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In re Steenes

United States Court of Appeals, Seventh Circuit

November 12, 2019

In the Matter of: Chester B. Steenes and Dorian Dudley, Debtors-Appellees. Appeal of: City of Chicago, Illinois

          Submitted May 7, 2019

          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.

          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 payment 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 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) contended in a petition for rehearing that the answer did matter 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 rehearing filed by Steenes and Dudley but denied petitions for rehearing filed by the other debtors. Our order provided that the administrative-expense question would be resolved using the existing briefs and argument.

         Steenes I sets out the basics. After bankruptcy judges confirmed 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 administrative expenses of the estates in bankruptcy, as long as the vehicles remain assets of the estates. Administrative expenses 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 "administrative." And because, under Chicago's law, a vehicle's own- 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 replied: "The Bankruptcy Code cannot reasonably be read to enlist the judiciary's aid in permitting 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; similarly 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 administrative-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 judges 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 inability to seize the vehicles means that the estates are protected without payment. For the same reason payment is not "necessary". 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 voluntarily 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 began), 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 incurred 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 general 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 into dealings with a debtor in possession or a receiver of an insolvent business unless priority is allowed. The trustee would exclude all negligence claims, on the theory that first priority for 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 derived from torts committed 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 district ...


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