City’s Lien on Vehicle Is Judicial and May be Avoided

Posted by NCBRC - April 22, 2022

The City’s possessory lien on the chapter 7 debtor’s vehicle was judicial rather than statutory and could therefore be avoided under section 522(f). City of Chicago v. Mance, No. 21-1355 (7th Cir. April 21, 2022).

After the chapter 7 debtor incurred several unpaid traffic tickets, the City of Chicago impounded her car subject to a possessory lien of $12,245, comprising the amount of the outstanding tickets, storage and towing costs, and the City’s attorney fees. The lien in this case was more than four times the car’s value. The debtor’s monthly income was $197 in food stamps. The bankruptcy court held that the lien was avoidable, and the district court affirmed. City of Chicago v. Howard, 625 B.R. 384, 390 (N.D. Ill. 2021).

On appeal, the Seventh Circuit addressed the interaction of the City of Chicago’s ordinance authorizing impoundment of vehicles as a result of unpaid traffic tickets, and the vehicle owner’s ability to avoid a lien in bankruptcy. It noted that the City’s aggressive ticketing policies have led to a significant increase in bankruptcy filings among its residents, while at the same time creating a substantial source of income to the municipal government.

The court began with the Code’s three, mutually exclusive liens: judicial, statutory, and security interest. Here, the issue was whether the City possessed the vehicle pursuant to a judicial lien, which would be avoidable in bankruptcy, or a statutory lien, which would not.

A judicial lien is defined in section 101(36) as a lien “obtained by judgment . . . or other legal or equitable process or proceeding.” A statutory lien, defined in section 101(53), is a lien that arises “solely by force of statute or specified circumstances or conditions.” The court noted that both definitions focus on the events, or lack thereof, that precede the creation of the lien. The court reasoned that the word “solely,” in the definition of the statutory lien, “seems clear enough and signals that prior legal proceedings leading to a lien would exclude the lien from the category of statutory liens.” Congress further clarified in the legislative historical discussion of the terms, that a “statutory lien is only one that arises automatically, and is not based on an agreement to give a lien or on judicial action.”

For purposes of illustration, the court pointed to a mechanic’s lien as the quintessential statutory lien. Mechanic’s liens arise automatically when the mechanic’s work on the property is complete, the bill comes due, and the bill remains unpaid. No judicial intervention is required for the creation of the lien.

In contrast, the quintessential judicial lien is a money judgment. There, the lien does not arise until a court enters judgment in favor of the creditor.

The court found the City’s possessory lien falls somewhere between the two illustrations. It then walked through the steps necessary for the lien to come into existence, beginning with the debtor receiving the traffic ticket and a police officer giving notice of the violation. The vehicle owner may then contest the violation and, upon losing that stage, commence an appeal process. If they lose on appeal, the resulting judgment is considered a “money judgment” comparable to a judicial lien, as held in In re Fulton, 926 F.3d 916, 924 (7th Cir. 2019), vacated and remanded on other grounds sub nom. City of Chicago v. Fulton, 141 S. Ct. 585 (2021). The next step is impoundment, requiring notification to the owner and an opportunity to pay the fine or seek a hearing to contest liability. The lien arises when these steps are exhausted.

Though the final step in the process is automatic, the court found that it could not ignore all the legal proceedings that necessarily precede that step. The court differentiated an impoundment that results from a car blocking an intersection or similar circumstance, where the City has a statutory right to tow the vehicle without prior judicial or other legal process.

The court also differentiated the Third Circuit case of In re Schick, 418 F.3d 321 (3d Cir. 2005), which involved a possessory lien on vehicles after the owner incurred surcharges in situations growing out of the accumulation of traffic tickets. The lien under that law was for the surcharges and interest only, and the judicial proceedings relating to the traffic tickets was too remote from the surcharges to render the lien “judicial.” Unlike Schick, the lien in this case was inextricably tied to the underlying traffic violations.

The City argued that if the lien at issue here were deemed judicial, it would call into question the status of tax liens, which are unquestionably statutory but which arise out of a similar process. The court disagreed, finding that Congress exercised its prerogative to specify in the text that tax liens are statutory and, therefore, the existence of a statutory tax lien did not alter the analysis of the lien at issue here.

The court found the lien to be judicial and avoidable. It affirmed.

Mance (7th Cir.) April 2022


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