odd construction” if Bank’s refusal to pay Debtor
violated section 362(a)(3) when section 542(b) requires Bank to pay the Trustee.
Finally, for several reasons, the Court is not persuaded by the reasoning of In re
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Flynn, 143 B.R. 798, 799 (Bankr. D.R.I. Vt. 1992), which was relied upon by both the
Bankruptcy Court and the Magistrate Judge to conclude that the freeze constituted a violation
of the automatic stay. 	In In re Flynn, a credit union bank with an alleged right of setoff
placed an administrative freeze on the Chapter 7 debtors’ bank accounts, prohibiting them
from accessing the funds. In re Flynn, 143 B.R. 798, 799 (Bankr. D.R.I. Vt. 1992). The
debtors moved for an order holding the credit union in contempt for a willful violation of the
automatic stay. 	In re Flynn, 143 B.R. at 799. The bankruptcy court ruled that the credit
union had violated the automatic stay by, among other things, imposing a freeze on debtors’
accounts. The court in In re Flynn reviewed the arguments on both sides of the then ongoing
controversy regarding whether a bank with a right of setoff could refuse to allow the debtor
to access its accounts, and sided with those jurisdictions and commentators that concluded
that such an action would violate the automatic stay. In re Flynn, 143 B.R. at 799–802. In
re Flynn was decided several years before Strumpf, which subsequently resolved this so-
called “banker’s dilemma” contrary to the result In re Flynn. The analysis of In re Flynn is
therefore of little value to the analysis of the issue in the present case.
The Bankruptcy Court also apparently found significance in the manner in which
Bank learned of Debtor’s bankruptcy, stating that because Bank was not a creditor, it “would
not have gained actual knowledge of the filing had it not searched the electronic docket
system for filings by account holders.” 	In re Jimenez, 335 B.R. at 462. The Bankruptcy
Court further reasoned that were it not for the alleged practice of searching electronic
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7 Section 542(c) provides some protection to an entity that, without actual knowledge or actual
notice of the commencement of the case, pays a debt owing to the debtor to someone other than the
trustee. 11 U.S.C. § 542(c).
22
dockets, Bank would be protected by the safe harbor provision of section 542(c). 7 In re
Jimenez, 335 B.R. at 462.
The Court disagrees with this reasoning. 	Banks may learn of an account holder’s
bankruptcy in any number of ways, both official and unofficial. If the bank is a creditor, it
should receive official notice through the administration of the case. Bankr. Rule 2002. If
the bank is not a creditor, then the trustee must give notice. 	Bankr. Rule 2015(a)(4) (“A
trustee...shall...as soon as possible after the commencement of the case, give notice of the
case to every entity known to be holding money or property subject to withdrawal or order
of the debtor, including every bank...”). Even prior to the advent of electronic filing, banks
could obtain unofficial notice of bankruptcy filings through, for example, credit bureau
bulletins. See, e.g., In re Carpenter, 14 B.R. 405, 406 (Bankr. M.D. Tenn. 1981).
Debtor’s contention that Bank is at fault because it “went looking” for bankruptcy
filings is without merit. [Doc. 17 at 28.] Notice of the bankruptcy filing need not be formal
or official to put a creditor on notice. In re Johnson, 501 F.3d 1163, 1172 (10th Cir. 2007)
(citing Greentree Servicing, LLC v. Taylor, 369 B.R. 282, 286 (S.D. W.Va. 2007) (collecting
cases). Though the Court expresses no opinion either approving or disapproving of Bank’s
policy, it concludes that it is immaterial how Bank came into its knowledge of Debtor’s case.
The undisputed fact is that Bank did know and section 542(c) therefore is inapplicable.
Because the Court concludes that a violation of the automatic stay did not occur, it
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does not reach the parties’ arguments regarding whether the violation was “willful” under
section 362(h).
IV. 	CONCLUSION
For the reasons set forth above, the Court rejects the Proposed Findings and
Recommendation of the United States Magistrate Judge [Doc. 21], filed July 23, 2007. The
Bankruptcy Court’s Order Denying Defendant’s Motion for Summary Judgment and
Granting Plaintiff’s Cross Motion for Summary Judgment [Doc. 1-6; Doc. 15 in Adversary
Proceeding 05-01150-m], filed December 21, 2005 is 	REVERSED. 	The case is
REMANDED to the Bankruptcy Court with instructions to enter an order denying Debtor’s
motion for summary judgment and granting summary judgment to Bank.
SO ORDERED this 6th day of August 2008, in Albuquerque, New Mexico.
_______________________
M. CHRISTINA ARMIJO
United States District Judge
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