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The facts in In re Mwangi, 432 B.R. 812 (9^th Cir. BAP 2010) are familiar to many.  The Debtors had four accounts (the two largest of which were not disclosed in their schedules) at Wells Fargo Bank at the time they filed chapter 7.  In accordance with its policy, Wells Fargo placed a hold on these accounts and requested direction from the trustee on the disposition of the accounts.  The Debtors amended their schedules to add their previously undisclosed accounts and to claim an exemption under Nevada law in 75% of the accounts, asserting that the monies deposited into the accounts were earnings from personal services.  Before the deadline for objections to the Debtor’s claimed exemption in the accounts expired, the Debtors demanded that the bank pay over the accounts to them, and filed a motion for sanctions for violating the automatic stay against the bank when it refused to do so in light of the lack of any instruction from the trustee on the disposition of the accounts.

The Bankruptcy Court  initially ruled that Wells Fargo did not violate the automatic stay, finding that the accounts never became property of the bankruptcy estate in light of the Debtor’s claimed exemption in them.  The Debtors appealed, and the BAP reversed and remanded the matter back to the Bankruptcy Court.  The BAP held that the accounts became property of the estate on the Debtors’ bankruptcy filing and remained estate property following the Debtors’ assertion of an exemption in the accounts.  Finding that the Debtors’ exemption vested the Debtors with an inchoate right in the property, the BAP concluded that the bank violated the automatic stay when it placed its hold on the accounts and awaited the trustee’s instruction rather than paying the accounts over to the trustee.  The BAP rejected the bank’s argument that its policy is authorized by the Supreme Court’s decision in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995). The BAP reversed and remanded the matter back to the Bankruptcy Court for a determination on whether the bank had willfully violated the automatic stay.

After remand, the Debtor’s filed an adversary complaint against the bank asserting that the bank violated the automatic stay and seeking certification of the matter as a class action.  The Bankruptcy Court dismissed the complaint on its holding that the Debtors lacked standing to pursue any alleged stay violation with respect to the accounts because only a trustee has standing to pursue stay violations that relate to estate property.  The Debtors appealed.

On appeal, the United States District Court for the District of Nevada affirmed the dismissal of the complaint.  The District Court opened its analysis by stating that the BAP’s decision was not binding on it.  The District Court then analyzed the Debtors’ rights with regard to the accounts following their bankruptcy filing.  First, the court ruled that the filing of a bankruptcy petition creates an estate, and that estate include all legal or equitable interests of the debtor in property as of the commencement of the case.  The Debtor may assert exemptions as to estate property, and creditors and the trustee must object to those objections within thirty days following the creditors meeting, or the exemption is allowed.  The district court rejected the bankruptcy court’s conclusion that the mere assertion of an exemption removes the property from the estate.  The court based this conclusion on the fact that the debtor simply files a list of property that he asserts is exempt, with the right in creditors and the trustee to object to that exemption, and the procedures for the bankruptcy court to resolve any objection.  The district court concluded that if no one timely objects to a debtor’s claimed exemption, then the property is exempt from the estate and passes to the debtor upon the expiration of the time to object, or the granting of the exemption by the court if an objection is filed.

The next analyzed the Debtors’ standing to pursue a stay violation.  First, the court held that a debtor has no standing to pursue a trustee’s turn over rights under § 542 because the Code endows the trustee with the exclusive right to sue on behalf of the estate.  Next, the court ruled that a debtor cannot state a plausible entitlement for damages for a stay violation under §  362(k) for a violation under § 362(a)(3) after the expiration of the deadline to object to an exemption claim because by then the exempt property has passed out of the estate to the debtor.  Because exempt property leaves the estate following that deadline, a creditor’s actions with regard to it do not violate the stay.

Finally, the district court disagreed with the BAP on the applicability of Strumpf to the bank’s conduct.  The district court held that the bank did not violate the stay under § 362(a)(3) as a matter of law: “A bank does not exercise control over property of the estate within the meaning of § 362(a)(3) when it refuses or fails to perform on its contractual obligation to pay the owner of the account.”  Strumpf, 516 U.S. at 21.  Because a bank account is a promise to pay, a bank’s temporary refusal to pay is neither a taking of possession of the debtor’s property nor an exercise of control over it.