A federal judge said the city of Chicago may not have the absolute right under federal law to withhold impounded vehicles from people who have filed for bankruptcy protection, but it at least deserves the chance to argue its case to do so.
In an opinion issued May 4, Judge Manish S. Shah considered a 2016 amendment to the Chicago municipal code the city asserts gave it the ability to retain vehicles impounded from owners, even after they filed for federal bankruptcy protection. According to Shah, the city said “its statutory possessory liens allow it to maintain possession without consequence from the bankruptcy court.”
Alan Kennedy filed for Chapter 13 bankruptcy three months after the city impounded his 1999 Oldsmobile Delta because he owed $7,171 in parking tickets. A federal bankruptcy judge ordered to the city to return the vehicle to Kennedy, but the city refused to comply, arguing it would lose its lien on Kennedy for the parking tickets without maintaining possession of the car.
According to Shah’s opinion, Kennedy’s proposed bankruptcy plan acknowledged the city’s interest and required the release upon the plan’s confirmation since the city would be entitled to “the full secured value of the vehicle.”
The bankruptcy court ordered the vehicle be released, saying it should happen by the next day or the court would consider sanctions. The city filed an appeal the same day and moved for a stay pending the outcome.
Shah agreed with the city’s position that its interest in Kennedy’s car fulfills requirements to qualify for exemption to the bankruptcy law’s automatic stay provision that usually prevents creditors from trying to control property of an estate filing for bankruptcy.
Kennedy likewise didn’t dispute the city’s possessory lien and acknowledged it could fall within the automatic stay exception. But Kennedy argued the provision itself violates his due process rights and is pre-empted by the federal Bankruptcy Code.
Shah, however, noted Kennedy could have demanded a hearing that could have led to the city releasing the car, and the judge said this undermined Kennedy’s due process claim.
Shah further said the city’s choice to rewrite its ordinances to change how its interest in property is defined doesn’t necessarily undermine the Bankruptcy Code, writing: “Though Kennedy raises genuine concerns about the city’s motives for amending the municipal code, there is no conflict — the municipal code operates within the bankruptcy regime.” As such, he said the bankruptcy court “erred in concluding that the city’s continued possession of Kennedy’s vehicle was a violation of the automatic stay.”
However, Shah also noted the Bankruptcy Code grants an estate possessory interest in certain property, while also securing rights for creditors to protect their interest even without holding the item.
“Requiring the city to release Kennedy’s vehicle, provided that adequate safeguards are put in place, aligns not only with the text, but also with the purpose, of the Bankruptcy Code,” Shah wrote.
Although Kennedy didn’t have possession of the car when he filed bankruptcy, it remained his car. Shah said giving him back the car would not expand his property rights.
“The whole point of turnover proceedings is to allow the estate to obtain possession of property in which the debtor had an interest, but was not in his possession of at the time of filing,” Judge Shah wrote.
However, Shah asserted the bankruptcy court judge erred by refusing to allow the city a chance to adequately protect its rights, such as by restricting Kennedy’s use, lease or sale of the vehicle upon regaining possession. He vacated the order and remanded the case to give the city that opportunity.
“It is possible that nothing short of retained possession will be adequate to protect the city’s interest, because of the nature of possessory liens,” Shah wrote, “but this is an issue that should be decided by the bankruptcy court in the first instance.”
Kennedy is represented in the action by attorney Brett J. Pfeifer, of Credit Solutions Law, of Chicago.