The protracted battle over parking fines between the City of Chicago and chapter 13 debtors may draw to a conclusion next year, unless the Supreme Court takes an interest in the question. If the Supreme Court weighs in, the high court could use parking tickets to decide whether the automatic stay is automatic after all.
In three consolidated, direct appeals to the Seventh Circuit, bankruptcy judges in Chicago had concluded that the city must turn over an impounded car automatically when the owner files a chapter 13 petition. The appeals court entered a scheduling order calling for the last brief to be filed on November 19.
Fiscally speaking, the issue is important for Chicago. Bankruptcy Judge Deborah L. Thorne said that Chicago relies on parking fines and red-light tickets for 7% of its budget. According to the most recent decision by Bankruptcy Judge Carol A. Doyle of Chicago, the fines generate $260 million for the city annually.
In substance, the question is whether the automatic stay in Section 362 requires the city to turn over impounded cars automatically. The city is fighting an uphill battle because Seventh Circuit law favors debtors.
In Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), the Seventh Circuit ruled that passively holding an asset is an act to “exercise control” that violates the automatic stay under Section 362(a)(3). The appeals court held that a lender must return an auto it had repossessed. After return, the lender may seek adequate protection.
Brandishing Thompson, Chicago residents who lost their cars could file chapter 13 petitions to regain possession of their vehicles, even if they have no intention of confirming their chapter 13 plans. Hoping to avoid Thompson, Chicago adopted legislation specifically giving the city a possessory lien against vehicles that were impounded as a result of unpaid fines.
Among other things, the city argues that the possessory lien invokes the exception to the automatic stay in Section 362(b)(3). That section makes the stay inapplicable 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) . . . .” The city believes that retaining possession is a means for maintaining perfection and is thus excepted from the automatic stay.
In August, Bankruptcy Judge Thorne dissected and rejected the Section 362(b)(3) theory in In re Peake, 18-16544, 2018 BL 292576 (Bankr. N.D. Ill. Aug. 16, 2018). Peake is one of the cases on direct appeal to the Seventh Circuit. To read ABI’s discussion of Peake, click here.
In the newest decision on September 7, Judge Doyle analyzed and rejected a plethora of arguments by the city, including a contention that Thompson was wrongly decided.
Judge Doyle provided an especially detailed analysis of Section 362(b)(3). She dismissed Chicago’s theories, concluding that “the City cannot shoehorn itself into any provision of Section 546(b) to qualify for Section 362(b)(3), an exception intended only to let parties preserve their lien rights in bankruptcy, not to retain possession of the debtor’s property.”
Judge Doyle found nothing special in Chicago’s statutory lien rights. She said “the City is really contending that possessory lien holders get better treatment in bankruptcy than other lien holders. Not so . . . . [A]ll secured creditors in a chapter 13 case are entitled to the same treatment.”
Having concluded that the exception to the automatic stay did not apply, Judge Doyle said that the city’s refusal to return the car on request “violated at least three provisions in the automatic stay — § 362(a)(3), § 362(a)(4), and § 362(a)(6) — and the dictates of Thompson.”
Chicago has not been without victories. In May, a district judge reversed the bankruptcy court and validated the city’s theories under Section 362(b)(3). City of Chicago v. Kennedy, 17-5945, 2018 BL 159358, 2018 WL 2087453 (N.D. Ill. May 4, 2018).
The Circuit Split
Even if Chicago loses in the Seventh Circuit, the city could file an attractive petition for certiorari, because two circuits disagree with Thompson. See, e.g., WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017), where 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 District of Columbia Circuit holds the same opinion.
The Second, Ninth and Eighth Circuits are in accord with Thompson and hold that retaining property after demand for turnover does violate the automatic stay.
The Supreme Court might use parking tickets as the vehicle for resolving the widening circuit split, but someone else might beat Chicago to the punch.
Although there was no certiorari petition in Cowen, the same underlying 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.
Because the issues in Garcia and Cowen are so similar, the Garcia appeal is likely to be a precursor to a motion for rehearing en banc or a certiorari petition to resolve the circuit split. Whether Chicago or Garcia is the launching pad, the split over the automatic stay is an issue the Supreme Court should tackle in the next couple of terms.
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.