In re: Zavala, No. 10-91718-E-7 (Bankr. E.D. Calif., February 7, 2011).
Can a bank refuse to disburse funds owed to a debtor who files for bankruptcy protection? In a recent 9th Circuit bankruptcy decision, a California bankruptcy court ruled that it was not a violation of the automatic stay for a Bank to deny a debtor the use of their account after filing for Chapter 7
Six days after filing for Chapter 7 bankruptcy, Rey Zavala and Michelle Catbagan sought money owed to them by Wells Fargo Bank for amounts the debtors claimed were exempt from their bankruptcy estate. The Bank did not comply with their request, instead writing to the trustee in the case to seek instructions.
About a week later, the debtors brought an action against the Bank. The court held that the debtors had no right to bring claims against the Bank for failure to deliver money, because the money was property of the estate.
The main issue in the case was who ought to control the funds in the debtors' account. The court reasoned that, upon commencement of a bankruptcy case, deposits in a bank account belonging to the debtor become property of the estate under section 541(a) of the Bankruptcy Code. Exempt property is not automatically exempt upon filing, but is first a part of the estate. The court held that the debtors were entitled to receive the value of their exemption, but only when the Bank had first administered the accounts as property of the estate to the trustee.
Thus, the trustee in the case had the right to possess and control the accounts, and the debtors had no right to allege a violation of the automatic stay relating to them.
