City of Chi. v. Marshall

• Decision Date: 27 November 2017
• Docket Number: 17 cv 2316, 17 cv 2309, 17 cv 5361, 17 cv 2311, 17 cv 2314,related cases: 17 cv 2319,No. 17 C 2308 (lead case),17 C 2308 (lead case)
• Citation: 281 F.Supp.3d 702
• Parties: The CITY OF CHICAGO, Plaintiff, v. Marilyn O. MARSHALL, not individually but solely as the chapter 13 trustee of the bankruptcy estates of Chester B. Steenes, et al. Appellee.
• Court: U.S. District Court — Northern District of Illinois

281 F.Supp.3d 702

The CITY OF CHICAGO, Plaintiff,

v.Marilyn O. MARSHALL, not individually but solely as the chapter 13 trustee of the bankruptcy estates of Chester B. Steenes, et al. Appellee.

No. 17 C 2308 (lead case)

related cases: 17 cv 2319

17 cv 2316, 17 cv 2309, 17 cv 5361, 17 cv 2311, 17 cv 2314

United States District Court, N.D. Illinois, Eastern Division.

Signed November 27, 2017

Anthony John Kudron, Jaime A. Torres, The Semrad Law Firm, LLC, Chicago, IL, for Plaintiff.

Lauren L. Tobiason, Office of the Chapter 13 Trustee–Marilyn O. Marshall, Clerk Bankruptcy Court, U.S., United States Trustee, Office of the United States Trustee, Timothy A. Barnes, U.S. Bankruptcy Court, Chicago, IL, for Appellee.

MEMORANDUM OPINION AND ORDER

Elaine E. Bucklo, United States District JudgeIn this consolidated bankruptcy appeal, the City of Chicago seeks reversal of the bankruptcy court's decisions, in two separate orders affecting seven individual cases, of the City's motions under § 503(a) of the Bankruptcy Code for allowance and priority payment of the respective debtors' post-petition traffic fines as administrative expenses. For the reasons that follow, I affirm the decisions of the bankruptcy court.

I.

The facts underlying these appeals are straightforward. On various dates between 2013 and 2016, each of the seven debtors filed a petition for bankruptcy under Chapter 13 of the Bankruptcy Code. Thereafter, the debtors incurred fines as the registered owners of vehicles involved in parking or traffic violations of Chicago's Municipal Code. In each bankruptcy case, the City sought payment of the outstanding post-petition traffic fines as administrative expenses pursuant to § 503 of the Bankruptcy Code, which, pursuant to § 507(a), would give these claims priority status (second only to domestic support obligations), ahead of pre-petition creditors in the distribution of the assets of the bankruptcy estates. See 11 U.S.C. § 507(a)(2). Six of the present appeals challenge the oral ruling of Judge Barnes, who denied the City's motions at the close of a collective hearing on March 23, 2017.¹ The seventh appeal is from the July 20, 2017, written decision of Judge Hollis, who denied the City's substantially identical motion in a separate case.²

Before the bankruptcy court, the City argued that seeking payment under § 503 was the only avenue available to it for enforcing the post-petition traffic fines. The City explained that the automatic stay prevents it from proceeding through its ordinary regime of progressive sanctions, in which the City tickets, immobilizes, tows, and ultimately sells or destroys vehicles involved in traffic violations. Compounding the problem, the City argued, is that the confirmation order entered in these cases (as in most cases in this district) overrides the default provision in Chapter 13 cases that confirmation of the bankruptcy plan vests the estate's property in the debtor. See 11 U.S.C. § 1327(a) ("Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor."). Indeed, the confirmation orders entered in these cases provide: "All property of the estate, as specified by the [sic] 11 U.S.C. section 541and 1306, will continue to be property of the estate following confirmation ..." In re Haynes , 569 B.R. 733, 741 (Bankr. N.D. Ill. 2017) (alteration in original).³ The City argued that because the vehicles remain the property of the estate for the duration of the bankruptcy (which may be three or five years), and because the automatic stay shields the estate's property from the City's progressive enforcement regime throughout that period, fundamental fairness mandates that the City be allowed to collect the post-petition traffic fines as administrative expenses.

Judge Barnes rejected the City's argument, concluding that the City's claim "runs contrary to the policy of the fresh start," which mandates that "[c]laims prior to the petition date are dealt with in the bankruptcy case, claims after are not." Tr. of Bankr. Order at 4. He found that the City's attempt to collect post-petition fines as administrative expenses had "a dangerous irritative effect, which is that the debtor could continue even after the first administrative expense claim for the life of the plan to incur additional tickets and they could be added to the plan," depleting the assets available to unsecured creditors. Id. at 8–9. Judge Barnes concluded that "the traditional set of circumstances holds true, which is the debtor remains responsible for these claims," and that the City had the same collections options as any post-petition creditor: it could move for relief from the stay and pursue state court remedies, or it could seek dismissal of the bankruptcy case. Id. at 9–11.

In Haynes , Judge Hollis denied the City's motion in a written opinion. She concluded that the post-petition traffic tickets did not qualify as administrative expenses under Matter of Jartran, Inc ., 732 F.2d 584 (7th Cir. 1984), and she declined to extend the alternative framework of Reading Co. v. Brown , 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) —the City's foundational authority—to the facts of this case. 569 B.R. at 740. Nevertheless, Judge Hollis considered whether the City had satisfied the test for recovering administrative expenses under Reading and concluded that it had not. Finally, Judge Hollis rejected the City's argument that 28 U.S.C. § 959(b) mandates administrative expense treatment of the City's claims.

On appeal, the City echoes the arguments it raised below, adding the overarching theme that the bankruptcy court's decisions effectively immunize the debtors' estates from the law. The City also assigns specific errors to the bankruptcy courts' analyses and urges me to hold that under Reading , its claims for payment of post-petition traffic fines should receive priority as administrative expenses.

II.

Administrative expense claims are governed by § 503(b) of the Bankruptcy Code, which provides:

(b) After notice and a hearing, there shall be allowed administrative expenses...including—

(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case[.]

11 U.S.C. § 503(b)(1)(A). Claims are entitled to administrative expense status only if they comport "with the language and underlying purposes of § 503." Matter of Jartran , 732 F.2d at 586. To satisfy that standard, a creditor ordinarily must establish, by a preponderance of the evidence, that the claim: 1) arises from a transaction with the debtor-in-possession; and 2) is "beneficial to the debtor-in-possession in the operation of the business." Id. at 587. This test reflects a primary objective of the administrative expense priority, particularly in Chapter 11 cases, of incentivizing creditors to extend credit to bankrupt businesses so that they can carry on operations during reorganization in hopes of maximizing assets available to creditors. See In re Resource Tech. Corp. , 662 F.3d 472, 476 (7th Cir. 2011).

In Reading v. Brown , 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), however, where the post-petition creditor was not a voluntary creditor of a bankrupt firm, but rather a victim of the bankrupt estate's negligence, the Court fashioned a different test premised on the fundamental statutory objective of fairness in bankruptcy. Id. at 477–78, 88 S.Ct. 1759. In view of that "decisive" consideration, the Court concluded that tort claims arising from the continued operation of a bankrupt business should be treated as administrative expenses, even though they cannot be said to benefit the estate. Id.

The Seventh Circuit explained the Reading Court's rationale in In re Resource Technology :

Tort liability is an expense of doing business, like labor or material costs, and should be treated the same way. Businesses operating in bankruptcy that were excused from tort liability would have an inefficient competitive advantage over their solvent competitors—and deficient incentives to use due care in the operation of the business. It could indeed be argued that in the interest of safety, insolvent firms, not being deferrable by threat of tort suits, should not be allowed to operate at all. Reading strikes a compromise between the safety interest and the interest in saving bankrupts from premature liquidation: the bankrupt that continues to operate (normally under Chapter 11) must give its tort victims priority access to such assets as the bankrupt estate retains.

662 F.3d at 476.

The City argues that it meets the Reading test, under which it must show: 1) that the post-petition traffic tickets arise out of a transaction with the estate; and 2) that fundamental fairness weighs in favor of granting priority administrative status to the City's request for payment.

On the first issue, the City argues persuasively that the administrative regime established by the Chicago Municipal Code makes clear that the debtors' post-petition traffic fines are liabilities of their bankruptcy estates. The Municipal Code provides that the "person in whose name the vehicle is registered with the Secretary of the State of Illinois...shall be prima facie responsible for the violation[.]" See Chi., Ill., Code § 0–100–030. Judge Hollis viewed this provision as dispositive of the debtor's liability for the tickets. But the Code elsewhere provides that the registered owner's prima facie liability may be rebutted by proof that the respondent is not the vehicle's actual owner. See Chi., Ill., Municipal Code § 9–100–6. Meanwhile, proof that someone other than the owner was operating the vehicle at the time of the infraction does not rebut the owner's liability. See Idris v. City of Chicago, Ill. , 552 F.3d 564, 565 (7th Cir. 2009). These authorities support the City's argument that as the actual owner of the vehicles...