F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

I N R E M A I N L I N E E Q U I P M E

N T , I N C ., DB A Consolidated Repair Group, Debtor
,

L O S A N G E L E S C O U

N T Y T R E A S U R E R & T A X C O L L E C T O R , Appellant
,

v

.

M A I N L I N E E Q U I P M E

N T , I N C ., A ppellee

. N o. 15-60069

B AP No. 14-1429

OPI NI ON

Appeal from the Ninth Circuit B ankruptcy

Appellate Panel Kurtz , Dunn, and Tay

lor, B a nkruptcy J udg es, Presiding

Arg ued and Submitted April 5, 2017 Pasadena, California

F iled J uly 31, 2017

B efore: Kim McL ane W ardlaw and Consuelo M. Callahan, Circuit J udg es, and Gordon J . Quist, * District J udg e.

Opinion by

J udg e W ardlaw

* T h e Ho n o rab le Go rd on J

. Q u ist, U n ited States District J u d g e f o r th e W estern District o f

Mich i g an , sittin g b y

d esig n atio n

.I N R E M A I N L I N E E Q U I P M E

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SUMMARY * *

Bankruptcy

The panel affirmed the B ankruptcy Appellate Panel’s affirmance of the bankruptcy court’s summary judg ment in f a vor of a debtor in an adversary proceeding seeking avoidance of tax liens on the debtor’s personal property

.

The panel held that the appeal was n ot mooted by the disbu r s ement of the debtor’s bankruptcy estate a nd the dismissal of the Chapter 11 case.

The p anel h eld that under 11 U.S.C. § 545(2), the County of L os Ang eles could not enforce a lien on the personal property o f a Chapter 11 debtor in poss e ssion, when the County had failed to perfect the lien as ag ainst a bona fid e purchaser. T he panel concluded that Cty. of H u mb oldt v

. Grover (I n r e Cummins)
, 656 F

. 2d 1262 (9th Cir. 1981), addressing the statutory antecedent to § 545(2)
, remained
go o d l a w

. The debtor could set aside the County ’s lien s because the li e n s were statutory and were unenforceable
ag ainst a hy

pothetical bona fide p u r c h aser under California law.

** T h is su m m ary co n stitu

t es n o p art o f th e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.I N R E M A I N L I N E E Q U I P M E

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COUNSEL

B arry S. Glaser (arg

ued), Susan M. F reedman, and J acquely n H. Choi, Steckbauer W e inhart L L P, L os Ang eles, California, for Appellant.

V a n essa M. Haberbush (arg ued) and David R. Haberbush
, Haberbush & Associates L L P, L ong B each, California, for Appellee.

W a lter J

. de L orrell, I I I
, Senior Deputy ; Thomas E. Montg omery , County Counsel; Office of County C o u n sel, San Dieg o, California ; f or Amici Curiae California State Association o f C o u

n t i e s a n d California Association of County Treasurers and Tax

Collectors.

OP INION

W A RDL AW , Circuit J udg e:

May the County of L o s Ang eles enforce a lien on the personal property of a Chapter 11 debtor in possession, when the County h as failed to perfect the lien as ag ainst a b ona fide purchaser? Under 11 U.S.C. § 5 45(2), th e a n s w e r is n o, a s the B ankruptcy

Appellate Panel (“B AP”) held in reliance on

our decision in County of Humbol d t v. Grover ( In re Cummins)
, 6 5 6 F.2d 1262 (9th Cir. 1 981), which remains
g ood law.

I.

Main l ine Equipment, I nc., dba Consolidated Repair Group (“Mainline”) w as in the busin e ss of manufacturing
,I N R E M A I N L I N E E Q U I P M E

N T , I N C

. 4

repairing
, and selling cable television e quipment. I t failed to pay pro p e r

ty tax es assessed by the L os Ang e les County Treasurer and Tax Collector (th e “C ounty ”) on its personal,

or non-real estate, property

. I n response, the County recorded
tax delinquency certificates with the L os Ang eles Cou n ty Recorder i n 1 993, 2010, and 2 012. Pursuant to section 2191.4 of the California Revenue and T a x ation Code, the recording of the c e r

tificates created broad liens o n all o f Mainline’s property in L os Ang e les County

. Section 2191.4 provides that “[ f] rom the tim e o f filing ” tax delinquency certifi c a t es, “the amount required to be paid tog ether with interest and penalty constitutes a lien up o n a l l personal a nd real property in the county ” owned by the tax pay er. Thoug h section 2191.4 liens attach to both personal and real property , Mainline owned only personal p rope r t y during the relevant time period. The County has conceded that it did not record
any of its liens w i th the Secretary of State of California; it
arg ues that it was not required to do so to perfect the liens.

I n 2012, Mainline filed a voluntary Chapter 11 bankruptcy petition, scheduling the County as an unsecured credit o r

. No trustee was appointed, and Mainline administered its estate as a “ debtor in p o ssession.” I t initiated

an adversary proceeding to set a side the County ’s liens on its personal property , maintaining that it h ad the power to do so under 11 U.S.C. § 545( 2 )

. T h e bankruptcy court g ranted
summary judg ment to Mainl i n e because the liens were statutory in n a t u r e a n d, under California law, had not been perfected ag ainst a hy

pothetical bona fide purchaser o fI N R E M A I N L I N E E Q U I P M E

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personal property

. T h erefore, Mainline was entitled to assert the rig h ts of a trustee to avoid the liens. 1

I n 2015, the B AP affirmed t h e b ankruptcy court’s judg ment, issuing a publi s h e d opinion. L.A. Cty. Treasurer & T a x C ollector v. Mainline Equip., Inc. ( In re Mainline Equip., Inc.)
, 539 B .R. 16 5 (BA P 9th Cir. 2015). The B AP found that our decisio n in Cummins
, 656 F .2d 1262, controlled the outcome of the case an d that our reasoning in that decisio n remains sound. I n Cummins
, we held that a bankrup tcy trustee could invalidate section 2191.4 liens on personal property unde r the p owers g iven to a trustee by the statutory antecedent to § 545(2).

After the B AP affirmed, the County appealed. During its appeal to the B AP in the adversary p roceeding
, the County
soug h t and r eceived a stay o f the Chapter 11 bankruptcy c ase, to e nsure that Mainline’s assets would n o t be fully d isbursed before the County ’s rig h t to those asse t s w as adjudicated. After the B AP issued its d ecision, the County soug ht another stay of the bankruptcy case d u ring its a ppeal to us. The B AP de n i ed the motion, allowing the bankruptcy case to move forward. Mainline’s attorn e y s t h en filed an application for attorney ’s fees a

nd costs to be disbursed f r o m M ainline’s

e state, and a motion to dismiss the bankruptcy case. On Mar c h 9, 2016—while this appeal was pending —the bankrup t c y court dismissed the bankruptcy case a nd authoriz ed pay

ment of attorney ’s fees and costs from the

1 Main lin e also co n ten d ed t h at th e lien s w ere av o id ab le u n der 1 1 U.S.C. § 5 4 4 . T h e b an k ru ptcy co u rt d isag reed an d g ran ted j u dg m en t to th e Co u n ty o n th at claim f o r relief

. O n ly th e § 5 4 5 (2 ) claim is at issu e h ere.I N R E M A I N L I N E E Q U I P M E

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available cash, “subject to any disg o rgement ordered b y the Ninth Circuit” in relation to this appeal.

II.

W e have jurisdiction under 28 U.S.C. § 158(d)(1) to review decisions of the B AP. W e review de novo a trustee’s avoida n c e p o w er under 11 U.S.C. § 5 45(2). See Saslow v

. Andrew ( In re Loretto W

inery Ltd.)
, 898 F .2d 715, 7 1 8 ( 9 th Cir. 1990).

III.

W e reject Mainline’s a

rg ument that this appeal was mooted by the disbursal of Mainline’s bankruptcy estate a nd dismissal of the Chapter 11 case.

A bankruptcy appeal may become moot in two different
way s. F irs t , i t may become constitutionally moot if intervening events make it “impossible for the a ppellate court to f ashion e ffective relief.” Focus Media, Inc. v. Nat’l Broad. Co. ( In re Focus Media, Inc.)
, 378 F. 3 d 9 16, 922 ( 9th Cir. 2004). Second, the appeal may b ecome equitably moot if the appellants failed to dilig ently pursue a stay of the bankruptcy

case and thus permitted “such a c o mprehensive chang e o f circumstances to occur as to r ender it inequitable” to hear the appeal. Id. at 923 (quoting Trone v. Roberts Farms, Inc. ( I n re Roberts Farms, Inc.)
, 652 F .2d 793, 798 (9th Cir. 1981)).

This appeal is not constitutionally moot b e c a u s e we can still provide “effective relief ” t o the County

. I n its order awarding fees and costs to Mainline’s counsel and disbursing the last of Mainl ine’s assets, the bankruptcy c ourt ex pressly made the pay

ment “subject to any disg o rg ement” we mig htI N R E M A I N L I N E E Q U I P M E

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o r d er in this appeal. T h e bankruptcy court correct l y interpreted our caselaw, which provides for an award of such relief. S e e id. (noting that our court could “order the disg org e ment of attorney ’s fees previously paid out o f F ocus’ estate to the [ appellees’] attorney s”).

Nor is this appeal e quitably moot. The County dilig ently pursued two stay s to prevent disbursement o f Mainline’s remaining assets. I n addition, thoug h the bankruptcy case moved forward, there has not been such a “comprehens ive chang e o f circumstances” as to render it inequitable for us to hear this appeal. T h is is not a c o m p l ex case w here it is difficult to unwind the a lready -completed transactions. “ [ A] n order compelling disg org ement of [ attorney ’s] fees a nd

ex p enses [ does] not require the bankruptcy court to un r a v el

a c omplicated bankruptcy p l a n

. ” Id. at 9 23–24 (second

a l teration in orig inal) (quoting S.S. Retail Stores Corp. v. Ekstrom ( In re S.S. Retail Stores Corp.)
, 216 F. 3 d 882, 884 (9th Cir. 2000)). I t requires “only that one p a r t y d i sg org e money it h as received, money that would then be distributed pursuant to the bankruptcy court’s final decree.” Id. at 924 (quoting S.S. Retail Stores Corp. , 216 F .3d at 884).

IV.

A. 11 U.S.C. § 545(

2) Allows a Chapter 11 Debtor in Possession to Set Aside Liens Against Its Estate.

After a company files a bankruptcy petition under Chapter 11, it must reorg aniz e its affairs and restore its finances. As

a “debtor in possession,” it creates a p lan to satisfy its d e b t s while retaining control of its business operations a nd property

. See W

. Homer Drake & Christopher S. Strickland, Chapter 11 Reorganizations §§ 1:1, 1:7 (2d ed. 2017). I t mayI N R E M A I N L I N E E Q U I P M E

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also initiate sep a rate “adversary proceeding s” in bankruptcy court—similar to c ivil lawsuits—to a brog ate certain clai ms

on its assets. See F ed. R. B ankr. P. 7 001; see also 8 W illiam L

. Norton J r. & William L

. Norton I I I
, Bankruptcy Law and Practice § 160:4 (3d ed. 2017). F ederal bankruptcy statutes d escribe claims that may be avoided throug h an adversary proceeding

.

11 U.S.C. § 545(2) is one of those statutes. I t affords a debtor in possession the powe r t o i n validate liens on its property , so long as the liens meet certain requirements:

The trustee may avoid the fix ing of a statutory lien o n property of t h e d ebtor to the ex tent that such lien

. . . is not perfected o r enforceable at the time of the commencement

o f the case ag ainst a bona fide purchaser tha t purchases such p roperty at t h e time of the
commencement o f the case, whether or not such a purchaser ex ists . . . .

Section 545(2) ex p r essly applies to a “trustee” and does not mention debtors in possession. However, a debtor in possession has the same powers as a t r u s t ee a nd may in v a l i d ate liens p ursuant to § 545(2). See 11 U .S.C. § 1107(a); s ee also J a mes L ockhart, Avoidance Under § 545( 2) of Bankruptcy Code of 1978
, 154 A.L .R. F ed. 1, § 2(a) (1999).

Ce rtain requirements must be met for the debtor in possession to avoid a lien. F irst, a debtor in possession may invalidate only statutory liens—liens a rising “solely by force of a statute on specified circumstanc es or conditions.” See 11 U.S.C. § 101(53)

. L i e n s a r i s i ng out of the common law,I N R E M A I N L I N E E Q U I P M E

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a judicial procee ding
, or a c ontract are not avoidable. See 4 Norton & Norton, supra § 64:1. Second, the lien must fail what w e have termed the “hy pothetical bona f

ide p urchaser test.” See Loretto W

inery
, 898 F .2d at 718. Under that test, the bankruptcy court must consider whether the lien would be

v a lid if the debtor sold the subject property to a b o n a fi d e purchaser—a purchaser for value, in g ood faith, and without notice of the lienholder’s rig hts in the property

. See L ockhart, supra § 1 2. I f the lien would be valid ag ainst such

a purchaser, the lien is also valid ag ainst the estate. I f n ot, the lien may be invalidated. State law g overns this analy sis. See Loretto W

inery , 898 F .2d at 718.

Cong r ess passed § 5 45(2) to address state-created “disg uised prioriti e s ” which would “ex haust all of the debtor’s estate, leaving little for g eneral creditors.” L ockhart,
supra § 2(a). Section 545(2) p laced r est r ictions o n these

“ s purious statutory liens” arising under state law to prevent distortion of the federal bankruptcy distribution process. Id. Cong r ess determined that “ if the lien created b y s t ate law is

so tenuous that it can b e defeated by tr a n s f e r of the subject property to a bona fide purchaser, it should not b e go o d
ag ainst the trustee in bankruptcy .” Id.

B. Under 1 1 U.S.C. § 5 4 5( 2)

, M ainline May A v o i d t h e County’s Liens.

Se ct i o n 545(2) allows Mainline to avoid liens that a re (1) statutory and (2) unenfor c eable ag ainst a hy pothetical bona fide purchaser under California law. W e ag ree with theI N R E M A I N L I N E E Q U I P M E

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bankruptcy

court and the B AP that our decision in Cummins controls a nd that Mainline may set aside the County ’s liens. 2

1. The County ’s L iens Are Statutory

.

The B an k r u p t c y Code d efines a statutory lien as o ne “arisin g s olely by force of a statute on specified circumstances or conditions.” 11 U.S.C. § 101(53).

The County filed certificates documenting Mainline’s tax delinquency wit h the L os A ng eles County Recorder. Under California Revenue and Tax Code s e c t i on 2191.4, by filing those certif

i cates, the County obtained liens “upon all personal and real property in the county ” owned by Mainline. B ecause the County ’s liens a rose “solely by force of statute,” they meet § 545(2)’s first requirement for avoidance.

2. The County ’s L iens Are I nvalid Ag ainst a B o n a F ide Purchaser.

Section 2191.4 not only created the County ’s liens but also describes their enforceability

. Therefore, we look to section 2191.4 to determine whether the County ’ s liens a re enforceable ag ainst a bona f i de purchaser. F or purposes o f

our analy sis
, we apply California’s definition o f a bona fide purchaser: o ne who pu r c hases for “value, in g ood faith, a nd without actual or co n structive n otice of another’s rig h ts.”

2 T h e Co u n ty arg u es th at Cu mmin s is in ap p o site becau se, i n th at case, Hu m b o ld t Co u n ty co n ced ed th at sectio n 21 9 1 .4 lien s are av o id ab le u n der § 5 4 5(2 ). B u t w e d id n o t rely o n th at co n cessio n

. Rath er, w e an aly zed th e statu to ry tex t an d th e leg i slativ e sch em e to reach o u r d ecisio n

. 65 6 F.2 d
at 1 2 6 4

– 6 5

. F u rth er, th o u g h Cu mmin s in v o lv ed th e statu t o ry p red ecesso rs to § 5 4 5 (2 ) an d sectio n 2 1 9 1

. 4
, th e s tatu tes at issu e h ere are th e sam e in all m aterial resp ects.I N R E M A I N L I N E E Q U I P M E

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12 B .E. W itkin et al., S

ummary of California Law § 328 (10th ed. 2016); s e e a l

s o Gates Rubber Co. v. Ulman
, 214 Cal. App. 3d 356, 364 (1989).

a. The plain language o

f section 2191.4 establishes that the County’s liens are unenforceable against a bona fide purchaser.

I n Cummins
, w e held that section 2191 .4 “ex pressly ma[ kes] invalid ag ainst a [ bona fide purchaser] ” personal property liens obtained under the statute. 656 F. 2 d a t 1265;

see also Franchise Tax Bd. v. Danning ( In re P e rry)
, 487 F .2d 84, 86 (9th C i r

. 1 9 73). Section 2191.4 has not materially chang ed since that dec i s i o n , and we reject the County ’s arg ument that our interpretation of the statute was incorrect.

Section 2191.4 provides in relevant part:

F rom t h e t ime o f filing the certificate for record pursuant to Section 2 191.3, the amount required to be p aid tog ether with interest a nd
p e nalty c onstitutes a lien upon all persona l and real property in the county owned by

and then asse s s e d t o and in the same name as the

assessee named in the certi f i c ate or acquired by him or her i n t h a t name b efore the lien

ex p ires, except that the lien upon unsecured
p r operty shall not b e valid against a purchaser for value or encumbrancer without actual knowledge of th e l i en when he or she acquires his or her interest in the proper t y. The lien has the f

orce, eff e ct , and priority o f

a judg ment lien and c o n t i nues for 1 0 y earsI N R E M A I N L I N E E Q U I P M E

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f r o m the time of the recording of the certificate unless sooner released or otherwise discharg ed. (emphasis added)

The statute e x pressly provides that liens on personal property

are unenforceable ag ainst a bona fide p urchaser. I t states that personal property liens are not “valid ag ainst a purchaser for value or encumbrancer without actual knowledge o f the lien wh e n h e o r she acquires his or her interest in the property

. ” A bona fide purchaser lacks notice o f any one else’s rig h ts in the subject property

. W ithout any notice, a b o n a f i de purchaser necessarily lacks knowledg e of anoth e r ’s rig hts. Cf. 12 B .E. W itkin et a l., supra § 3 31 (“[ A] subsequent purchaser may

. . . have actual k n owledg e or constructive notice

. . . and, if s o wi l l not be a b o na fide purchaser.”). Therefore, a bona fide purchaser falls within the statute’s

ex c e ption to the enforceability o f personal property

liens. 3

b. That section 2191.4 liens generally have theforce

a n d effect of

judgment liens does not m ake th e m enforce able against a bona fide purchaser of personal property.

The County p o i n ts out that section 2191.4 provides that liens created by the statute have “the force
, e f f e ct, a nd priority o f a j u d gm ent lien.” According to the County
, this “judg ment lien” provision renders its liens enforceable

3 T h e C o u n ty arg u es th at, f o r p u rp o ses o f o u r an aly sis, th e h y p o th eti c a l b o n a f

id e p u rch aser sh ou ld b e d ef

in ed as o n e with actu a l kn o wled g e o f an o th er’ s rig h ts in th e s ub j ect p ro p erty

. Ho w ev er, th at arg u m en t r u n s h ead lo n g in t o Calif o rn ia’ s d ef

in itio n o f a b o n a f

id e p u rch aser, w

h ich ex p l ain s t

h at a b o n a f

id e p u rch aser lack s an

y n o tice of

an o th er’ s rig h ts in

th e p ro p erty

.I N R E M A I N L I N E E Q U I P M E

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a ga i nst a bona fide purchaser. I t r elies on the fact that i n Califo rn ia some judg ment liens—those that have been recorded with the Secretary of State—are valid ag ainst a bona fide purchaser of personal property

. S ee Cal. Civ. Proc. Code § 697.510. W e reject the County ’s arg ument for two reasons.

F irst, even if the County w e r e c orrect that, construed b y itself, the judg ment lien provision sug g ests that the County ’s liens are perfected a g ainst a b o n a fide purchaser, its r eading of section 2191.4 as a whole is untenable. “A speci f ic provision relating to a partic u l a r subject will g overn in respect to that su b

j e c t , as ag ainst a g eneral provision, althoug h the latter, standing a lone, would be broad enoug h to include the subject to which the more partic u l a r provision relates.” S.F. Taxpa

y e r s A s s’n v

. Bd. of Supervisors
, 2 Cal. 4th 571, 577 (1992) (quoting Rose v

. State
, 19 Cal. 2 d 7 1 3
, 723–24 ( 1942)); see also Fox Ins. Co. v. Ctrs. f o r Me d i c are & Medicaid Servs.
, 715 F .3d 1211, 1 224 (9th Cir. 2013). A s

we discuss above, there is an e x press ex ception t o t he enforceability of liens created by sec tion 2191.4—liens on personal property are not perfected ag ainst bona fide purchasers. T hat ex ception must control ag ainst the more g eneral judg ment lien p rovision, which applies to both personal and real property

. Second, the County ’s interpretation of the judg ment lien provision is incorrect. I n Fra nchise Tax Board v. Danning ( In re Perry)
, 487 F .2d 84 (9th Cir. 1 9 7 3 )
, w e were confronted with an identical judg ment lien provi s i o n in a different tax lien statute. J udg ment l iens recorded with the county were perfected ag ainst real property , and thus the Tax B oard’s liens were per f ected ag ainst real property

. Id. H o wever, the Tax B oard’s liens were not perfected aga i n s t p ersonal property

. Id. To p erfect a judg ment lien ag ai n s tI N R E M A I N L I N E E Q U I P M E

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p e r s o nal property , a lienholder h a d to “g o[ ] further” tha n recording wi t h t h e county and “levy [ ] a warrant for the collection o f the tax .” Id. The Tax B oard had not taken those additional steps, and thus its liens w ere not perfected ag ainst
p e r s o n al p roperty

. Id. Several y ears later, in Cummins
, w e adopted the same interpretation of section 2191.4’s judg ment lien provision. 656 F .2d at 1265.

Under Perry and Cummins
, section 2191

. 4 ’ s judg ment lien provision did not g ive the County ’s liens the s a me enforceability as any judg ment l ien. Rather, it g ave the C ounty ’s liens—which were recorded with the county —t h e validity of a judg ment lien recorded with the county

. J udg ment liens re c o r d ed with the county are enforceable
ag ainst real, but not personal, p rope r t y

. See Cal. Civ. Proc. Code §§ 697.310, 697.510. T houg h judg ment liens recorded with the Secretary of State are enforceable ag a inst personal property , the County took no additional steps to per f ect its liens bey ond recording

them with the county

. 4

The County arg ues that our interpretation of the judg ment lien provision in Perry and Cummins is no long er sound. At the time those cases were decided, j u d gm e n t liens c ould be enforced ag a inst a bona fid e purchaser of personal property only by levy ing
, or seiz i n g, the property

. Now, a judg ment lien on personal property can be p e r f e c ted by recording it

w i t h the Secretary of State. See Cal. Civ. Proc. C o d e § 697.510. B ut, as the B AP ap t l y n oted, “[ A] bedrock fact considered in [ those cases] has n ot chang ed; more than a

4 A s t h e BA P reco g n ized
, to o btain lien s v al i d ag ain st a b o n a f id e p u rch aser o f p erso n al p ro p erty , th e Co u n ty w ou ld h av e n eed ed to o b tain

a m o n ey j u dg m en t ag ain st Main lin e, an d t h en reco rd th e j u d g m en t w i th th e Secretary o f

State.I N R E M A I N L I N E E Q U I P M E

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c o u n t y filing is necessary f or perfection that defeats th e claims of a bona fide purchaser.” Mainline Equip.
, 539 B .R.
at 171. Therefore, we r eaffirm our h olding that a county filing
, by itself, is insu f

f i c i e n t to perfect a lien on personal property ag ainst a bona f i d e p urchaser. Our reasoning in Perry and Cummins is n ot undercut by the intervening chang e to California law. See TC Heartland L L C v

. Kraft Foods Grp. Br ands LLC
, 137 S. Ct. 1514, 1520 (2017) (“A clear, authoritative judicial holding on the meaning of a particular provision should not be cast in doubt an d subjected to challeng e w henever a related thoug h not utterly

inconsistent provision is a dopted in the same statute or even in an affiliated statut e

. ” ( quoting A. Scalia & B

. Garner, Reading Law 331 (2012))).

V.

The County o btained statutory liens on Mainline’s
p e r s o nal property under section 2191.4. That statute

ex p ressly provides that liens on p ersonal property a re invalid
ag ainst a bona fide purchaser. There f o r e, the B AP and the bankruptcy c ourt correctly c oncluded that Mainli n e could avoid the County ’s liens under § 545(2), and properly relied on our decision in Cummins

.

AF F IRMED.