Case preview: Squaring impoundment with federal chapter process

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The Supreme Court will hear arguments against Fulton in the City of Chicago on Tuesday. The court originally scheduled Fulton for the April 2020 session but postponed the dispute when the coronavirus pandemic closed the court. In this case, the court will be asked to clarify how the seizure interacts with the bankruptcy proceedings. As with so many of these consumer bankruptcy cases, the text of the United States Bankruptcy Act and the Federal Rules of Bankruptcy Procedure is difficult to reconcile with what is known as the fresh start policy of bankruptcy: the idea that bankruptcy gives borrowers comprehensive relief from their debts should allow. Aside from the well-known conflict between bankruptcy law and bankruptcy policy, this case is a small window into "taxation by quotation," the practice of local authorities closing budget gaps through fines and fees normally imposed on the most vulnerable residents.

The case arises from four separate bankruptcy cases that were consolidated on appeal in the U.S. Court of Appeals for the 7th Circuit. Each of these cases began with the city of Chicago seizing a car for failure to pay various fines and fees, many of them related to traffic and parking violations. After the city confiscated every car, the vehicle owner filed for bankruptcy and attempted to have the car returned to Chicago. Critically, all debtors filed for bankruptcy protection before Chicago could sell the vehicles, which meant that they remained the owners of the cars even though Chicago owned the cars. The parties disagree on what Chicago has to do with the cars under the bankruptcy code after it has been notified of the bankruptcy filings.

Chicago's obligations to debtors depend on how two provisions of bankruptcy law interact. The first is the automatic stay in Section 362, which interrupts all debt collection activities to prevent creditors from running for the consumption of debtors' assets before relief can occur. With a few exceptions, section 362 automatically remains collection activity if the debtor applies for bankruptcy protection. Creditors who continue their collection activities after their stay are subject to sanctions.

Here the debtors assert that Chicago is obliged under Section 362 (a) (3) to return the cars to them after the stay has come into effect. This provision prohibits two types of conduct: “any act” either to “gain possession of the estate or property of the estate” or “to exercise control over the property of the estate”. Debtors argue that the passive safekeeping of property confiscated prior to bankruptcy is an "act" to "exercise control over the property of the estate". The U.S. appeals courts for the 2nd, 8th, 9th, 11th and now the 7th circuit have adopted this reading from Section 362 (a) (3).

The city argues that the analysis of its obligation to return the cars to the debtors cannot end at Section 362 (a) (3). Instead, they argue that Section 542 (a) regulates. Section 542 (a) provides that “an entity in possession of, custody, or control of property that the Trustee may use, sell, or lease must deliver to the Trustee … that property or the value of that property because this property has an insignificant value or benefits the estate. "

The city argues that the language "shall deliver" is not self-executing. Rather, as the U.S. Appeals Courts for the 10th and District of Columbia Circuits have found, if the trustee files an appeal to seek the property, it is an obligation to surrender property. The Federal Insolvency Code, which corresponds to the insolvency procedure analogous to the Federal Civil Procedure Code, declares that "a procedure for reclaiming money or property that does not force the debtor to hand over property to the trustee" is an opponent. The procedure is subject to the rule 7001. The city and the United States, which filed a "friend of the court" in support of the city, argue that section 362 freezes the status quo – this is where the cars are seized – and then the trustees must act under section 7002. 542 and rule 7001 to reclaim property.

Both city and federal government briefs focus on the simple textualism that the Supreme Court often finds attractive. Both argue that the court needs to read the bankruptcy code as a legal system. While it may be possible to read Chicago's continued ownership of the debtors' cars as an "act" to "exercise control of the estate's property" contrary to residence, doing so would make Section 542 redundant. In this larger system, § 542 would have to be separated from § 362 in order to preserve the various exceptions and defense mechanisms for sales anchored in the code.

Chicago and the United States emphasize that the bankruptcy code reflects a “balance” between exonerating the debtor and safeguarding the rights of the creditors. One such exception is the provision in Section 542 that debtors are not required to surrender property "of unimportant value or use for the property". Even more important for the creditors is that the creditors can insist on adequate protection – objective certainty that there is no collateral, as section 542 (a) only applies to real estate that is either usable under section 363 or under section 522 for the Creditors are not accessible to depreciation when used by the debtor or trustee – prior to the transfer of property.

In addition, the city and its amici contend that the court has already determined that Section 542 (a) allows creditors to retain debtor property in Whiting Pools notwithstanding Section 362 of the Bankruptcy Chestnut United States versus Whiting Pools, Inc. The IRS seized the debtors' property in order to satisfy a tax lien. The debtor then filed for bankruptcy protection and relied on Section 542 to force the IRS to return the property before proceeding with a tax sale. When the court found that Section 542 required the IRS to surrender property, it never considered that the IRS had already breached auto-residence by not returning the property at the beginning of the bankruptcy process. The debtors in this case and their amici have an opposite interpretation of whiting pools, arguing that this shows that section 542 is self-executing.

Chicago argues that the court reiterated its view that Section 362 does not cover Section 542 of the Citizens Bank of Maryland against Stocking. In the Strumpf case, the debtor alleged that a creditor bank had breached automatic residence when it placed an administrative freeze on its account after the debtor filed for bankruptcy. There, Section 542 (b) required the bank to "pay" the trustee all debts owned by the estate that are due, payable on demand, or payable on order … except to the extent that those debts are sub-offset can section 553. ”Section 553 regulates offsetting. The Supreme Court concluded that "it would be foolish to view the exception clause under Section 553 (a) as an indication that Section 362 (a) (7) requires immediate payment of an offsetting debt." Debtors find it difficult to imagine that the current court distinguishes the facts of these cases from Stocking.

The United States goes a step further than the city, arguing that even if the language "shall deliver" in section 542 is self-executing, it need not be a violation of section 362 too. The remedy for violating Section 542 is contempt, while The appeal against Section 362 is monetary. Indeed, Section 342 (g) specifically provides that “(a) no fine shall be imposed on a creditor for violating a Section 362 (a) residence (including a fine under Section 362 (k)). or for failure to comply with Section 542 or 543, unless the conduct underlying such breach or breach occurs after that obligee receives notice under that section of the relief order. “The United States states that the use of the disjunctive indicates that Section 542 does not rely on Section 362 for enforcement.

The debtors, represented by a well-respected bankruptcy judge, Eugene Wedoff, also begin their reasoning in the law. Relying on the word "shall" in Section 542 (a), they state that Section 362 enforces the mandates in Section 542. In their view, Congress could have inserted something like "upon receipt of a court order" in section 542 of the word "shall" should not be executed itself.

Her argument next revolves around failure to do something that is an "act" within the meaning of Section 362. Arguing that withholding property is an act, the debtors have several strong amici to back up their arguments. Professors John Pottow and Jay Westbrook, two bankruptcy law experts, best put this when they state that “the behavior of the city – which refuses to take action until the debtor's debt is paid off – is literally a textbook example of one automatic violation of residence is. It is an act of collecting, evaluating or restoring a claim (emphasis in the original). They warn that distinguishing between active and passive behavior in auto-residence violations would produce ridiculous results. Pottow and Westbrook also contend that reading Chicago's retention of cars as a stay violation does not obviate the need for Section 542 (a). The key, they argue, is that section 542 (a) imposes a duty of accountability for the property of the debtor. Even if the obligee left the property without violating the residence, section 542 would hold the obligee liable to the estate for the value of the property.

Bankruptcy policies and common sense are likely to favor debtors. It is wasteful for trustees to file opposition proceedings as a condition of recovering property to which they are entitled. Pottow and Westbrook point out, "Any burden on the trustees means delay and expense to the unsecured creditors in a bankruptcy estate with limited resources where, by definition, there is not enough money to get around." The weight of the Amici reflects this point. Bankruptcy is likely better served by returning property to the trustee and allowing the creditor to file a routine residency petition – which Pottow and Westbrook refer to as "the bread and butter of bankruptcy litigation" – if they wonder if your property is adequately protected.

An amicus letter in support of debtors from various groups such as the American Civil Liberties Union, the Cato Institute, the Fines and Fees Justice Center and the Institute for Justice is currently dealing with this case. There is an ugly story of local governments increasing the revenues of their poorest residents through aggressive fines and charges, with no credible link to public safety. According to amici, 11% of Chicago's total budget in 2018 came from fines and fees. The letter reads: "Chicago charges exorbitant charges for seizing, towing and storing vehicles and refuses to return vehicles to their owners without paying all of the money owed in full." It doesn't matter that Chicagoans need their vehicle, to work for the wages the fines might pay. In this context, it is all the more urgent to return the vehicle to the borrower without additional tires and delays. Regardless of the overriding policy, this case looks like another close, legal battle.

Posted in City of Chicago, Illinois v. Fulton, Featured, Merits Cases

Recommended citation:
Danielle D & # 39; Onfro,
Case Preview: Squaring the Seizure with the Federal Bankruptcy Proceedings,
SCOTUSblog (October 12, 2020, 2:51 p.m.),
https://www.scotusblog.com/2020/10/case-preview-squaring-impoundment-with-federal-bankruptcy-procedure/