Seventh Circuit Provides Rare Guidance On "Statutory Liens"

• Published date: 21 July 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Ivan Loncar, Michele Maman and Casey Servais

In this article, the authors discuss a decision by the U.S. Court of Appeals for the Seventh Circuit interpreting the Bankruptcy Code's definitions of "statutory lien" and "judicial lien" that adds to the relatively small library of appellate court decisions that can offer issuers and investors guidance on the nature of "statutory liens."

The U.S. Court of Appeals for the Seventh Circuit has issued a decision interpreting the Bankruptcy Code's definitions of "statutory lien" and "judicial lien," holding that a lien imposed by the Chicago Municipal Code was "judicial" rather than "statutory" because it arose partly as the result of a "quasi-judicial" process rather than "solely by force of a statute."¹

In the Seventh Circuit's view, the fact that a "quasi-judicial" process functioned as an "essential prerequisite" to the imposition of the lien and determined the amount of the lien was sufficient for it to qualify as a "judicial" rather than a "statutory lien," notwithstanding that the lien was ultimately imposed automatically by operation of a municipal ordinance rather than directly by a court order.

Statutory liens are an important tool in municipal finance, because unlike some other types of liens, they are not cut off by Section 552 of the Bankruptcy Code in the event of a municipal issuer's bankruptcy. ² Whether a municipal investor will qualify as a "secured" or "unsecured" creditor in a municipal bankruptcy therefore may depend on whether that investor's lien qualifies as a "statutory lien."

Notwithstanding the importance of "statutory liens" to municipal finance, however, judicial decisions on the nature of "statutory liens" are relatively rare, particularly at the federal appellate court level. The Seventh Circuit's Mance decision now adds to the relatively small library of appellate court decisions that can offer issuers and investors guidance on the nature of "statutory liens."

BACKGROUND

The Mance appeal arose out of a long-running series of cases'including the U.S. Supreme Court's 2021 decision in Chicago v. Fulton³'in which the city of Chicago (the "City") impounded motor vehicles for various parking-related and driving-related infractions. The Chicago Municipal Code provides that any vehicles so impounded "shall be subject to a possessory lien in favor of the City in the amount required to obtain release of the vehicle."⁴ The issue in this particular appeal was whether the City's possessory lien on a vehicle that it had impounded should be deemed a "judicial lien" or a "statutory lien" under the Bankruptcy Code. If the lien was found to be "judicial" rather than "statutory," then it would be avoidable pursuant to a provision of the Bankruptcy Code authorizing individual debtors to avoid liens on motor vehicles.⁵

DEFINITIONS AND EXAMPLES OF "STATUTORY" AND "JUDICIAL" LIENS

The Seventh Circuit concluded that...