Going Broke Over Parking Tickets in Chicago

The City of Chicago is finding itself entangled in a set of legal issues surrounding the Bankruptcy Code and the enforcement of parking tickets through civil fines, impoundment and license suspension. The interplay of Chicago parking ticket debt and consumer bankruptcy is making for a fascinating legal showdown. Driving these questions is the city’s strategy of aggressively enforcing and collecting pre- and post-petition parking ticket fines and circumventing the hurdles historically imposed by the automatic stay.

Here are some relevant background numbers: ^[1]

• Of the 8,809 chapter 13 consumer bankruptcy filings overseen by Chapter 13 Bankruptcy Trustee Tom Vaughn in 2016, 47 percent listed the City of Chicago, Department of Revenue as a creditor.
• Nonbusiness chapter 13 filings decreased 26.8 percent nationwide from 2011-16. But in the Northern District of Illinois, nonbusiness chapter 13 filings increased 35 percent during the same period.
• In 2015, DNAinfo reported that Chicago had $1.5 billion in unpaid ticket debt for parking, red light and speed camera violations.
• In 2016, tickets, fines and fees generated approximately $264 million in revenue for the City.^[2]

Three questions are currently pending before the Northern District of Illinois Bankruptcy and District Courts and the Seventh Circuit Court of Appeals:

• Does post-petition retention of an impounded vehicle violate the automatic stay?
• Are post-petition traffic fines “administrative expenses” under § 503 of the Bankruptcy Code and thus entitled to priority status and payment ahead of pre-petition creditors?
• Does the Northern District’s form confirmation order constitute an abuse of discretion because it provides that all property of the chapter 13 bankruptcy estate remains property of the estate without a finding that the property is required to fulfill the plan?

This article will examine the recent decisions surrounding these questions.

Does Post-Petition Retention of an Impounded Vehicle Violate the Automatic Stay?

Until recently, bankruptcy courts interpreted the Seventh Circuit’s decision in Thompson v. Gen. Motors Acceptance Corp. LLC[3] as requiring the immediate release of vehicles retained by a secured creditor upon filing of a bankruptcy petition. Northern District of Illinois Bankruptcy Judges Donald R. Cassling, Jack B. Schmetterer and Jacqueline P. Cox, however, have now split on the issue of whether Thompson applies where a debtor’s vehicle is impounded by the City.[4]

In response to the city’s motion to declare that its retention of the vehicle did not violate the automatic stay in Avila, Judge Cassling found that the city was not in violation because its act of possessing the vehicle counted as an action to perfect or maintain its interest in the property as permitted by § 362(b)(3). Based on a 2016 amendment to the municipal code, Judge Cassling found that the city has a possessory lien on impounded vehicles and that this lien has priority over pre-existing lienholders. Therefore, the city’s possessory lien “qualifies as the type of generally applicable law referred to in § 546(b)(1)(B), making the trustee subject to the perfection of such a lien.”

Judge Cassling distinguished the Seventh Circuit’s ruling in Thompson because that decision did not address possessory liens. According to Judge Cassling, the creditor is protected from the automatic stay if the “continued possession of the property is necessary to maintain or continue that creditor’s perfection of its statutory lien under § 546(b).” As such, the debtor can only regain the vehicle by proposing a voluntary replacement lien in the plan.

In Walker, Judge Schmetterer disagreed, finding that Thompson required the city to turn over a debtor’s vehicle upon request; otherwise, the city must file a motion to lift the automatic stay in order to retain its possessory lien. Judge Schmetterer subsequently withdrew his opinion due to settlement of the underlying issue. But in his order withdrawing the decision, Judge Schmetterer declared that “not a single syllable of the Opinion’s logic is withdrawn.” Judge Schmetterer reiterated this reasoning in In re Cross[5] and In re Fulton.[6]

Neither of these decisions was appealed, but the city did appeal Judge Cox’s earlier decision in In re Kennedy,[7] which sided with Judge Schmetterer on this issue.[8] District Court Judge Manish Shah issued his opinion in City of Chicago v. Kennedy,[9] holding that continued possession of the vehicle was an exception to the automatic stay, according to § 362(b)(3), because it perfected the city’s interest in the property. However, citing to United States v. Whiting Pools Inc.[10] and 11 U.S.C. § 542, Judge Shah found that the possessory interest of the bankruptcy estate required returning the car to the debtor in return for adequate protection. Judge Shah found that the city had not had an opportunity to seek adequate protection because no adversary complaint had been filed in the underlying bankruptcy seeking turnover of the vehicle. The case was remanded to the bankruptcy court for that hearing.[11]

In another decision by Judge Cox, she reaffirmed the application of Thompson. In In re Scott,[12] Judge Cox found that, according to Illinois law, there is no possessory lien in favor of the city because the city has not supplied the debtor with goods or services as required by Illinois law. Judge Cox then fined the city for failing to release the vehicle.

Are Post-Petition Traffic Fines “Administrative Expenses” Under § 503 of the Bankruptcy Code and Thus Due Priority Status Ahead of Pre-Petition Creditors?

The city has moved to have post-petition traffic fines recognized as administrative expenses for allowance of priority payment in seven separate bankruptcies. In motions filed in those cases, the city argued that recognition under § 503 is the only way it can enforce post-petition fines. Section 503 defines administrative expenses as “the actual, necessary costs and expenses of preserving the estate....” The city argued that it cannot proceed with progressive sanctions allowing it to tow and dispose of vehicles involved in traffic violations, because the vehicle remains the property of the estate. Therefore, fundamental fairness mandates that the city be allowed to collect the post-petition traffic fines as administrative expenses. Judges Timothy A. Barnes and Pamela S. Hollis denied these motions. Judge Barnes held that allowing the city’s motion would create “a rolling fresh start” and that, in order to pursue enforcement, the city can move to lift the automatic stay or seek dismissal of the bankruptcy case.

The city appealed each case, and the seven appeals were consolidated before District Court Judge Elaine Bucklo in City of Chicago v. Marshall.[13] Judge Bucklo held that the city had not satisfied the test for recovering administrative expenses under Reading Co. v. Brown.[14] The Reading test has two parts: (1) the debt must arise out of a transaction with the estate; and (2) fundamental fairness must weigh in favor of granting priority status to the debt. Judge Bucklo found that the city had failed to meet the second prong. While fundamental fairness may mandate priority status in chapter 11 cases, as per Reading, the same is not true in chapter 13, where debtors are not operating businesses. Allowing recognition of fines as administrative expenses would create a perverse incentive for debtors to be heedless of traffic laws, because some or all of such noncompliance would simply be borne by other creditors who would get paid less. The city has appealed, and this matter is before the Seventh Circuit in City of Chicago v. Marshall.[15]

Does the Northern District’s Form Confirmation Order Constitute an Abuse of Discretion Because It Provides that All Property of the Chapter 13 Bankruptcy Estate Remains Property of the Estate Without Further Showing that the Property Is Required to Fulfill the Plan?

The city has objected to the Northern District form confirmation order in two cases: In re Moore[16] and In re Hernandez.[17] The city is challenging the portion of the form order stating that, unless specifically surrendered or sold, all of the bankruptcy’s estate shall remain property of the estate. Under such language, a vehicle owned by the debtor enjoys the protection of the automatic stay.

According to the city, the form order is a reaction to the 1997 opinion in In re Fisher.[18] In that case, the city enforced post-petition parking tickets by booting and destroying the debtor’s vehicle. The debtor moved for a rule to show cause alleging violation of the automatic stay. The district court denied the motion, finding that under § 1327(b), the car vested in the debtor upon confirmation because the plan did not provide otherwise. The city argues that as a result of Fisher, the bankruptcy court adopted the form confirmation order, which improperly “negates the decision on appeal.” The city further asserts that keeping all property within the estate post-confirmation is a “presumed abuse of discretion.”

Judge Hollis confirmed the plans of debtors Moore and Hernandez over the city’s objection. The city appealed, and a direct appeal to the Seventh Circuit was granted in Case No. 17-3663. With these three issues bubbling their way up through the courts, the future of the methods of enforcement of City of Chicago parking tickets in the bankruptcy arena is plainly uncertain.