The City of Chicago v. Marshall

Filing 35

MEMORANDUM Opinion and Order Signed by the Honorable Elaine E. Bucklo on 11/27/2017. Mailed notice. (mgh, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

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.

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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

MEMORANDUM OPINION AND ORDER
In 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

1

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

obligations),

status

ahead

of

(second

only

to

pre-petition

domestic

creditors

support
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

1

sanctions,

in

which

the

City

In re Jones, 17-cv-2314 (13-bk-46330); In re Steenes, 17-cv2308 (14-bk-16692); In re Allen, 17-cv-2309 (14-bk-17256); In re
Woodward, 17-cv-2311 (14-bk-33498); In re Dudley, 17-cv-2316
(16-bk-08230); and In re Henry, 17-cv-2319 (16-bk-20534). On May
5, 2017, I consolidated these appeals for a single briefing
schedule.
2
In re Haynes, 17-cv-5361 (15-bk-39945). On July 28, I granted
the City’s motion to reassign and consolidate this case and for
supplemental briefing.
2

tickets,

immobilizes,

vehicles

involved

tows,

in

and

ultimately

traffic

sells

violations.

or

destroys

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
(Bankr.

confirmation...”

N.D.

Ill.

2017)

In

re

Haynes,

(alteration

in

569

B.R.

original).3

733,

741

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.

3

Substantially identical confirmation orders were entered in
each case. See, e.g., Appellant’s Mot. to reassign, Exh. A-1 at
12.
3

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 (1968)—the City’s foundational authority—to the facts
of

this

case.

569

B.R.

at

740.
4

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

decisions

overarching

effectively

theme

that

immunize

the

the

bankruptcy

debtors’

estates

court’s
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.3d at
5

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 (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. 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:

6

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
provides

of

that

their
the

bankruptcy

“person

in

estates.
whose

The

name

Municipal
the

vehicle

Code
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

7

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 § 9100-6. 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

involved in the post-petition violations, the bankruptcy estates
are responsible for the debts.
Where the City’s argument falls short is with respect to
the second prong of the Reading analysis. The City points to a
host

of

authorities

from

the

First,

Second,

Fourth,

Fifth,

Sixth, and Eleventh Circuits, which, in its view, stand for the
broad proposition that “post-petition involuntary creditors must
receive administrative expenses priority.” Supp. Br. at 17-18.
While

it

is

true

that

some

appellate

courts

have

upheld

administrative expense priority for post-petition taxes, fines,
penalties, and tort claims on the authority of Reading, none of
the City’s authorities establishes the sweeping rule the City
presses. See, e.g., In re N.P. Min. Co., Inc., 963 F.2d 1449,
1454-55 (11th Cir. 1992) (“The Reading Court did not hold...that
in all cases costs normally incident to operation of a business
are administrative expenses. Only in ‘some cases,’ the Court
8

stated, do they merit such status.”) (original emphasis); see
also In re Munce’s Superior Petroleum Products, Inc., 736 F.3d
567, 571 (1st Cir. 2013) (post-petition environmental violation
fines

and

penalties

are

administrative

expenses);

Matter

of

H.L.S. Energy Co., Inc., 151 F.3d 434 (5th Cir. 1998) (postpetition cost of plugging unproductive wells in compliance with
state law); In re Sunarhauserman, Inc., 126 F.3d 811 (6th Cir.
1997) (post-petition ERISA obligations arising out of employees’
post-petition employment). More importantly, none of the City’s
authorities involves an individual bankruptcy under Chapter 13.
The City insists that Chapter 11 and Chapter 13 are “analogous,”
but they are not identical, and some of the distinctions bear
importantly on the issue of fundamental fairness.
First, the City’s argument loses sight of at least one
common-sense
entities:

distinction

individuals

between

do

not

individuals

exist

for

the

and

sole

business

purpose

of

making money for stakeholders. In an effort to paint Chapter 11
and Chapter 13 bankruptcies as materially identical, the City
argues

that

individual

a

“chapter

debtor

creditors

while

business

entity

a

as

13

a

going

chapter
as

a

estate

11

is

a

concern
estate

going

is

concern

continuation
for
a
for

the

of

benefit

continuation
the

the

of

benefit

of
a
of

creditors.” But while it may rationally be argued that every act
undertaken by a business serves the ultimate goal of increasing
9

the

entity’s

assets

for

its

owners

and

creditors,

the

City

cannot seriously contend that the same is true of individuals.
Because a debtor living her life is not merely “doing business,”
not every act she undertakes that may result in a liability can
reasonably be construed as a “cost of doing business” that in
fairness must be borne by her pre-petition creditors.
The Seventh Circuit is mindful of this distinction. In In
re Palomar v. First American Bank, 722 F.3d 992 (7th Cir. 2013),
the court explained that “Chapter 13 is only analogous to a
reorganization; the debtor does not become a slave....he pays
his creditors, over a three- or five-year period, as much as he
can afford. Often this makes the creditors better off than they
would be in a liquidation, for the assets, though important to
the debtor, may have little market value.” Id. at 995. In other
words,

while

allowing

a

Chapter

13

debtor

to

continue

in

possession of the estate’s assets “often” inures to the benefit
of his creditor, the regime also preserves the enhanced value of
the assets to the debtor personally.
Nor

does

the

Court’s

reasoning

in

Reading

support

the

City’s individual qua business argument. In Reading, the Court
justified holding the estate responsible for the administrator’s
post-petition

negligence

by

observing

that

“[t]he

‘master,’

liable for the negligence of the ‘servant’ in this case was the
business

operating

under

a

Chapter
10

XI

arrangement

for

the

benefit of creditors and with the hope of rehabilitation.” 391
U.S. at 479. While the City is certainly correct that Chapter
13,

no

less

than

Chapter

11,

creates

a

legally

independent

estate, the “master/servant” analysis the Court relied upon in
Reading breaks down in the Chapter 13 context. Unlike in the
Chapter 11 context, where holding the estate liable on a theory
of respondeat superior for the misdeeds of its receiver creates
a positive incentive for the receiver to operate the business
with due care (lest the business be forced to cease operations
and

leave

creditors

with

no

hope

of

recovery

beyond

the

liquidation value of its assets), holding the debtors’ estates
liable for traffic fines creates a perverse incentive for the
debtors to be heedless of City’s traffic laws, knowing that some
or all of the cost of non-compliance will be borne by their
creditors. As Judge Barnes observed, this result is at odds with
the

basic

bankruptcy

principle

that

debtors

are

allowed

one

“fresh start,” not a “rolling fresh start” that begins anew with
each post-petition debt.
The City strains to escape this conclusion, arguing that
the “quasi-criminal act that the City has fined” is not the
vehicle operators’ traffic violations, but rather the vehicle
owners’ act of “allowing their vehicles to be used for speeding,
running red lights, and other violations.” Supp. Br. at 22-23.
For this argument, the City relies on City of Chicago v. Hertz
11

Commercial Leasing Corp., 375 N.E. 2d 1285, 1291 (Ill. 1978)),
but Hertz does not stand for the proposition that a vehicle
owner is directly liable for allowing the vehicle to be used in
violation

of

the

law.

Instead,

Hertz

holds

that

Chicago’s

Municipal Code establishes a vehicle owner’s vicarious liability
for the conduct of those it authorizes to operate the vehicle.
Id.

at

344.

In

other

words,

it

creates

respondeat

superior

liability of the kind that supported the Court’s analysis in
Reading, but that does not support the City’s claim for priority
in the Chapter 13 context because of the distinct incentive
structure involved in individual debtor cases.
Other
support
below

distinctions

the

are

conclusion

consistent

between
that

with

the

Chapter

11

bankruptcy

fundamental

and

Chapter

courts’

fairness.

For

13

decisions
example,

unlike the Chapter 11 receiver who ordinarily bears no personal
responsibility for her administration of the estate, Chapter 13
debtors who incur post-petition traffic fines remain personally
liable for those fines at the termination of the bankruptcy.
Indeed, as Judge Barnes noted, the City retains the rights any
other post-petition creditor has to collect its debts outside of
the bankruptcy proceedings, either by moving to lift the stay or
by seeking dismissal of the bankruptcy. That the City may not
prevail

on

such

motions

does

not

render

these

remedies

“immaterial and impossible” as the City submits. Supp. Br. at
12

23.

To

the

contrary,

leaving

the

City

consistent

with

to

the

City’s

pursue

Congress’s

own

remedies

intent.

See

argument
against
id.

reveals

the

at

24

that

debtor

is

(“Congress

intended the vehicles to revest in the debtors upon confirmation
to

allow

the

City

to

pursue

its

enforcement

rights

without

asking for permission. But the form confirmation order brought
the City into the bankruptcy court by shifting responsibility
for violations to the bankruptcy estate.”).
This

portion

of

the

City’s

argument

reveals

that

the

essence of its claim is its objection to the bankruptcy courts’
entry of confirmation orders providing that the estate’s assets
remained the property of the estate throughout the duration of
the bankruptcy proceedings. But whether that confirmation order
is

appropriate,

either

in

these

cases

specifically

or

as

a

matter of practice in this district, is not an issue properly
presented for resolution in these appeals. The question before
me

is

whether

fundamental

fairness

compels

granting

priority

administrative expense status under Reading to the City’s claim
for

post-petition

parking

fines.

For

the

reasons

explained

above, I conclude that the answer is no.
Nor am I persuaded otherwise by the City’s insistence that
denying its motion for administrative expense priority renders
the

estates

“immune

from

the

law.”

The

City

argues

that

governmental units “pass laws to protect the health, safety and
13

welfare

of

their

citizens,”

and

have

“a

strong

interest

in

enforcing traffic ordinances for the safety and convenience of
the public.” Supp. Br. at 20 (quoting Grant v. City of Chicago,
594 F. Supp. 1441, 1447 (N.D. Ill. 1984)).

The City insists

that unless it is allowed to recover from the estates for the
debtors’ post-petition tickets, it enjoys “nothing more than the
theoretical privilege of requiring compliance without any actual
requirement.” Supp. Br. at 2. But as just explained, that is not
true, since the City retains its right to pursue the debtors
themselves, who are undoubtedly the more susceptible to being
induced by the fines to comply with the law.4 Accordingly, the
City’s alarmist invocation of careless drivers threatening the
lives

of

children

in

safety

zones

militates

against

its

position, rather than in its favor.
Finally, the City argues that 28 U.S.C. § 959(b), which
requires a debtor in possession to manage the estate’s property
“in the same manner that the owner or possessor would be bound
to do if in possession thereof,” requires administrative expense
priority treatment of its post-petition claims. The City cites,
4

While the debtors’ own liability for the fines is also
vicarious under the Municipal Code, they nevertheless have a
greater interest than the estates do in preserving their rights
to the vehicle. As the court noted in Palomar, the estate’s
assets in a Chapter 13 case generally have greater value to the
debtor than to the creditors for whose benefit the estate is
managed, and the consequences of non-compliance—progressive
sanctions culminating in forfeiture of the vehicle—are certainly
more threatening to the debtors than to the estates.
14

inter alia, In re N.P. Mining Co., Inc., 963 F.2d 1449, 1458
(11th Cir. 1992), but a review of the court’s reasoning in that
case shows that it is inapplicable on the facts here. In N.P.
Mining,

the

court

reversed

the

denial

of

an

administrative

expense priority claim for the payment of civil penalties for a
mining
court

company’s
concluded

post-petition
that

priority

environmental
was

violations.

warranted

by

the

The

policy

embodied by § 959(b), reasoning: “it makes sense that when a
trustee or debtor in possession operates a bankruptcy estate,
compliance with state law should be considered an administrative
expense. Otherwise, the bankruptcy estate would have an unfair
advantage

over

nonbankrupt

competitors.”

Id.

at

1458.

The

court’s reasoning does not advance the City’s argument here,
since

individual

bankruptcy

estates

are

not

in

“competition”

with non-bankrupt individuals, nor does denial of the City’s
motion give debtors a “competitive advantage” over non-bankrupt
individuals. In fact, one could argue that the opposite is true,
since allowing the debtors to pass the cost of post-petition
non-compliance

with

traffic

laws

on

to

their

pre-petition

creditors would presumably allow them to use the vehicles at a
lower overall cost than non-bankrupt individuals.

15

III.
For the foregoing reasons, the decisions of the bankruptcy
court are affirmed.

ENTER ORDER:

Elaine E. Bucklo
United States District Judge
Dated: November 27, 2017

16