Seventh Circuit Holds that Parking Tickets and Fines Are Chapter 13 ‘Admin’ Expenses

The Seventh Circuit slammed the door on another theory used by bankrupt citizens of Chicago to avoid paying traffic tickets and parking fines incurred while in chapter 13.

In March, the Chicago-based appeals court ruled that bankruptcy courts may not, as a general practice, approve chapter 13 plans providing for debtors’ cars to remain estate property after confirmation. In that regard, the standard plan in Chicago deviated from Section 1327(b), which “vests all property of the estate in the debtor” upon confirmation.

The distinction is important. If a car after confirmation is property of the estate, it remains protected by the automatic stay. If it becomes the debtor’s property, there is no protection from the automatic stay.

When a plan retained a car in a debtor’s estate, the city could not collect a parking fine without obtaining a modification of the automatic stay. In his March opinion, Circuit Judge Frank Easterbrook said, “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.” To read ABI’s report on the March opinion, click here.

In the March appeal, the City of Chicago had also contended that traffic tickets and parking fines incurred in the course of a chapter 13 case should be afforded administrative priority. At the time, Judge Easterbrook believed it was unnecessary to rule on administrative priority. However, the parties pointed out in a petition for rehearing that the issue needed to be decided.

So, the appeals court granted panel rehearing and reversed the two lower courts on the additional question of administrative priority. In his new opinion on November 12, Judge Easterbrook held that tickets and fines incurred during a chapter 13 case must be accorded administrative priority under Section 503(b).

In the new opinion, Judge Easterbrook relied primarily on the rationale in his March opinion.

To qualify for administrative status, tickets and fines must represent “actual, necessary costs and expenses of preserving the estate.” To interpret the statute, Judge Easterbrook found guidance in a receivership decision from the Supreme Court. Reading Co. v. Brown, 391 U.S.471 (1968).

Judge Easterbrook characterized Reading as holding that “torts committed during a bankruptcy must be treated the same as debts voluntarily incurred.” He went on to say, “What is true of involuntary debts for torts is equally true of involuntary debts amassed while operating a car.”

To fit within the confines of Section 503(b), Judge Easterbrook said that “maintaining an automobile is necessary for the success of a Chapter 13 bankruptcy.” If a driver must pay for gasoline and insurance, then a debtor must also necessarily pay involuntary debts like fines and tickets.

Judge Easterbrook cited several decisions from other circuit courts holding that fines for civil offenses committed during bankruptcy “must be treated as administrative expenses.”

Judge Easterbrook summed up the rationale near the end of his opinion. Given that operating a car is necessary for a debtor to commute to work to earn the money required to make plan payments, “then the costs of operating that necessary asset are themselves necessary.” He therefore held that “vehicular fines incurred during the course of a Chapter 13 bankruptcy are administrative expenses that must be paid promptly and in full.”

Observations

Ironically, the debtor’s theory that persuaded the lower courts ended up being the engine of the debtor’s destruction in the Seventh Circuit.

The debtor argued that the car deserved protection from the bankruptcy court because the car was necessary for commuting to work and generating income to cover plan payments. Judge Easterbrook took the car’s necessity for income production as reason for holding that car expenses are chapter 13 “admin” costs.

As it now stands in the Seventh Circuit, the city can file a motion to dismiss the chapter 13 case if the debtor does not promptly pay a ticket or fine. On dismissal, the city can impound the car. In addition, the debtor will not receive a discharge for the debts the debtor was paying under the plan.

But what if a chapter 13 debtor cannot pay other post-confirmation expenses? Do all expenses after confirmation fall into the category of administrative expenses?

If everything is an administrative expense, post-confirmation creditors can use the threat of dismissal to coerce payment. If everything is not an administrative expense, where is the line between personal expenses and administrative expenses?

If a debtor commutes to work on public transit, will the failure to pay parking fines result in dismissal? Will bankruptcy courts in Chicago come to the conclusion that post-confirmation administrative expenses are limited to those directly related to income production?

Conceivably, bankruptcy courts may apply the Seventh Circuit’s holding only to situations where the debtor has declared that a car is necessary for income production.