City of Chi. v. Mance (In re Mance)

• Decision Date: 21 April 2022
• Docket Number: 21-1355
• Citation: 31 F.4th 1014
• Parties: In the MATTER OF: Marcella M. MANCE, Debtor, City of Chicago, Appellant, v. Marcella M. Mance, Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

31 F.4th 1014

In the MATTER OF: Marcella M. MANCE, Debtor,City of Chicago, Appellant,

v.Marcella M. Mance, Appellee.

No. 21-1355

United States Court of Appeals, Seventh Circuit.

Argued October 29, 2021

Decided APRIL 21, 2022

Daniel P. Lindsey, Miriam Veronica Hallbauer, David S. Yen, Attorneys, Legal Aid Chicago, Chicago, IL, for Debtor-Appellee.

Myriam Z. Kasper, Attorney, Office of the Corporation Counsel, Chicago, IL, Ellen W. McLaughlin, Attorney, City of Chicago Law Department, Chicago, IL, for Appellant.

Before Sykes, Chief Judge, and Kanne and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

This appeal presents a new chapter in a long-term effort by the City of Chicago to collect parking fines and other traffic fees from drivers who seek bankruptcy protection. Some of the City's tactics have worked and others have not. See In re Fulton , 926 F.3d 916, 924 (7th Cir. 2019) (City's refusal to turn over vehicles to petitioners during bankruptcy proceedings violated automatic stay), vacated and remanded sub nom. City of Chicago v. Fulton , ––– U.S. ––––, 141 S. Ct. 585, 208 L.Ed.2d 384 (2021) ; In re Steenes , 942 F.3d 834, 839 (7th Cir. 2019) (vehicular tickets incurred during course of a Chapter 13 bankruptcy are administrative expenses that must be paid in full).

The issue in this appeal is whether the City's possessory lien on a vehicle that it impounds due to unpaid tickets should be deemed a "judicial lien" or a "statutory lien" under the Bankruptcy Code. If the lien is judicial, all parties agree, it is avoidable in bankruptcy under 11 U.S.C. § 522(f). If the lien is instead deemed statutory, it is not avoidable under the same provision.

We agree with the bankruptcy and district courts that the City's possessory lien on impounded vehicles is properly classified as judicial and therefore avoidable. Part I lays out the stakes of this particular issue. Part II explains how judicial and statutory liens are defined in the Bankruptcy Code. Part III outlines the specific procedures the City must follow before it can impose a lien on an impounded vehicle. Part IV explains why a lien that flows from these procedures is judicial.

I. The Stakes

This case may appear to be a technical dispute with modest stakes, but it's a test case that is important to the City and will affect many drivers. Outstanding debt for Chicago traffic tickets surpassed $1.8 billion last year.¹ On average, the City issues around three million tickets a year, and by one recent estimate, revenue from those tickets in 2016 exceeded a quarter of a billion dollars and constituted seven percent of the City's operating budget. Melissa Sanchez & Sandhya Kambhampati, Driven into Debt: How Chicago Ticket Debt Sends Black Motorists into Bankruptcy , ProPublica Ill. (Feb. 27, 2018), https://features.propublica.org/driven-into-debt/chicago-ticket-debt-bankruptcy.

As the dockets in this court and the Northern District of Illinois show, aggressive ticketing practices may help push many drivers into bankruptcy. Id. (explaining that "[p]arking, traffic and vehicle compliance tickets prompt so many bankruptcies the court [in Chicago] [led] the nation in Chapter 13 filings" at the time); see also Table F-2—Bankruptcy Filings (December 31, 2019) , U.S. Courts, https://www.uscourts.gov/statistics/table/f-2/bankruptcy-filings/2019/12/31 (last visited Apr. 21, 2022) (Northern District of Illinois led nation in non-business Chapter 13 filings with 15,851 cases in 2019). Even with recent reforms to ticketing practices, bankruptcy filings remain high by comparison to other districts. Table F-2—Bankruptcy Filings (December 31, 2021) , U.S. Courts, https://www.uscourts.gov/statistics/table/f-2/bankruptcy-filings/2021/12/31 (last visited Apr. 21, 2022) (in 2021 the Northern District of Illinois had the second most non-business Chapter 13 filings (5,198)).

When a vehicle owner's parking-ticket debt accumulates, the City has the legal right to impound the vehicle and can eventually sell the vehicle to help pay off the debt. If the impoundment lien can be discharged in bankruptcy, however, the owner may be able to recover her vehicle through the bankruptcy court. Classifying an impoundment lien as judicial or statutory can make the difference between, on one hand, allowing drivers to avoid a debt and denying the City the sums owed, and on the other hand the owner permanently losing the vehicle and putting more money in the hands of the City.

The foundation for this particular issue was laid in 2016. See Fulton , 926 F.3d at 920. The City Council passed a new ordinance that granted the City a lien on impounded vehicles for ticket debts. Municipal Code of Chicago ("M.C.C.") § 9-92-080(f). Once a driver incurs the needed number of outstanding tickets and final liability determinations, the City is authorized to impound her vehicle and to attach a possessory lien. The amount of the lien is based on how much the driver owes in unpaid traffic tickets, plus additional fees. § 9-100-120(d)(2).

Many drivers cannot afford to pay their outstanding tickets and fees, let alone the liens imposed on their cars through this process. As a result, some drivers declare bankruptcy and seek to avoid them. Debtor-appellee Marcella Mance, for instance, incurred several unpaid parking tickets and saw her car impounded and subject to a possessory lien that totaled $12,245, more than four times her car's value. Facing this liability with a monthly income of $197 in food stamps, Mance filed for bankruptcy under Chapter 7 and sought to avoid the lien under 11 U.S.C § 522(f). When a vehicle owner files for bankruptcy through Chapter 7, she can avoid a lien under § 522(f) if the lien qualifies as judicial and its value exceeds the value of her exempt property (in this case, her car). Conversely, if the lien is statutory, it is not avoidable under the same provision.²

The bankruptcy and district courts concluded that the lien was judicial and avoidable. Both courts reasoned that the lien was tied inextricably to the prior adjudications of Mance's parking and other infractions, so it did not arise solely by statute, as the Bankruptcy Code requires for a statutory lien. As the district court explained in its opinion in this case: "There is simply no way to disaggregate the final determinations of liability from the lien resulting from immobilization. ... Without the requisite number of judgments, the City would have no right to immobilize the vehicles and no liens could arise." City of Chicago v. Howard , 625 B.R. 384, 390 (N.D. Ill. 2021).³

II. Lien Definitions in the Bankruptcy Code

The classification of a lien under the Bankruptcy Code is a question of law that we review de novo. In re Willett , 544 F.3d 787, 790 (7th Cir. 2008). The Code sorts liens into three mutually exclusive categories—statutory liens, judicial liens, and security interests. In re Financial Oversight & Management Board for Puerto Rico , 899 F.3d 1, 10 (1st Cir. 2018) ; In re Wigfall , 606 B.R. 784, 786–87 (Bankr. N.D. Ill. 2019) ; see also S. Rep. No. 95-989, at 25 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5811 ("Those three categories are mutually exclusive and are [exhaustive] except for certain common law liens."). Only the first two are relevant here. The parties agree that Mance satisfies all the requirements for discharge under 11 U.S.C. § 522(f) if her lien is considered judicial, so the classification is decisive.

A. The Statutory Text

We begin our analysis with the statutory text. The Bankruptcy Code defines judicial and statutory liens in 11 U.S.C. § 101. Here is each definition in full:

(36) The term "judicial lien" means lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.

...

(53) The term "statutory lien" means lien arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, 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.

§ 101(36), (53).

Both definitions focus on the events (or the lack thereof) that precede creation of the lien. The two definitions use distinct language to describe how the two different types of liens arise. We see this in the use of "arising solely" for statutory liens versus "obtained by" for judicial liens. "Solely" seems clear enough and signals that prior legal proceedings leading to a lien would exclude the lien from the category of statutory liens. The definition of a judicial lien—"obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding," § 101(36) —has an "element of causation inherent in the phrase ‘obtained by.’ " See Field v. Mans , 516 U.S. 59, 66, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (interpreting § 523(a)(2), which prohibits discharge of certain debts "obtained by ... false pretenses, a false representation, or actual fraud"). The statutory definition of a judicial lien indicates that the term applies when the lien is caused by or results from the broad categories of process identified in the latter part of the definition. These textual differences are noted in the history of the Bankruptcy Reform Act of 1978. The House and Senate reports on the Act explained: "A statutory lien is only one that arises automatically, and is not based on an agreement to give a lien or on judicial action." H.R. Rep. No. 95-595, at 314 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6271; S. Rep. No. 95-989, at 27, as reprinted in 1978 U.S.C.C.A.N. at 5811; see also 5 Collier on Bankruptcy ¶ 545.01 (16th ed. 2021).

Under these definitions, classification of a lien depends on the events, if any, that must occur before the lien attaches. In re Schick , 418 F.3d 321, 324 (3d Cir. 2005) ("The relevant inquiry is to determine the nature of the [ ] lien, i.e., whether it arises solely by...