Bankruptcy Judge Deborah L. Thorne has written the most definitive opinion so far in the continuing battle between the City of Chicago and debtors who file chapter 13 petitions to regain immediate possession of their impounded cars.
The outcome has enormous significance on both sides. Debtors need their cars to drive to work and earn income necessary for making chapter 13 plan payments. On the other hand, Chicago relies on parking fines and red-light tickets for 7% of its budget, as Judge Thorne said in her August 15 opinion.
Judge Thorne concluded that exceptions to the automatic stay do not apply and that the city is obliged to return impounded vehicles immediately after a debtor files a chapter 13 petition. Do not be surprised if the judge certifies a direct appeal to the Seventh Circuit.
The Facts in Judge Thorne’s Case
The chapter 13 debtor owned an 11-year-old car worth perhaps $4,500 that was subject to a $7,300 lien, meaning that the car had value to the debtor but no equity for the estate. The city had impounded the car before filing to recover on the debtor’s unpaid parking fines.
The debtor had used the car for his daily 90-mile commute to work. Without the car, he was paying people to drive him to and from work. He filed chapter 13 intending to pay off the fines in full under the plan.
After filing, the debtor demanded return of the car, arguing that continued retention of the car violated the automatic stay under Section 362(a)(3) as “an act” to “exercise control over” estate property. The city refused to return the car until the debtor confirmed a plan paying parking fines in full over the 60-month life of the plan. Or, the city would return the car if the debtor immediately paid $1,250 and filed a plan to pay the remainder of the tickets in full.
In response to the debtor’s motion to enforce the automatic stay and compel immediate return of the vehicle, the city argued that retention of the car was covered by the exceptions to the automatic stay under Section 362(b)(3) and (4).
The Seventh Circuit’s Thompson Opinion
The burden on Judge Thorne was simplified at the outset by Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), where the Seventh Circuit ruled that passively holding an asset is an act to “exercise control” that violates the automatic stay. In Thompson, the appeals court held that a lender must return an auto it had repossessed. After return, the lender may seek adequate protection.
Thompson did not address the exceptions to the automatic stay asserted by Chicago under Section 362(b)(3) and (4).
Section 362(b)(3) provides that the stay does not apply to “any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b) . . . .”
Section 362(b)(4) makes the stay inapplicable to an action “by a governmental unit . . . to enforce such governmental unit’s . . . police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained . . . to enforce” the government’s police power.
The Nature of the City’s Interest in the Auto
Judge Thorne agreed with Chicago that the city had an interest in the car when it took possession. She said the interest “would likely be considered a lien under Illinois law.”
Addressing the prerequisites to application of the stay exception, she said that the city’s possessory interest qualified as an “interest in property” under Section 362(b)(3) when the petition was filed. She said that the right to possess the car would continue if the city were forced to give it up involuntarily by application of the automatic stay. The conclusion, she said, “comports with the fundamental notion” that property interests on the filing date are not destroyed “unless they are positively avoided.”
Judge Thorne agreed with the city’s theory that continued possession of the car would “maintain or continue” perfection because surrendering the car would render the lien unperfected.
Had she stopped there, Judge Thorne might have handed the city a victory. However, she did not. Next, Judge Thorne explored the purposes of Section 362(b)(3).
The Purposes of Section 362(b)(3)
Judge Thorne said that Section 362(b)(3) was adopted for two purposes: (1) to allow the filing of a continuation statement when a security interest would otherwise lapse, and (2) to permit perfection of a lien that was not perfected on the filing date when the time had not expired for taking an action to perfect the lien.
Judge Thorne also focused on the word “act,” because the section refers to “any act to perfect, or to maintain or continue” perfection. Although an act, she said, would include continuing actions, such as the retention of possession, she said the words of the statute must be “placed in its wider context.”
Because Section 362(b)(3) is also qualified by reference to Section 546(b), Judge Thorne concluded that the word “act” refers to “a single, positive, definite act, such as the filing of a continuation statement.” Otherwise, there would be “no sensible way to apply the language of section 546(b)(1)(B).”
Consequently, Judge Thorne held that the exception to the stay in Section 362(b)(3) did not apply because retaining possession to maintain perfection of an interest was not “a definite, positive act.”
Policy Considerations and Legislative History
Judge Thorne buttressed her plain language argument by addressing policy considerations, such as the idea that exceptions to the automatic stay “are narrowly construed.” She also quoted legislative history saying that the section was designed to cover actions such as the filing of a continuation statement or a financing statement when necessary to maintain the status quo and not improve the position of a secured creditor.
Judge Thorne said that legislative history contains no indication that Congress was intending to improve the position of creditors with possessory liens.
Section 362(b)(4)
Finally, Judge Thorne dealt with (b)(4), which makes the automatic stay inapplicable “to enforcement of a [governmental unit’s] judgment other than a money judgment” that was obtained under police or regulatory powers.
In short order, she found “no doubt” that (b)(4) did not apply because retaining possession of the car “constitutes the enforcement” of a money judgment.
Assuming that Thompson is good law, a higher court intending to reverse Judge Thorne could focus on the language of Section 362(b)(3) rather than the reasons why it was adopted.
The sympathy of higher courts could tip in either direction. Surely, a debtor without his or her car deserves sympathy, but on the other hand, should the city suffer when debtors file chapter 13 petitions purely intending to regain possession of their cars and then allow their cases to be dismissed?
The Underlying Circuit Split
Even if Chicago loses in the Seventh Circuit, all is not lost, because there is an underlying circuit split. Two circuits disagree with Thompson.
The Tenth Circuit deepened the split last year in deciding WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017), where the appeals court 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, but 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.
Chicago could take the case to the Supreme Court, but someone else may get there first.
Although there was no petition for rehearing en banc in Cowen, the issue is on direct appeal to the Tenth Circuit 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.
For ABI’s discussion of Davis v. Tyson Prepared Foods Inc. (In re Garcia), 17-3247 (10th Cir.), click here. The appeal is scheduled for oral argument on September 26.