The lien on an impounded car in Chicago is a judicial lien that a debtor may avoid as an impairment of an exemption under Section 522(f), according to the Seventh Circuit.
In ruling on April 21 that the lien was judicial, not statutory, the Seventh Circuit may or may not have created a split with the Third Circuit. We doubt the Supreme Court will be inclined to grant certiorari because the liens were based on dissimilar statutes.
A chapter 7 debtor in Chicago had more than $12,000 in parking tickets and other charges on an impounded car that was worth maybe $3,000. The bankruptcy court ruled that it was a judicial lien that the debtor could avoid, because the lien was inextricably tied to prior quasi-judicial proceedings.
The district court affirmed. See City of Chicago v. Howard, 625 B.R. 384, 390 (N.D. Ill. 2021), for a similar case where the district court affirmed. To read ABI’s report on Howard, click here.
As a test case, the city appealed the decision involving the debtor with the $3,000 car and $12,000 in tickets. Circuit Judge David F. Hamilton upheld the two lower courts.
Both sides agreed that the debtor was entitled to avoid the lien if it were found to be judicial. The categorization of the lien was the only issue before the Seventh Circuit.
To rule, Judge Hamilton founded his decision on the definitions of judicial and statutory liens in Sections 101(36) and (53). The statute says that a judicial lien “means [a] lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
The definition of statutory lien is more complex. It “means [a] lien arising solely by force of a statute on specified circumstances or conditions . . . but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute.”
Focusing on the “distinctive language” in the two definitions, Judge Hamilton said that the word “solely” seems “clear enough and signals that prior legal proceedings leading to a lien would exclude the lien [on the debtor’s car] from the category of statutory liens.” He cited the Senate and House Reports for saying that a “‘statutory lien is only one that arises automatically, and is not based on an agreement to give a lien or on judicial action.’”
Next, Judge Hamilton laid out the complex quasi-judicial procedures that the city must undertake before impounding a car. Among other things, he said that “several legal proceedings had to be completed before impoundment.” At the moment the city boots or hauls the car away, the possessory lien attaches.
Judge Hamilton distinguished a mechanics’ lien from the lien on an impounded car. In the case of a statutory mechanics’ lien, it arises automatically by statute when the debtor fails to make a payment.
For Judge Hamilton, “the substantial quasi-judicial proceedings needed for the City to obtain an impoundment lien” were “decisive.”
Hoping to persuade the circuit to the contrary, the city contended that the lien was statutory because it arose automatically upon impoundment and without further judicial or quasi-judicial action.
Judge Hamilton was not persuaded. He said, “we do not think we can ignore all the prior legal process that must occur before the City’s possessory lien arises.” He refused to regard the prior processes as “irrelevant.”
The relevant inquiry, Judge Hamilton said, “is not whether a statute authorizes or governs the lien but what is necessary for the lien to arise.”
The city contended that upholding the lower courts would create a split with the Third Circuit where the Philadelphia-based appeals court was ruling on a New Jersey statute. Judge Hamilton said there was a “critical difference” in the procedures that made the statutes “markedly different.”
The city next argued that affirming would turn tax liens into avoidable judicial liens.
Judge Hamilton said that tax liens are “unquestionably statutory,” because “Congress is entitled to single out a particular category of liens and classify it accordingly. We do not disturb that prerogative or conclusion with this opinion.”
Judge Hamilton upheld the lower courts and ruled that the lien was judicial because it did “not arise solely by statute.”
The lien on an impounded car in Chicago is a judicial lien that a debtor may avoid as an impairment of an exemption under Section 522(f), according to the Seventh Circuit.
In ruling on April 21 that the lien was judicial, not statutory, the Seventh Circuit may or may not have created a split with the Third Circuit. We doubt the Supreme Court will be inclined to grant certiorari because the liens were based on dissimilar statutes.
A chapter 7 debtor in Chicago had more than $12,000 in parking tickets and other charges on an impounded car that was worth maybe $3,000. The bankruptcy court ruled that it was a judicial lien that the debtor could avoid, because the lien was inextricably tied to prior quasi-judicial proceedings.