Seventh Circuit Bars Chapter 13 Plan from Conferring Immunity from Traffic Tickets

In a tightly worded, conversational opinion fraught with memorable quotations, Seventh Circuit Judge Frank Easterbrook voided a standard provision in Chicago chapter 13 confirmation orders calling for the estate to retain ownership of property for the duration of the plan. He said that deviation from Section 1327(b) gave debtors license “to violate traffic laws” in the City of Chicago.

The filing of a chapter 13 petition creates an estate under Section 1306 consisting of all of the debtor’s property. “Except as provided in the plan or order confirming the plan,” Section 1327(b) provides that “confirmation of a plan vests all property of the estate in the debtor.”

However, bankruptcy judges in the Northern District of Illinois adopted a standard-form confirmation order “reversing this presumption and maintaining the property in the estate for the duration of the plan,” Judge Easterbrook said.

Local law in Chicago makes the owners of cars liable for fines for parking, speeding, and other traffic violations, not the drivers. Since the confirmation orders kept debtors’ cars in their estates, the city could not proceed against the cars without violating the automatic stay. The city therefore appealed confirmation orders in seven cases where debtors had incurred 72 unpaid fines aggregating almost $12,000.

To collect a $50 fine, Judge Easterbrook said the confirmation order would force the city to engage a lawyer and file a motion to modify the automatic stay. He said that the bankruptcy judges had “not given a reason . . . for flipping the statutory presumption . . . .” in Section 1327(b).

“Immunity from traffic laws for the duration of a chapter 13 plan does not seem to us an outcome plausibly attributed to the Bankruptcy Code,” Judge Easterbrook said. The purpose of Section 1327(b), he said, is “to ensure that debtors pay the ordinary and necessary expenses of maintaining property.”

Judge Easterbrook conceded that Section 1327(b) gives bankruptcy judges “discretion to hold assets in the estate for particular cases, but the exercise of this discretion . . . requires good reason.”

Although the bankruptcy judges had not proffered a reason, debtors’ counsel and amici did. Judge Easterbrook rejected them all, including the idea that the confirmation order ensures that debtors will not lose their jobs if their cars are impounded to collect unpaid tickets. This rationale, he said, “does not explain why chapter 13 permits debtors to use particular assets to earn money without paying the assets’ expenses.”

Judge Easterbrook said that the circuit judges asked at oral argument whether the provision had any effect other than to shelter debtors from traffic and parking tickets. “No one was able to suggest such an effect,” he said.

Beyond precluding a lienholder from repossessing a debtor’s car, Judge Easterbrook said that “permitting debtors to park for free wherever they like, or drive without a risk of fines for moving violations, has nothing to recommend it. The Bankruptcy Code cannot reasonably be read to enlist the judiciary’s aid in permitting debtors to violate the law.”