The City of Chicago lost the latest battle over the collection of parking fines, but the bankruptcy judges in the Windy City remain split over the underlying legal issue. In the immediate future, the Seventh Circuit will decide whether the city wins or debtors get their impounded cars back automatically after filing chapter 13 petitions.
Chicago’s persistence in collecting parking fines may eventually lead the Supreme Court to decide whether inaction is a violation of the automatic stay.
In Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), the Seventh Circuit held that passively holding property amounts to an exercise of control and therefore violates the automatic stay under Section 362(a)(3). Under Thompson, Chicago was being required to turn over cars belonging to chapter 13 debtors that had been impounded before filing on account of unpaid parking fines.
Then, the city came up with a theory that persuaded Bankruptcy Judge Donald R. Cassling. In In re Avila, 566 B.R. 558 (Bankr. N.D. Ill. 2017), he held in March that the city only had a possessory lien.
Since the city had no consensual lien if it were to give up the possessory lien, Judge Cassling held that retention of a vehicle fell within the exception to the automatic stay under Section 362(b)(3). That section provides that the stay does not apply to “any act to perfect, or to maintain or continue the perfection of, an interest in property . . . .”
Because he held that the city was not required to turn over a car automatically, Judge Cassling in substance put the onus on the debtor to file a turnover motion and offer adequate protection. In practical effect, filing a chapter 13 petition would not automatically or quickly give a car back to its owner and would require the debtor to incur additional legal expense.
In an opinion on Dec. 20, Bankruptcy Judge Jack B. Schmetterer of Chicago said that Avila was “incorrect” and explained why he henceforth will require the city to turn over impounded cars. However, Judge Schmetterer did not divest the city of its lien or leave Chicago without remedy.
Judge Schmetterer pointed out how the Seventh Circuit said in Thompson that a creditor must first return property “and then, if necessary, seek adequate protection of its interests.” He then explained why the exception to the automatic stay in Section 362(b)(3) did not apply.
The exception only applies to “an act,” not to an “act or omission,” Judge Schmetterer said. According to him, the “plain statutory language does not say” that possession required to maintain a possessory lien affords the protection of Section 362(b)(3).
In Thompson, Judge Schmetterer found the means for Chicago to preserve its rights while turning over a car. He referred to the discussion in Thompson where the appeals court said that a creditor worried about the loss in value before a hearing on adequate protection could file an emergency motion under Bankruptcy Rule 4001(a)(2).
To preserve its lien, the city must file an emergency motion to modify the automatic stay and request adequate protection, Judge Schmetterer said.
The procedure to protect its lien will not come without cost to the city, however. Judge Schmetterer said the “crux of the matter” is Chicago’s desire to avoid the payment of a filing fee for an emergency motion every time a debtor requests turnover of an impounded car.
Whether Chicago ultimately wins or loses also might be decided if the Supreme Court tackles a split of circuits that the Tenth Circuit deepened in 2017. In WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017), the Tenth Circuit held that passively holding an asset of the estate, in the face of a demand for turnover, does not violate the automatic stay in Section 362(a)(3) as an act to “exercise control over property of the estate.”
The Tenth Circuit aligned itself with the District of Columbia Circuit. The Seventh, Second, Ninth and Eighth Circuits hold to the contrary and say that retaining property after demand for turnover does violate the automatic stay.
Although there was no petition for rehearing en banc in Cowen, the issue is going to the Tenth Circuit on a direct appeal from Davis v. Tyson Prepared Foods Inc. (In re Garcia), 17-5006, 2017 BL 235622 (Bankr. D. Kan. July 7, 2017), where Bankruptcy Judge Robert E. Nugent of Wichita, Kan., was forced to rule contrary to two prior decisions of his own that the automatic stay did not prevent a statutory worker’s compensation lien from attaching automatically after bankruptcy to a recovery in a lawsuit.
Presumably, the debtor in Garcia will seek en banc review because the outcome otherwise seems controlled by Cowen. There may be a delay, however, because the case has been sent for mediation in January. The case in the Tenth Circuit is Davis v. Tyson Prepared Foods Inc. (In re Garcia), 17-3247 (10th Cir.). For ABI’s discussion, click here.