By: Alexis Zobeideh
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
The filing of a petition for relief under title 11 of the United States Code (the “Bankruptcy Code”) generally results in an automatic stay enjoining creditors from taking certain actions against the debtor or property of the estate.[1] In particular, creditors are stayed from exercising control over property of the estate.[2] The Bankruptcy Code also requires any entity in possession of property of the estate to turn over that property to the trustee or the debtor.[3] In In re Rice, the United States Bankruptcy Court of Illinois found that the City of Chicago (the “City”) violated the automatic stay by refusing to return a debtor’s impounded vehicle.[4] The City impounded the debtor’s car in early February 2018.[5] The following month, while the City retained possession of the vehicle, the debtor filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code.[6] The debtor’s counsel demanded the release of the vehicle from the City.[7] The City denied the request and only offered to release the vehicle if the debtor modified her confirmed Chapter 13 plan.[8] In response, the debtor requested an order from the Illinois bankruptcy court imposing sanctions, including actual damages, attorney’s fees, and punitive damages, against the City.[9] On appeal, the case was assigned to the United States Court of Appeals for the Seventh Circuit.
The Seventh Circuit has held that “creditors who exercised control over vehicles belonging to debtors by possessing them before the bankruptcy was filed must turnover those vehicles upon the request of a debtor once bankruptcy has been filed.”[10] Willful violations of an automatic stay are subject to sanctions.[11] In the Seventh Circuit, a willful violation is one in which the creditor takes “questionable action” despite awareness of a pending bankruptcy proceeding.[12] To avoid sanctions, a creditor may seek an order lifting the automatic stay to permit it to retain the property.[13]
Here, the City was aware of the debtor’s bankruptcy case and confirmed plan.[14] Therefore, the bankruptcy court found that the City willfully violated the automatic stay when it deliberately failed to release the property to the debtor.[15] The City argued that the stay should be annulled because the debtor had incurred a series of post-petition traffic tickets, and the City has a strong interest in enforcing traffic ordinances for public safety and convenience.[16] However, the City failed to produce any evidence demonstrating that debtor was a dangerous driver and thus according to the bankruptcy court, cause could not be established.[17] The court further denied the City’s request to modify the automatic stay, finding the City acted deliberately and an annulment would be inappropriate.[18] The court imposed sanctions on the City for violating the stay.[19] The court explained that “[a]n individual subject to a willful violation of the automatic stay shall recover actual damages, including attorneys' fees and costs,” and accordingly, awarded the debtor $8,967.50 in damages.[20]
The Illinois Bankruptcy Court noted that sanctions may be appropriate where the automatic stay is violated.[21] Here, the court held the City’s deliberate failure to return the car following the debtor’s bankruptcy filing was a willful violation.[22] Thus, even when the initial impounding of a vehicle is legal, if a creditor fails to act or return a vehicle after a debtor files for bankruptcy in the Seventh Circuit, the creditor may be sanctioned by the court for violating the automatic stay.[23]
[1] In re Swindle, 584 B.R. 259, 264 (Bankr. N.D. Ill. 2018) (Cox, J.).
[2] See 11 U.S.C. § 362(a)(3).
[3] 11 U.S.C. § 542(a).
[4] In re Rice, 613 B.R. 690, 693 (Bankr. N.D. Ill. 2020).
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id. at 692–93.
[10] Id. at 694 (citing Thompson v. Gen. Motors Acceptance Corp., LLC, 566 F.3d 699, 701 (7th Cir. 2009)).
[11] 11 U.S.C. 362 (k)(1).
[12] In re Radcliffe, 563 F.3d 627, 631 (7th Cir. 2009) (“[I]t is sufficient that the creditor takes questionable action despite awareness of a pending bankruptcy proceeding.”).
[13] In re Szyszko, 234 B.R. 408, 412 (Bankr. N.S. Ill. 1999) (noting that annulment asks the court to approve post-petition action which violated the automatic stay if cause exists).
[14] In re Rice, 613 B.R. at 693.
[15] Id. at 695.
[16] Id.
[17] Id. at 696 (“Therefore, because no evidence was introduced into the record to substantiate the City’s position that Debtor is a reckless driver, the City’s unsupported argument will not be considered. Accordingly, no cause exists to support annulment.”).
[18] Id. at 695
[19] Id. at 699.
[20] Id. citing 11 U.S.C. § 362(k)(1); id. at 698 (explaining damages are a combination of attorney fees, damages for lost wages, and vehicle repair costs).
[21] See id. at 695.
[22] Id. at 690 (“[W]hile city may have lawfully impounded Chapter 13 debtor’s motor vehicle prepetition, it had an obligation, once the debtor filed for bankruptcy and made demand for return of vehicle, to turn the vehicle over, and its failure to do so was in nature of stay violation[.]”).
[23] Id.