Supreme Court To Decide What Happens To Impounded Cars When Owners File For Bankruptcy

The United States Supreme Court is the highest court in the country, so when it takes up a bankruptcy case, everyone pays attention. This year, in City of Chicago v. Fulton, the Supreme Court is tasked with determining what parties in possession of a debtor’s property are to do with that property if the debtor files for bankruptcy. As the case name suggests, it involves the Windy City to our South, meaning the lower court whose opinion is being reviewed, the Court of Appeals for the Seventh Circuit, also handles cases from Wisconsin. This makes this case particularly interesting to us since the Supreme Court will critique the decision-making done by judges the Hanson & Payne team may appear before. 

Who Gets The Keys?

The case is actually a consolidation of four different cases. In all the cases, the city of Chicago impounded a vehicle because the owner failed to pay a fine or fee, typically related to a traffic violation. In such situations, the city is allowed by law to sell off the car if it is not reclaimed by the owner within a certain period of time. In each of these four cases, the various owners filed for bankruptcy after their car was impounded, but before the point where the city could have sold the car. Each owner demanded the city return their vehicle. 

The question before the Court is what the city is supposed to do with the cars after the owner has filed for bankruptcy. And more broadly, what any party that possesses property owned by someone who has filed for bankruptcy is supposed to do with that property. 

SCOTUSblog has the most succinct summary of the laws at issue that we have seen: 

Chicago’s obligations to the debtors turn on how two provisions of the Bankruptcy Code interact. The first is the automatic stay in § 362, which pauses all collection activity against debtors to prevent creditors from racing to consume debtors’ assets before any relief can occur. With a few exceptions, § 362 stays collection activity automatically when the debtor files for bankruptcy protection. Creditors who continue collection activity after the stay is in place risk sanctions.

Here, the debtors argue that § 362(a)(3) required Chicago to return the cars to them as soon as the stay went into effect. This provision bars two kinds of conduct: “any act” either to “obtain possession of property of the estate or of property from the estate” or to “exercise control over property of the estate.” The debtors argue that passively retaining property impounded before bankruptcy is an “act” to “exercise control over property of the estate.” The U.S. Courts of Appeals for the 2nd, 8th, 9th, 11th and now the 7th Circuits have adopted this reading of § 362(a)(3).

The city argues that the analysis of its obligation to return the cars to the debtors cannot stop at § 362(a)(3). Instead, they argue that § 542(a) governs. Section 542(a) provides that “an entity … in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease … shall deliver to the trustee … such property or the value of such property unless such property is of inconsequential value or benefit to the estate.”

The city argues that the “shall deliver” language is not self-executing. Rather, as the U.S. Courts of Appeals for the 10th and District of Columbia Circuits have held, it is an obligation to turn over the property if and when the trustee files an adversary proceeding seeking the property.

Figuring out which section of the Bankruptcy Code is controlling, in this case, means the Court will determine which is more important — protecting bankruptcy filers from debt collection actions, or the rights of creditors. 

What Happens Next?

The Court heard oral arguments in the case in October. Unless something out of the ordinary happens (and it might, oral arguments, in this case, were delayed because of the COVID-19 pandemic) we expect the Court to issue an opinion by the end of June 2021. 

The Hanson & Payne team is keeping a close eye on this case. The Supreme Court’s opinion may impact anyone who is holding property owned by a bankruptcy filer. It may also signal lower courts to put a thumb on the scale in favor of either debtors or creditors when multiple sections of the bankruptcy code are at play. Whatever happens, we will be ready to apply the Court’s ruling in our clients’ cases.

Preference Defense: Bringing Playground Justice Into The Courtroom

There are a set of unwritten yet universal rules that every kid who grows up in the Milwaukee area seems to know. Eeny, meeny, miny, moe is the best way to select a winner. Pinky promises are akin to unbreakable contracts. And saying “no take backs” when you make a trade locks that deal into place, no matter how much the other kid later regrets their decision. These and other rules ensure justice prevails on the playground. 

As we grow up, we see echoes of these edicts in the laws that govern our lives. There is a particularly striking similarity between the playground rule of “no take backs” and preference defense actions in bankruptcy court

What Is the Preference Defense?

Having a preference defense you can assert when one of your customers files for bankruptcy is the “no take backs” of the bankruptcy world. If you do not have a defense, the bankruptcy court can claw back any funds paid to you by someone who has filed for bankruptcy if the payment was made within 90 days of the bankruptcy. Policymakers gave courts this power because they don’t want people who are planning on filing bankruptcy to pay off their favorite creditors and leave others in a lurch. This is where the term preference action comes from.

Although the power to claw back payments through preference actions was given to the courts to protect creditors from debtors who might attempt to transfer assets improperly, no wrongdoing is necessary on the part of the creditor for a preference action to be filed against them. Most preference actions are filed against a business that was just going about its business, as usual, not suspecting that its customer was in financial distress.

Fortunately, going about your business as usual may be a valid defense. The ordinary course of business defense applies when a payment subject to clawback was received in the ordinary course of business between the creditor and the debtor. To take advantage of this defense, the creditor must be able to show that its relationship with the debtor did not change in the time period leading up to the debtor’s bankruptcy filing. 

Another popular defense is the contemporaneous exchange for new value defense. It applies when the payment sent to a creditor was intended by both the debtor and creditor to be a payment for some new good or service exchanged right when new assets were transferred to the creditor. This is why a lot of contracts, and especially those with a financially troubled business partner, specify that they are cash-on-delivery (COD).

Unless you want to risk having the money you are rightfully owed clawed back by the courts when one of your customers files for bankruptcy, it is a good idea to talk with an experienced bankruptcy attorney about what options are available to you in case you are served with a preference action. It is understandably frustrating to pay someone to protect the money that is rightfully yours, but it is better to pay a little extra than to pay it all back to a court, and that is what may happen unless you call “no take backs.” 

New Financing Can Cut A Bankruptcy Short

In October, a group of 29 Applebee’s Grill and Bar locations across Wisconsin filed for bankruptcy. Less than a month later, their operator asked the bankruptcy court to dismiss the case. This quick reversal of fortune has everything to do with financing, something the Hanson & Payne team has a lot of experience with

A Deal Even Better Than The 2 For $20

Seenu Kasturi is the president of Wisconsin Apple, the holding company that owns the Applebee’s in question. He is also the CEO of ARC Group, which owns and operates the Dicks Wings & Grill casual-dining chain, and is the parent entity of a holding company named ARC Fat Patty’s LLC, which owns and operates the Fat Patty’s chain of burger joints. 

Shortly after Wisconsin Apple filed for bankruptcy, ARC Fat Patty’s acquired Wisconsin Apple’s debt from financier Bremer Bank National Association. Now that this new financial arrangement is in place, and Wisconsin Apple is purportedly in a better position to take on the financial challenges posed by the pandemic, Kasturi is asking that the bankruptcy case be dismissed. 

“Throughout an extremely challenging environment, our focus was always on our guests and team members, specifically protecting hundreds of jobs,” Kasturi said in a statement to the Milwaukee Business Journal. “We took the extraordinary step to file, since we were left with no other options. With significant effort from Dine Brands [the parent company of the Applebees brand] in facilitating a dialogue with our lender, we were able to reach an amicable resolution and work towards dismissing the bankruptcy.”

Financing Is Key In Many Milwaukee Area Bankruptcies 

The Wisconsin Apple bankruptcy made headlines because Applebee’s is such a well-known brand, and the pandemic played a part in this story, but the behind the scenes financial issues outlined above are fairly run-of-the-mill. 

Our firm’s experience representing troubled companies means we have advised companies seeking new financing, restructuring their current financing, or buying and selling part or all of a distressed business. Whether the goal is staying afloat or winding down operations, we can provide assistance. 

Hanson & Payne also represents banks and other commercial lenders and borrowers from across the state of Wisconsin in a wide range of transactions, including commercial loan transactions, bankruptcy matters, and insurance issues. We have extensive experience securing and realizing upon wide-ranging forms of collateral, which allows our clients in the Milwaukee area and beyond to broaden their commercial loan portfolios and better secure them at the same time. 

Milwaukee Bankruptcy Lawyers Business Owners & Banks Can Rely On

Hanson & Payne, LLC is a trusted advisor to businesses and lenders in the Milwaukee area. We have a reputation for being business-minded and financial-savvy in an industry that is often criticized for not understanding that legal action is a means to an end, not an end in and of itself. If you are looking for legal counsel in this challenging time, we would be honored to take your call. Contact us today to schedule an initial consultation.