Who Owns Frozen Funds After an Account Hold?

A bank freezes a business account after a fraud alert. A payment processor places a reserve on merchant funds. A crypto exchange suspends withdrawals during a compliance review.

The first legal question is always the same: who owns the money?

The answer matters. It determines what the institution can do with the funds, how long it can hold them, and what remedies the customer may have.

Deposit or Trust? The Ownership Question

California law recognizes that ownership depends on the nature of the relationship between the customer and the institution.

As the court explained, “the relationship between a bank and a depositor depends upon the type of deposit made – whether it is a general deposit or a special one.” Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819.

With a general deposit, title passes to the bank. The bank becomes a debtor and owes the customer a contractual obligation to repay the funds. Most ordinary checking and business accounts are structured this way. When such an account is frozen, the dispute is typically framed as a contract claim rather than a property claim.

A special deposit or trust arrangement is different. In those cases, title may remain with the customer. The outcome depends on the parties’ intent, the agreement, and the instructions governing the funds.

Payment processors and fintech platforms often fall into a gray area. Their terms frequently describe the platform as the customer’s “agent” for receiving, holding, and distributing funds.

Some agreements also state that customer funds are maintained separately from the platform’s own assets. Those provisions may support an agency or trust theory, but labels alone are not controlling.

Courts look at the substance of the relationship. In In re Coupon Clearing Service, 113 F.3d 1091 (9th Cir. 1997), the Ninth Circuit rejected an agency argument where retailers “could not control” the processor’s handling of proceeds.

The court found a debtor-creditor relationship because the processor was obligated to make payments on a fixed schedule regardless of whether it had collected the underlying funds.

Trust claims face similar scrutiny. An express trust requires intent, identifiable property, a lawful purpose, and a beneficiary. In In re Sale Guaranty Corp., 220 B.R. 660 (B.A.P. 9th Cir. 1998), segregation of funds into a separate account played a key role in the court’s finding that a trust existed.

Why Ownership Matters

The ownership question drives the available remedies.

If the customer retains title to the funds, the institution’s rights are limited by the governing agreement.

The money is generally not the institution’s property to invest, offset, or permanently retain beyond what the contract allows. The funds may also remain outside the institution’s bankruptcy estate if the institution fails.

Most importantly, the customer may have a claim for conversion, not just breach of contract.

California courts recognize conversion claims involving a specific and identifiable sum of money. As the court noted in Voris v. Lampert, conversion may exist where there is “a specific, identifiable sum involved, such as where an agent accepts a sum of money to be paid to another and fails to make the payment.”

Likewise, in Fischer v. Machado (1996) 50 Cal.App.4th 1069, the court held that an agent who receives identifiable proceeds for a principal and refuses to deliver them can be liable for conversion, even without a duty to segregate particular bills or funds.

If the customer owns only a right to payment, the dispute becomes a contract case. The focus shifts to the institution’s hold rights, reserve provisions, setoff rights, and other contractual protections.

How Long Can Funds Be Held?

Most account agreements give banks, processors, and exchanges broad discretion to impose fraud holds, reserves, and compliance reviews. Courts routinely enforce those provisions.

For example, in Chen v. PayPal, Inc. (2021) 61 Cal.App.5th 559, the court assumed an agency relationship but nevertheless held that PayPal’s retention of interest on pooled customer funds did not breach any fiduciary duty because the conduct was expressly authorized by the governing agreement.

That discretion, however, is not unlimited.

Every contract includes an implied covenant of good faith and fair dealing. Under Schertzer v. Bank of America, N.A., 109 F.4th 1200 (9th Cir. 2024), the covenant may be violated where a party abuses that discretion to deprive the other party of a reasonably expected contractual benefit.

The standard is demanding. The Ninth Circuit explained that liability requires “a conscious and deliberate act” that “unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party.” An honest mistake or poor judgment is not enough. Nor can the implied covenant override an express contractual term.

The strongest claims often arise when a hold continues long after its stated justification has disappeared. A prolonged freeze with no clear explanation, no identified risk amount, and no meaningful timeline may support a claim that the institution has exceeded the limits of its contractual discretion.

Where a hold effectively becomes a forfeiture, California law may provide relief. California Civil Code § 3275 allows a party relief from a forfeiture upon “making full compensation to the other party,” provided the opposing party receives adequate protection. (Cal. Civ. Code § 3275)

The customer’s own record

Institutions defend holds by pointing to the customer: undisclosed business changes, transactions for third parties, unrecognized billing descriptors, chargeback rates, or incoming funds traced to fraud.

These facts often determine whether a hold was reasonable in the first place. They should be reviewed carefully before sending a demand letter, commencing arbitration, or filing suit.

This article is for informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Dilendorf Law Firm. Attorney Advertising.