Traffic Fines Not Given Priority in Chapter 13

Posted by NCBRC - December 22, 2017

Claims based on post-petition traffic fines are not administrative expenses entitled to priority in chapter 13 bankruptcy. City of Chicago v. Marshall, No. 17-2308 (lead case) (N.D. Ill. Nov. 27, 2017).

Bankruptcy debtors in seven separate cases and two courts incurred post-petition traffic fines in the City of Chicago. The City moved the courts to prioritize its claims as “administrative expenses” under sections 503 and 507(a). The courts denied the City’s motions.

In a consolidated appeal, the district court noted that sections 503 and 507, which define and prioritize administrative expenses, were enacted for the primary purpose of encouraging creditors to continue to do business with the debtor, particularly in chapter 11 cases, in order to make it possible for the debtor to operate his business while restructuring. Against this backdrop, two requirements must be met for a claim to be deemed an administrative expense: 1) the claim must arise from a transaction with the debtor-in-possession, and 2) the transaction must be beneficial to operation of the debtor-in-possession’s business. In the event that the creditor is not a voluntary creditor of the debtor, as in the case of a claim based on negligence in the operation of the debtor’s business, courts will address the question of the nature of the debt under the umbrella of fundamental fairness.

While recognizing that chapter 13 is analogous to chapter 11 in many ways, the court here distinguished between the two chapters noting that debts in chapter 11 are typically incurred in support of business operations, while chapter 13 debtors incur debt for many reasons some of which have nothing to do with business and which do not necessarily create income adhering to the benefit of bankruptcy creditors.

Moreover, the chapter 13 trustee is unlike the chapter 11 trustee who, under a theory of respondeat superior, is incentivized to continue operation of the debtor’s business for the benefit of creditors and shareholders. In chapter 13, prioritizing traffic fines over other debts would merely elevate one creditor over the others, with the effect of actually giving the debtor a “free pass” for incurring more traffic fines while his bankruptcy is pending.

Based on these differences, the court rejected the City’s position that the fines incurred by the debtors were analogous to chapter 11 business expenses.

Additionally, the court found that fundamental fairness would be preserved by treating the debts to the City as any other post-petition debt. The debtors would remain liable on the debts post-petition and, like any creditor, the City would have the option to move for lifting the automatic stay or to seek dismissal of the case. In limiting its discussion to whether fundamental fairness required prioritizing the City’s claims as administrative expenses, the court declined to reach the issue of whether the district’s standard confirmation order which provides that estate property does not revert to the debtor upon confirmation, is appropriate either generally or in this instance.

The court affirmed the decisions below.

City of Chicago ND Ill opinion Nov 2017

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