The ultimate outcome of a lawsuit in Chicago will determine whether bankruptcy courts have the power to entertain class actions where the damages for any one debtor are so small that individual lawsuits are impractical.

The putative class action before Bankruptcy Timothy A. Barnes of Chicago arose from the same facts leading to the Supreme Court’s decision in City of Chicago, Illinois v. Fulton, 592 U.S. 154 (2021). The proposed class representatives in the case before Judge Barnes suffered their damages before the Court handed down Fulton.

Impounding Cars and Refusal to Turn Over

As Judge Barnes said in his March 10 opinion, the “City of Chicago has for a number of years used its superior power as a state actor to protect its regressive tax system of parking ticket revenue.” Specifically, he had said in a previous opinion that the city allegedly “refus[ed] to release impounded cars to debtors in bankruptcy.”

When someone would file a chapter 13 petition and demand the return of an impounded car, Judge Barnes previously said that the city did “not dispute . . . that [it] demanded an upfront lump sum amount, often over $1,000.00, and treatment of its claim in the Plaintiffs’ plan[s] as fully secured in exchange for turnover of the vehicles.”

Judge Barnes went on to say that the demanded “amount bore no relation to the fair market value of the impounded vehicle, or its diminution of value as a result of [the] passage of time. For those that could not afford to make the upfront payment, the City continued to retain the vehicles.”

The putative class action was filed in 2019, alleging violations of the turnover provisions in Section 542, the enforcement of liens in violation of Section 362(a)(4), and the attempted recovery of prepetition debts in violation of Section 362(a)(6).

In Fulton, the Supreme Court precluded the class plaintiffs from alleging that the retention of cars by itself was a stay violation. Unanimously, the Court held “that mere retention of property does not violate the [automatic stay in] § 362(a)(3).” Id. at 156.

However, the opinion by Justice Samuel Alito left the door open for a debtor to obtain somewhat similar relief under the turnover provisions of Section 542, although not so quickly. At the end of his opinion, Justice Alito said, “we need not decide how the turnover obligation in § 542 operates.” Id. at 161.

The lawsuit claimed to represent a class of chapter 13 debtors whose cars were impounded between 2013 and 2019 and were deprived of the use of their vehicles.

The Certification Motion

In his 49-page opinion on March 10, Judge Barnes granted the plaintiffs’ motion for class certification. For anyone contemplating the filing of a class complaint dealing with alleged Section 362 violations, we recommend reading the opinion in full text to appreciate the complexity of issues that plaintiffs must confront.

We will not attempt to summarize the holdings by Judge Barnes on questions related to class certification. We recommend that a bankruptcy lawyer contemplating a class complaint should associate with a firm that specializes in class actions. Proficiency in bankruptcy law doesn’t prepare a lawyer to confront the confounding issues in class action cases.

After finding that the city had no sovereign immunity defense under Section 106(a), Judge Barnes said that “the City is incorrect that the only enforcement mechanism for a section 542 violation is by way of contempt.” Even if Section 542 were not self-effectuating, he said, “These issues do not act as a bar to proceeding by way of class action.”

On the class certification issues under Rule 23(a), Judge Barnes found the necessary numerosity, commonality, typicality, and adequacy of representation. Under Rule 23(b), he found that at least one of the three factors satisfied the requirement for class certification.

Regarding Rule 23(b), Judge Barnes said that “forcing the Proposed Class members to litigate these matters individually with the City is a losing proposition. Individual, bankrupt debtors will never be able to match the deep pockets of the City.” He also decided that the plaintiffs had satisfied the requirements for appointment of class counsel under Rule 23(g).

Judge Barnes granted the motion for class certification, finding that the plaintiffs had “met the standards for certification” required by “Rule 23(a), Rule 23(b) and Rule 23(g).”

Observations

The ability of bankruptcy courts to preside over nationwide class actions is doubtful, at best. The case before Judge Barnes, though, involves only the Northern District of Chicago and cases that were before him or other bankruptcy judges on the same bench.

As Judge Barnes said, requiring debtors to litigate the same issues individually “is a losing proposition,” because impecunious debtors can’t “match the deep pockets of the City.”

The outcome of the suit before Judge Barnes will decide whether bankruptcy courts are equipped to provide remedies for debtors where the damages to individual debtors won’t justify private actions.