City Could Not Collect Post-Petition Traffic Fines as Administrative Expenses

City Could Not Collect Post-Petition Traffic Fines as Administrative Expenses

In this consolidated bankruptcy appeal, the City  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.

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 City’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). These appeals challenge the oral ruling of the Bankruptcy Court, which denied the City’s motions at the close of a collective hearing on March 23, 2017.

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 541 and 1306, will continue to be property of the estate following confirmation…” 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.

The Bankruptcy Judge 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.”  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. He 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.

In a related case, the Judge  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 (1968)—the City’s foundational authority—to the facts of this case. 569 B.R. at 740. Nevertheless, the Judge considered whether the City had satisfied the test for recovering administrative expenses under Reading and concluded that it had not. Finally, Judge  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  its claims for payment of post-petition traffic fines should receive priority as administrative expenses.

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