City of Chicago v. Marilyn O. Marshall ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 17-3630
IN THE MATTER OF:
CHESTER B. STEENES and DORIAN DUDLEY,
Debtors-Appellees.
APPEAL OF:
CITY OF CHICAGO, ILLINOIS
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
Nos. 17 C 2308 et al. — Elaine E. Bucklo, Judge.
____________________
SUBMITTED MAY 7, 2019 — DECIDED NOVEMBER 12, 2019
____________________
Before EASTERBROOK, ROVNER, and HAMILTON, Circuit
Judges.
EASTERBROOK, Circuit Judge. In re Steenes, 918 F.3d 554 (7th
Cir. 2019) (Steenes I), holds that the confirmation of a pay-
ment plan under Chapter 13 of the Bankruptcy Code causes
the debtor’s assets, including automobiles, to revert to the
debtor’s personal ownership unless the judge has made a
debtor-specific finding under 11 U.S.C. §1327(b). We thought
that this conclusion resolved the appeals. Although counsel
2 No. 17-3630
briefed an additional question—whether automotive fines
incurred by estates during confirmed Chapter 13 payment
plans should be treated as administrative expenses—the City
of Chicago said that this question need not be answered if
we decided the §1327(b) issue in its favor, as we did.
Two debtors (Chester Steenes and Dorian Dudley) con-
tended in a petition for rehearing that the answer did mafer
to their situations. Chicago confirmed that this is so and
added that the City is unwilling to give up its claims against
these debtors. We therefore granted the petition for rehear-
ing filed by Steenes and Dudley but denied petitions for re-
hearing filed by the other debtors. Our order provided that
the administrative-expense question would be resolved us-
ing the existing briefs and argument.
Steenes I sets out the basics. After bankruptcy judges con-
firmed their Chapter 13 payment plans, Steenes and Dudley
used their cars in ways that led to fines for running red
lights, illegal parking, and similar offenses. They refused to
pay, observing that the confirmed plans do not require them
to pay fines (as opposed to other expenses). Chicago asked
the bankruptcy and district judges to treat the fines as ad-
ministrative expenses of the estates in bankruptcy, as long as
the vehicles remain assets of the estates. Administrative ex-
penses are entitled to priority payment. 11 U.S.C. §507(a)(2).
But the bankruptcy and district judges ruled that the fines
are not administrative expenses, principally because paying
them does not promote the debtors’ interests. 569 B.R. 733
(Bankr. N.D. Ill. 2017), affirmed, 281 F. Supp. 3d 702 (N.D. Ill.
2017). Unless payment is beneficial to the debtor, the judges
concluded, an expense is not properly classified as “adminis-
trative.” And because, under Chicago’s law, a vehicle’s own-
No. 17-3630 3
er, which means the estate, is the entity that must pay, the
automatic stay of 11 U.S.C. §362 means that the City cannot
seize, tow, or immobilize the cars.
Our prior opinion explained that the debtors, including
Steenes and Dudley, have taken the view that debtors in
Chapter 13 need not pay vehicular fines. Our opinion re-
plied: “The Bankruptcy Code cannot reasonably be read to
enlist the judiciary’s aid in permifing debtors to violate the
law.” 918 F.3d at 558. That is equally true whether the device
for sheltering scofflaws is holding the asset in the estate (the
subject of our prior opinion) or authorizing the estate not to
pay debts incurred during the course of its administration.
Steenes I discussed the debtors’ principal argument: that
they need autos to earn the money promised to creditors by
the Chapter 13 plans. We observed that this is true but does
not justify allowing debtors to avoid the costs of operating
vehicles. They must pay for gasoline and insurance; similar-
ly they must pay for parking, whether they acquire space
legally or illegally. Allowing debtors in bankruptcy to stiff
involuntary creditors, such as cities trying to collect for on-
street parking, has nothing to recommend it. To the extent
the bankruptcy and district judges’ resolution of the admin-
istrative-expense question is supported by the same “debtors
need cars” rationale that Steenes I deemed inadequate, it is
equally bad as a justification for concluding that the expense
cannot be “administrative” (when a car remains in an estate).
The language on which the bankruptcy and district judg-
es relied appears in 11 U.S.C. §503(b)(1)(A), which says that
administrative expenses include “the actual, necessary costs
and expenses of preserving the estate”. Paying fines does not
“preserve” the estate, because the fining jurisdiction’s inabil-
4 No. 17-3630
ity to seize the vehicles means that the estates are protected
without payment. For the same reason payment is not “nec-
essary”. So the bankruptcy and district judges reasoned. But
on that view no involuntary debt would be an administrative
expense, because the automatic stay always could be used to
protect the estate. Only a debt that the estate incurred volun-
tarily would satisfy the statute. Reading Co. v. Brown, 391 U.S.
471 (1968), shows that this perspective is incorrect.
During the course of an equity receivership, a debtor’s
employee started a fire that caused damage to neighboring
owners, who filed tort claims. Under the law then in force,
the debts of a receivership were handled the same as debts
of a debtor in bankruptcy (once the formal proceeding be-
gan), so the Justices treated the tort claims as debts incurred
during the bankruptcy—just as Chicago fined Steenes and
Dudley during the course of their bankruptcy. The Supreme
Court observed that the norm is to treat as administrative
expenses all costs of operating an estate in bankruptcy. The
trustee representing other creditors argued that tort claims
should be treated differently and that only voluntarily in-
curred debts should be deemed administrative expenses.
The trustee contends that the relevant statutory objectives are
(1) to facilitate rehabilitation of insolvent businesses and (2) to
preserve a maximum of assets for distribution among the gen-
eral creditors should the arrangement fail. He therefore argues
that first priority as “necessary” expenses should be given only
to those expenditures without which the insolvent business
could not be carried on. For example, the trustee would allow
first priority to contracts entered into by the receiver because
suppliers, employees, landlords, and the like would not enter in-
to dealings with a debtor in possession or a receiver of an insol-
vent business unless priority is allowed. The trustee would ex-
clude all negligence claims, on the theory that first priority for
No. 17-3630 5
them is not necessary to encourage third parties to deal with an
insolvent business, that first priority would reduce the amount
available for the general creditors, and that first priority would
discourage general creditors from accepting arrangements.
391 U.S. at 476–77. The trustee in Reading advanced the same
basic line as the one the bankruptcy and district judges
adopted here. But the Supreme Court held that claims de-
rived from torts commifed during a bankruptcy must be
treated the same as debts voluntarily incurred. What is true
of involuntary debts for torts is equally true of involuntary
debts amassed while operating a car.
When concluding that Reading does not control, the dis-
trict judge gave two principal reasons.
The first is that, for a business, liability in tort is just one
of many operating costs, similar to labor and materials. Re-
quiring a debtor to pay for its torts preserves an incentive to
conduct the business safely, see In re Resource Technology
Corp., 662 F.3d 472, 476–77 (7th Cir. 2011), while fines are not
necessary. 281 F. Supp. 3d at 705–06. This overlooks the
point that maintaining an automobile is necessary to the suc-
cess of a Chapter 13 bankruptcy. A debtor who failed to pay
for insurance or gasoline could not continue using the car to
commute to work. The question then becomes whether vol-
untary creditors (such as private parking lots) must be paid,
while involuntary ones (such as cities whose streets may be
used for parking) are not. Our earlier decision concludes that
debtors who need cars must pay their involuntary credi-
tors—including cities as well as, say, pedestrians run down
by reckless driving—along with the suppliers of gasoline
and insurance.
6 No. 17-3630
The district judge’s second reason is that a natural person
is entitled to a “fresh start” in a way that a business debtor is
not. 281 F. Supp. 3d at 707–08. That’s true enough, but the
fresh start is dated when the bankruptcy begins. Pre-
bankruptcy debts may be wrifen down or discharged, un-
der Chapter 13, to the extent they cannot be paid from cur-
rent assets and income. But this does not mean that debtors
are entitled to pay less than the expenses freshly incurred. A
debtor making payments under a Chapter 13 plan is not en-
titled to buy gasoline at 50% of the price charged to other
persons or to get gas on credit (promising to pay after the
Chapter 13 plan ends) while others must pay when the gas is
delivered. Similarly a debtor making payments under a
Chapter 13 plan is not entitled to park for free on city streets,
when others must pay in advance or pay fines for parking in
forbidden places or at forbidden times.
An argument that it would be a good idea to distinguish
between business and personal debtors is one properly ad-
dressed to Congress. Chapter 13 does treat personal debtors
differently from business debtors in some respects, but the
rules for identifying administrative expenses and sefing
priorities for payment are in Chapter 5, which applies to
personal and business debtors alike. 11 U.S.C. §103(a). The
district judge and the litigants have not identified any textu-
al basis for differentiating the treatment of involuntary debts
that arise during the course of business versus personal
bankruptcies.
This is hardly the first time that a unit of government has
contended that fines for civil offenses commifed after the
commencement of the bankruptcy must be treated as admin-
istrative expenses. Many courts of appeals have held that
No. 17-3630 7
they must be so treated. See, e.g., In re Munce’s Superior Petro-
leum Products, Inc., 736 F.3d 567, 571–73 (1st Cir. 2013) (fine
for contempt of court); In re Al Copeland Enterprises, Inc., 991
F.2d 233, 240 (5th Cir. 1993) (penalty interest for failing to
remit trust-fund taxes); In re N.P. Mining Co., 963 F.2d 1449,
1458 (11th Cir. 1992) (civil penalties for post-petition mining
activities). We have not found any contrary decision.
Steenes and Dudley contend that 11 U.S.C. §1305 sup-
plies the exclusive provision for payment of post-filing liabil-
ities under Chapter 13. This statute reads:
(a) A proof of claim may be filed by any entity that holds a claim
against the debtor—
(1) for taxes that become payable to a governmental unit
while the case is pending; or
(2) that is a consumer debt, that arises after the date of the
order for relief under this chapter, and that is for property or
services necessary for the debtor’s performance under the
plan.
(b) Except as provided in subsection (c) of this section, a claim
filed under subsection (a) of this section shall be allowed or dis-
allowed under section 502 of this title, but shall be determined as
of the date such claim arises, and shall be allowed under section
502(a), 502(b), or 502(c) of this title, or disallowed under section
502(d) or 502(e) of this title, the same as if such claim had arisen
before the date of the filing of the petition.
(c) A claim filed under subsection (a)(2) of this section shall be
disallowed if the holder of such claim knew or should have
known that prior approval by the trustee of the debtor’s incur-
ring the obligation was practicable and was not obtained.
Section 1305(a) allows a city to file a proof of claim for un-
paid taxes—which means, Steenes and Dudley contend, that
a city may not recover unpaid fines and penalties. Otherwise
§1305(a)(1) would be surplusage, the argument runs, and it
8 No. 17-3630
must not be read that way. See Hall v. United States, 566 U.S.
506, 517 (2012).
This is a non-sequitur. Section 1305 does not mention
administrative expenses, as defined in §503, or change the
priority of payment laid out in §507. It does not read like an
exemption from payment, so that a debtor under Chapter 13
who hired a chauffeur would not ever need to pay the em-
ployee’s wages. (After all, §1305 does not mention wages any
more than it mentions fines.) To the extent §1305 bears on
our situation, the important subsection is §1305(a)(2), which
authorizes claims for “property or services necessary for the
debtor’s performance under the plan.” That reference to ne-
cessity kicks us back to §503(b)(1)(A), which says that neces-
sary expenses receive administrative priority. And, as we
have mentioned several times, it won’t do to ask whether
violating local law was itself “necessary”; the question is
whether operating a vehicle is necessary to earn the money
needed to perform the Chapter 13 plan. If the answer is
yes—and the debtors insist that cars are essential—then the
costs of operating that necessary asset are themselves neces-
sary. That’s why a debtor who must pay to park in private
parking lots also must pay to park on public streets. The
debtors have not cited any appellate decision holding or
even suggesting that administrative expenses as defined in
§503(b)(1)(A) are outside the scope of §1305(a)(2).
We hold that vehicular fines incurred during the course
of a Chapter 13 bankruptcy are administrative expenses that
must be paid promptly and in full.
REVERSED