Eric Mwangi v. Wells Fargo Bank

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In the Matter of: ERIC NJAU No. 12-16087
MWANGI; PAULINE MUTHONI
MWICHARO, D.C. No.
Debtors, 2:11-cv-01753-
PMP-GWF
ERIC NJAU MWANGI; PAULINE
MUTHONI MWICHARO, OPINION
Appellants,
v.
WELLS FARGO BANK, N.A.,
Appellee.
Appeal from the United States District Court
for the District of Nevada
Philip M. Pro, Senior District Judge, Presiding
Argued and Submitted
April 11, 2014—San Francisco, California
Filed August 26, 2014
Before: Barry G. Silverman, William A. Fletcher,
and Jay S. Bybee, Circuit Judges.
Opinion by Judge Bybee
2 IN THE MATTER OF MWANGI
SUMMARY*
Bankruptcy
The panel affirmed the district court’s affirmance of the
bankruptcy court’s dismissal of two chapter 7 debtors’
adversary proceeding against a bank that placed a “temporary
administrative pledge” on their accounts after it discovered
that they had filed a bankruptcy petition.
The panel held that the debtors could not state a claim for
willful violation of the automatic stay provision 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.” The panel
concluded that 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. The panel concluded that
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).
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN THE MATTER OF MWANGI 3
COUNSEL
Christopher P. Burke (argued), Las Vegas, Nevada, for
Plaintiffs-Appellants.
M. David Minnick (argued), Kevin M. Fong, and Daniel
Lamb, Pillsbury Winthrop Shaw Pittman LLP, San Francisco,
California; Lance Earl and Lars K. Evensen, Holland & Hart
LLP, Las Vegas, Nevada, for Defendant-Appellee.
OPINION
BYBEE, Circuit Judge:
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
4 IN THE MATTER OF MWANGI
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.
I. FACTS AND PROCEDURAL HISTORY
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
IN THE MATTER OF MWANGI 5
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
6 IN THE MATTER OF MWANGI
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 (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
IN THE MATTER OF MWANGI 7
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
1
The Debtors do not appeal that decision here.
8 IN THE MATTER OF MWANGI
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 injure the Debtors under
§ 362(a)(3), the district court affirmed the bankruptcy court’s
judgment of dismissal with prejudice. Id. at 810–13.
II. STANDARD OF REVIEW
“We review de novo the district court’s decision on an
appeal from a bankruptcy court.” Barclay v. Mackenzie (In re
IN THE MATTER OF MWANGI 9
AFI Holding, Inc.), 525 F.3d 700, 702 (9th Cir. 2008). “A
bankruptcy court’s decision to dismiss an action for failure to
state a claim is reviewed de novo, as is its interpretation of
the bankruptcy code.” Barrientos v. Wells Fargo Bank, N.A.,
633 F.3d 1186, 1188 (9th Cir. 2011) (citations omitted).
“Whether the automatic stay provisions of 11 U.S.C. § 362(a)
have been violated is a question of law reviewed de novo.”
Eskanos & Adler, P.C. v. Leetien, 309 F.3d 1210, 1213 (9th
Cir. 2002).
III. STATUTORY FRAMEWORK
The filing of a Chapter 7 bankruptcy petition
automatically creates an estate. 11 U.S.C. § 541(a). Subject
to exceptions not relevant here, the property of the
bankruptcy estate includes “all legal or equitable interests of
the debtor in property as of the commencement of the case.”
Id. § 541(a)(1). The trustee is the representative of this estate,
id. § 323, and the debtor has a duty to surrender to the trustee
all estate property, id. § 521(a)(4).
By filing a bankruptcy petition, the debtor immediately
obtains the protection of an automatic stay. Id. § 362(a). The
automatic stay “is designed to effect an immediate freeze of
the status quo by precluding and nullifying post-petition
actions, judicial or nonjudicial, in nonbankruptcy fora against
the debtor or affecting the property of the estate.” Hillis
Motors, Inc. v. Haw. Auto. Dealers’ Ass’n, 997 F.2d 581, 585
(9th Cir. 1993). “The stay [thus] protects the debtor by
allowing it breathing space and also protects creditors as a
class from the possibility that one creditor will obtain
payment on its claims to the detriment of all others.” Id.
10 IN THE MATTER OF MWANGI
The specific stay provision at issue here is § 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.” Section 362(k)(1) provides the
enforcement mechanism for the automatic stay: “[A]n
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.”
In addition to the operation of the automatic stay, the
turnover provisions of 11 U.S.C. § 542 help preserve the
status quo of the bankruptcy estate at the time of its
formation. The relevant turnover provision in this appeal is
§ 542(b), which provides that “an entity that owes a debt that
is property of the estate and that is matured, payable on
demand, or payable on order, shall pay such debt to, or on the
order of, the trustee, except to the extent that such debt may
be offset under section 553 of this title against a claim against
the debtor.”
Although, as previously noted, the debtor is required to
surrender all estate property to the trustee, the debtor may
claim certain exemptions. 11 U.S.C. § 522. To do so, the
debtor must file a list of property that he claims as exempt.
Id. § 522(l). “[A] party in interest may [then] file an objection
to the list of property claimed as exempt 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.” Fed. R.
Bankr. P. 4003(b)(1). If a party in interest does not object
during the objections period, however, “the property claimed
as exempt on such list is exempt.” 11 U.S.C. § 522(l). This is
true “even if the debtor had no good faith basis for the claim
IN THE MATTER OF MWANGI 11
of exemption.” In re Gebhart, 621 F.3d at 1209–10. “The
effect of an exemption is that the debtor’s interest in the
property is ‘withdrawn from the estate (and hence from the
creditors) for the benefit of the debtor.’” Id. at 1210 (quoting
Owen v. Owen, 500 U.S. 305, 308 (1991)). Indeed, “[i]t is
widely accepted that property deemed exempt from a debtor’s
bankruptcy estate revests in the debtor.” Smith v. Kennedy (In
re Smith), 235 F.3d 472, 478 (9th Cir. 2000).
IV. DISCUSSION
Although this statutory framework is undisputed, the
parties contest how it applies to the case before us. The
parties’ disagreement revolves around (A) when exempted
property revests in the debtor under Nevada Revised Statutes
§ 21.090(1)(g); (B) whether the alleged willful violation of
§ 362(a)(3) injured the Debtors’ property interest;
(C) whether the Debtors were required to take any action to
perfect their claim of exemption before asserting a claim for
damages; and (D) whether the Debtors have a claim under
11 U.S.C. § 105(a).
A. The Revesting of Property under Nevada Revised Statutes
§ 21.090(1)(g)
Resolution of this appeal requires us to determine when
the account funds revested in the Debtors—i.e., when the
Debtors developed a right to possess or control the account
funds. The Supreme Court’s decision in Schwab v. Reilly,
560 U.S. 770 (2010), guides our analysis. There, the Court
considered “whether an interested party must object to a
claimed exemption where . . . the [relevant statute] defines
the property the debtor is authorized to exempt as an interest,
the value of which may not exceed a certain dollar amount, in
12 IN THE MATTER OF MWANGI
a particular type of asset” rather than as the asset itself. Id. at
774. The Court concluded that an interested party has no duty
to object so long as the asserted value of the property claimed
as exempt is within the limits the statute allows. Id. at 782. In
addition, the Court found that even when a debtor claims an
exemption in an amount that is equal to the full value of the
property as stated in the petition and the trustee fails to
object, the asset itself remains in the estate; only an “interest”
in the property equal to the value of the exemption claimed at
filing is removed from the estate. Id. at 782–83, 792.
We applied Schwab’s holding in In re Gebhart. There, we
considered two statutes that allow a debtor to exempt an
interest in real property, the value of which may not exceed
a certain dollar amount. In re Gebhart, 621 F.3d at 1210.
Relying on Schwab, we held that “the fact that the value of
the claimed exemption [was] . . . equal to the market value of
the residence at the time of filing the petition did not remove
the entire asset from the estate.” Id. “Instead, what [was]
removed from the estate [was] an interest in the property
equal to the value of the exemption.” Id. (internal quotation
marks omitted). As a result, the asset would remain estate
property until it was administered in bankruptcy, the trustee
abandoned the asset, or the bankruptcy case closed. Id. at
1210, 1212; see also Schwab, 560 U.S. at 792 (“Where a
debtor intends to exempt nothing more than an interest . . .
[and] an interested party does not object to the claimed
interest . . . , title to the asset will remain with the estate
pursuant to § 541, and the debtor will be guaranteed a
payment in the dollar amount of the exemption.”).
The BAP concluded that Schwab applies to all
exemptions, not just exemptions of an interest, the value of
which may not exceed a certain dollar amount. In re Mwangi
IN THE MATTER OF MWANGI 13
I, 432 B.R. at 821. Under this view, all exempt property
remains estate property until it is administered in bankruptcy,
the trustee abandons the asset, or the bankruptcy case closes.
We disagree. The general rule is that exempt property
immediately revests in the debtor. See In re Gebhart,
621 F.3d at 1210 (“The effect of an exemption is that the
debtor’s interest in the property is ‘withdrawn from the estate
(and hence from the creditors) for the benefit of the debtor.’”
(quoting Owen, 500 U.S. at 308)); Bell v. Bell (In re Bell),
225 F.3d 203, 216 (2d Cir. 2000) (“Quite simply, property
that has been exempted belongs to the debtor.”). We read
Schwab and In re Gebhart as an exception to this general
rule, motivated by the fact that certain statutes exempt only
a partial interest in an asset, the value of which may fluctuate
during the pendency of the bankruptcy case. Accordingly, in
our view, Schwab and In re Gebhart are limited to
exemptions of an interest, the value of which may not exceed
a certain dollar amount.
The question then becomes whether the relevant
exemption in this case falls within the Schwab and In re
Gebhart exception to the general rule that exempt property
immediately revests in the debtor. We conclude that it does
not. Under Schwab and In re Gebhart, we look to the text of
the statute to determine whether the statute exempts the asset
or an interest therein. Schwab, 560 U.S. at 782; In re Gebhart,
621 F.3d at 1210. Nevada Revised Statutes § 21.090(1)(g)2
2
The statute provides in relevant part:
The following property is exempt from execution,
except as otherwise specifically provided in this section
or required by federal law:
...
14 IN THE MATTER OF MWANGI
purports to exempt “75 percent of the disposable earnings of
a judgment debtor during [any] workweek.” On its face,
§ 21.090(1)(g) defines the property that the debtor is
authorized to exempt as the asset itself, i.e., disposable
(g) For any workweek, 75 percent of the disposable
earnings of a judgment debtor during that week, or 50
times the minimum hourly wage prescribed by section
6(a)(1) of the federal Fair Labor Standards Act of 1938,
29 U.S.C. § 206(a)(1), and in effect at the time the
earnings are payable, whichever is greater. Except as
otherwise provided in paragraphs (o), (s) and (t), the
exemption provided in this paragraph does not apply in
the case of any order of a court of competent
jurisdiction for the support of any person, any order of
a court of bankruptcy or of any debt due for any state or
federal tax. As used in this paragraph:
(1) “Disposable earnings” means that part of the
earnings of a judgment debtor remaining after the
deduction from those earnings of any amounts required
by law to be withheld.
(2) “Earnings” means compensation paid or payable for
personal services performed by a judgment debtor in
the regular course of business, including, without
limitation, compensation designated as income, wages,
tips, a salary, a commission or a bonus. The term
includes compensation received by a judgment debtor
that is in the possession of the judgment debtor,
compensation held in accounts maintained in a bank or
any other financial institution or, in the case of a
receivable, compensation that is due the judgment
debtor.
Nev. Rev. Stat. § 21.090(1).
IN THE MATTER OF MWANGI 15
earnings.3 Therefore, § 21.090(1)(g) does not fall within the
Schwab and In re Gebhart exception, and the general rule that
exempt property immediately revests in the debtor controls
exemptions claimed under this Nevada statute.
Applying the general rule, we can now determine when
the account funds revested here. The Debtors filed their
Chapter 7 bankruptcy petition on August 3, 2009. The
account funds automatically became part of the bankruptcy
estate with the filing of the Debtors’ petition. 11 U.S.C.
§ 541(a). On August 11, 2009, the Debtors 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. But the account funds did not become exempt on
that date. Under Federal Rule of Bankruptcy Procedure
4003(b)(1), “a party in interest may file an objection to the
list of property claimed as exempt 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.” Because
the property is only “claimed as exempt” during this 30-day
objection period, it may be inferred that the property is not
deemed exempt, and therefore the property does not revest in
the debtor, until the end of the objection period. The § 341
meeting of creditors was held on September 18, 2009, after
the filing of the Amended Schedule C. Accordingly, any
interested party had thirty days after the § 341 meeting of
creditors to object to the Debtors’ claimed exemption. During
3
Although the statute refers to a percentage of disposable earnings,
which might suggest an interest in a non-divisible asset, the earnings are
simply an amount of money. Thus, the percentage of disposable earnings
is best characterized as a portion of a divisible asset rather than an interest
in an asset.
16 IN THE MATTER OF MWANGI
this period—from the filing of the Chapter 7 bankruptcy
petition on August 3, 2009, to the end of the thirty-day
objections period on October 18, 2009—the account funds
remained estate property. Because all interested parties failed
to act during the objections period, however, the account
funds passed out of the bankruptcy estate and revested in the
Debtors on October 19, 2009.4 On that date, the Debtors
developed a right to possess and control the account funds.
B. Injury
The Debtors argue that Wells Fargo’s administrative
pledge injured their interests before and after the account
4
As the district court noted, the Bankruptcy Code does not
unambiguously establish when property claimed as exempt revests in the
debtor. In re Mwangi II, 473 B.R. at 809. There are several possibilities,
including the date of filing of a claim for exemption, the end of the thirty-
day objections period, the trustee’s abandonment of the property under
§ 554, a court order that the property claimed as exempt belongs to the
debtor, and the closing of the bankruptcy case. As we have discussed, the
general rule is that property immediately revests in the debtor when the
property is deemed exempt. See In re Gebhart, 621 F.3d at 1210; In re
Smith, 235 F.3d at 478; In re Bell, 225 F.3d at 216. In contrast, under the
Schwab and In re Gebhart exception, only an interest in the property is
removed from the estate when the interest is deemed exempt. In re
Gebhart, 621 F.3d at 1210. The property itself remains part of the estate
until it is administered in bankruptcy, the trustee abandons it, or the
bankruptcy case closes. This interpretation of the Bankruptcy Code
enhances predictability for interested parties. In addition, this
interpretation prevents potential unwarranted liability on the part of third
party possessors of estate property, who might otherwise have to choose
either (1) to comply with § 542’s turnover provisions, risking potential
liability to the debtor for violation of § 362’s automatic stay; or (2) to
comply with the debtor’s demands to control the property, risking liability
to the trustee for violation of § 542’s turnover provisions. In re Mwangi
II, 473 B.R. at 810.
IN THE MATTER OF MWANGI 17
funds revested. The Debtors contend that before the thirty-
day objections period ran, they had an inchoate interest in the
account funds. They claim that the administrative pledge
caused them injury during this period because even their
inchoate interest was superior to any interest Wells Fargo
might have had. The Debtors recognize that the account funds
revested after the thirty-day objections period. But despite the
revesting of the account funds, the Debtors maintain that their
exempt property retained its status as estate property, subject
to the protection of § 362(a)(3)’s automatic stay provision.
The Debtors thus claim that Wells Fargo’s administrative
pledge also caused them injury during this second period
because they developed a right to possess and control the
exempt property when it revested in them.
We reject the Debtors’ argument. From the filing of the
Chapter 7 bankruptcy petition on August 3, 2009, to the end
of the thirty-day objections period on October 18, 2009, the
account funds remained estate property. During this period,
the Debtors had no right to possess or control the account
funds. See 11 U.S.C. §§ 323, 704. The Debtors thus failed to
allege a plausible injury based on the operation of the
administrative pledge between August 3, 2009, and October
18, 2009. Accord Zavala v. Wells Fargo Bank, N.A. (In re
Zavala), 444 B.R. 181, 189–90 (Bankr. E.D. Cal. 2011);
Bucchino v. Wells Fargo Bank, N.A.(In re Bucchino),
439 B.R. 761, 771–73 (Bankr. D.N.M. 2010).
Nor can the Debtors allege a plausible injury based on the
operation of the administrative pledge after October 18, 2009.
As we have explained, the account funds passed out of the
bankruptcy estate and revested in the Debtors on October 19,
2009. On that date, the account funds lost their status as estate
property. And because the account funds were no longer
18 IN THE MATTER OF MWANGI
estate property, they were no longer subject to the protections
of § 362(a)(3)’s automatic stay provision. See 11 U.S.C.
§ 362(a)(3). Accordingly, Wells Fargo’s administrative
pledge could not cause injury to the Debtors under § 362(k)
after the account funds revested on October 19, 2009. We
therefore conclude that the district court properly affirmed the
bankruptcy court’s dismissal of the Debtor’s § 362 claim.5
C. Required Action
The bankruptcy court suggested that the Debtors were
required to take action to perfect their claim of exemption
before they could assert a claim for damages. Specifically, the
bankruptcy court found that the Debtors could have sought
the trustee’s agreement that the exempt property no longer
belonged to the estate, could have requested an order from the
bankruptcy court confirming that the exempt property had
revested, or could have moved to compel the trustee to
abandon the exempt property to them.
The Debtors contend that the bankruptcy court’s
suggestion erroneously placed the burden on them to secure
the return of exempt property. As support, the Debtors point
to our decision in California Employment Development
Department v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147
(9th Cir. 1996). There, we held that a creditor violated
§ 362(a)(3) by refusing to turn over estate property to the
5
We note that this conclusion does not deprive the Debtors of their
exempt property. As long as the account funds remained estate property,
the Debtors could file a motion to compel the trustee to abandon them.
And as soon as the account funds revested, the Debtors could sue Wells
Fargo for breach of contract based on Wells Fargo’s failure to perform its
promise to pay. Our conclusion is simply that the Debtors chose the wrong
tool for the job.
IN THE MATTER OF MWANGI 19
trustee. In so holding, we reasoned that “[t]o effectuate the
purpose of the automatic stay [i.e., to alleviate financial
strains on the debtor], the onus to return estate property is
placed upon the possessor; it does not fall on the debtor to
pursue the possessor.” Id. at 1151. Accordingly, the Debtors
argue that Wells Fargo had an obligation to return their
account funds, regardless of any inaction on their part.
In our view, In re Del Mission Ltd. is distinguishable on
two bases. First, the relevant turnover provision there was
§ 542(a), whereas the relevant turnover provision here is
§ 542(b). Section 542(a) provides that an entity in possession
of estate property “that the trustee may use, sell, or lease . . .
shall deliver to the trustee . . . such property.” 11 U.S.C.
§ 542(a). This turnover provision unambiguously requires the
entity to deliver estate property to the trustee. In contrast,
§ 542(b) provides that “an entity that owes a debt that is
property of the estate . . . shall pay such debt to, or on the
order of, the trustee.” Id. § 542(b). Unlike § 542(a), § 542(b)
does not unambiguously require the entity to turnover estate
property to the trustee. Instead, it allows the entity to seek
direction from the trustee, which is precisely what Wells
Fargo did here.
Second, In re Del Mission Ltd. involved the failure of a
creditor to deliver assets to the trustee. Here, in contrast,
Wells Fargo did not withhold estate property from the estate.
On the contrary, Wells Fargo confirmed that the account
funds were estate property and asked the trustee for his
instructions regarding their disbursement. In other words,
Wells Fargo offered to pay its debt “to, or on the order of, the
trustee,” in compliance with § 542(b).
20 IN THE MATTER OF MWANGI
Despite the valid policy concerns described in In re Del
Mission Ltd., the scenario presented in this case is very
different. Under the Bankruptcy Code, the trustee has
responsibility for estate property. See 11 U.S.C. §§ 323, 704.
The debtor has no right to possess or control estate property
while it remains property of the estate. A debtor claiming an
exemption in estate property may contact the trustee to obtain
a distribution of exempt property. If the trustee fails to
properly distribute it, the debtor’s remedy under the
Bankruptcy Code is to obtain an order for abandonment
pursuant to § 554(b). But where, as here, the defendant is “an
entity that owes a debt that is property of the estate,” the
debtor has no right to possess or control the funds, and the
entity has complied with § 542(b) by seeking instructions
from the trustee, the debtor cannot plausibly assert that he
was damaged by the defendant’s purported violation of
§ 362(a)(3). While we agree with the Debtors that the onus to
return property that, by way of a perfected exemption, has
revested in the debtor is properly placed upon the possessor,
the bankruptcy court did not improperly place the burden on
the Debtors to take action to perfect their claim of exemption
before asserting a claim for damages.
D. Section 105(a)
Finally, the Debtors argue that the district court erred in
affirming the bankruptcy court’s dismissal of their 11 U.S.C.
§ 105(a) claim. Section 105(a) authorizes the bankruptcy
court to “issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this
title.” For the reasons articulated above, we conclude that the
Debtors cannot state a claim under § 362(a)(3) and that Wells
Fargo complied with § 542(b). The Debtors have identified
no other relevant provisions of the Bankruptcy Code. We
IN THE MATTER OF MWANGI 21
therefore conclude that the Debtors cannot state a claim under
§ 105(a). Pac. Shores Dev., LLC v. At Home Corp. (In re At
Home Corp.), 392 F.3d 1064, 1070 (9th Cir. 2004) (“[A]
bankruptcy court must locate its equitable authority in the
Bankruptcy Code.”).
V. CONCLUSION
We hold that property immediately revests in the debtor
when the property is deemed exempt under Nevada Revised
Statutes § 21.090(1)(g). The Debtors cannot allege a plausible
injury under § 362(a)(3) based on the operation of Wells
Fargo’s administrative pledge before the account funds
revested because the Debtors had no right to possess or
control the account funds during this period. Similarly, the
Debtors failed to allege a plausible injury under § 362(a)(3)
based on the operation of Wells Fargo’s administrative pledge
after the account funds revested because § 362(a)(3) applies
only to estate property. We therefore conclude that the district
court properly affirmed the bankruptcy court’s judgment of
dismissal.
AFFIRMED.