By: Donald L Swanson
[UPDATE: The U.S. Supreme Court granted certiorari in this case on December 18, 2019.]
The bankruptcy proceeding is City of Chicago, Illinois v. Fulton, with a Petition for certiorari pending before the U.S. Supreme Court (Case No. 19-357).
The dispute is over City of Chicago refusing to surrender possession of impounded vehicles upon the owner’s bankruptcy filing.
Question Presented & Statutory Prohibition
The “Question Presented” in the Petition is this:
Whether an entity that is passively retaining possession of a bankruptcy debtor’s vehicle has an affirmative obligation under the Bankruptcy Code’s automatic stay to return the vehicle to the debtor immediately upon the filing of the bankruptcy petition.
The primary statute at issue is 11 U.S.C. § 362(a)(3), which contains an automatic stay prohibition against “any act to . . . exercise control over property of the estate.”
The circuits are in open conflict about the question presented, according to the certiorari Petition:
- In the Second, Seventh, Eighth, Ninth and Eleventh Circuits, the creditor must turn the vehicle over to the debtor immediately upon receiving notice of the bankruptcy filing or face sanctions for violating the automatic stay, because a creditor’s retention of such property is an impermissible exercise of control; but
- In the Tenth and D.C. Circuits, the creditor may keep the car for an extended period of time—until the bankruptcy court determines, on debtor’s initiative (and probably in an adversary proceeding), whether the debtor has a right to turnover, since the statutory text prohibits only “acts” of control, not passive inactivity.
These conflicting positions cannot be squared, the Petition says, and only the U.S. Supreme Court can resolve the conflict.
Here is what’s happening.
Chicago’s Municipal Code permits the City to immobilize and then impound a vehicle, if its owner has multiple parking, standing, or speeding violations.
Fines for such violations range from $25 for parallel parking wrongs to $500 for parking on a public street without a wheel tax license emblem. A failure to pay the fine within twenty-five days automatically doubles the penalty. And once a vehicle is impounded, the owner also owes towing and storage fees, plus the City’s collection costs and attorney fees. The City Code grants Chicago a lien on debtor’s vehicle to secure all these obligations.
To regain possession of the vehicle, the owner must either, (i) pay the fines, fees and costs at once, or (ii) agree to an installment payment plan, after making a substantial down payment.
Chicago refuses to return an impounded vehicle when its owner files Chapter 13 bankruptcy.
It seems likely, in light of the circuit split and significance of the issue, that the Supreme Court will grant certiorari in this case, or in a similar one.
If certiorari is granted, how will the Supreme Curt Rule? I have no idea.
What Makes Sense
—In Secured Lender Contexts
I do have some experience with the question presented, in the context of vehicle and equipment repossessions by secured creditors.
In such contexts, here’s what I believe the rule should be, as a practical matter:
- Immediate action should be required of the secured creditor within the bankruptcy case, since the debtor needs the vehicle or equipment; and
- The secured creditor should act immediately to either, (i) turn over possession of the vehicle to the debtor, or (ii) file a motion for relief from stay, with a request for expedited process, to address adequate protection issues.
—For the City of Chicago
Whether such a practical answer makes sense for the City of Chicago and it’s impounded vehicle owners is outside my experience. But the practical answer seems to make sense there as well. Here’s how.
Technically, it’s a stretch to say that maintaining the status quo is not an “act” of “control.” After all, the impound lot is undoubtedly flush with security efforts to assure that owners and other unauthorized persons don’t remove vehicles. Locking the gate at night, for example, is an “act” of “control” over the impounded vehicles.
It seems likely that Chicago will lose any adequate protection battle because:
- Many vehicles owned by Chapter 13 debtors are fully encumbered, with Chicago’s lien being out of the money (I’m assuming the lien Chicago has granted to itself is junior to liens created under state law);
- When equity does exist for Chicago’s lien, the lien is likely to be avoidable at debtor’s request (under § 522(f)(1)(B)(i)) as a non-purchase money lien that impairs an exemption; and
- Chicago’s leverage against a debtor is not in the existence of the lien, it is in withholding possession of the vehicle from the debtor—and that’s precisely the type of leverage the automatic stay’s prohibition against the “exercise” of “control” is designed to prevent.
Hopefully, the U.S. Supreme Court will grant certiorari in this case, or a similar one, and resolve this important issue quickly!
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
Leave a Reply