*District Judge of the Western District of Louisiana,

sitting by designation. 

1

United States Court of Appeals,

Fifth Circuit.

No. 93-8408.

In the Matter of BOERNE HILLS LEASING CORPORATION, Debtor.

CITY OF BOERNE, Appellant,

v.

BOERNE HILLS LEASING CORP. and Chrysler Credit Corporation,

Appellees.

In the Matter of BOERNE HILLS LEASING, Debtor.

KENDALL COUNTY and Boerne Independent School District,

Appellants,

v.

BOERNE HILLS LEASING CORP. and Chrysler Credit Corporation,

Appellees.

Feb. 28, 1994.

Appeal from the United States District Court for the Western

District of Texas.

Before HIGGINBOTHAM and DUHÉ, Circuit Judges, and LITTLE,* District

Judge.

LITTLE, District Judge:

This bankruptcy appeal is essentially a priority dispute

between the lien claims of, on the one hand, the Chrysler Credit

Corporation ("Chrysler") and, on the other, certain taxing units of

the State of Texas: the City of Boerne, Kendall County, and the

Boerne Independent School District (collectively, the "taxing

units"). The bankruptcy court concluded that Chrysler had a

superior claim to the proceeds of sale of the debtor's property.
 

1When the debtor filed bankruptcy, § 32.01 of the Texas Tax

Code provided, "On January 1 of each year, a tax lien attaches to

property to secure the payment of all taxes ... ultimately

imposed for the year on that property." Tex.Tax Code Ann. §

32.01 (West 1992) (amended 1993). On 1 October 1988, taxes

became due and payable on the debtor's business personal property

in the aggregate amount of $35,446.40. Of this total, the debtor

owed the City of Boerne $9,994.60, Kendall County $4,826.80, and

the Boerne Independent School District $20,625. 

 

2The debtor filed a Chapter 11 bankruptcy petition on 6

December 1988. The debtor's case was converted to a Chapter 7

liquidation on 30 April 1990. 

 

3The City of Boerne filed an "Objection to Distribution of

Sale Proceeds" on 19 October 1989, Kendall County filed a "Notice

of Lien Claim to Proceeds of Sale and Request for Distribution"

on 20 October 1989, and the Boerne Independent School District

filed a "Notice of Lien Claim to Proceeds of Sale and Request for

Distribution" on 4 January 1990. The taxing units' filings will

hereinafter be referred to, collectively, as "objections." 

2

On appeal, the district court affirmed. We reverse.

I.

Chrysler and the taxing units held liens on the inventory of

the debtor, the Boerne Hills Leasing Corporation. Chrysler

perfected its lien by filing a financing statement; subsequently,

the taxing units' liens arose pursuant to Texas statute.1 The

debtor then filed bankruptcy,2 and the bankruptcy court authorized

the debtor to sell its inventory free and clear of liens. Upon

determining that Chrysler's lien had priority over all other liens

against the debtor's property and that the inventory sale would not

generate enough cash to pay Chrysler's claim in full, the

bankruptcy court ordered the debtor to distribute all sale proceeds

to Chrysler. The taxing units then filed objections to the

bankruptcy court's distribution order,3 and the bankruptcy court

scheduled a hearing on the priority dispute.
 

4Section 32.05 of the Texas Tax Code provides, in pertinent

part, "a tax lien provided by this chapter takes priority over

... the claim of any holder of a lien on property encumbered by

the tax lien, whether or not the debt or lien existed before

attachment of the tax lien." Tex.Tax Code Ann. § 32.05(b) (West

1992). 

 

5When the debtor filed bankruptcy, § 32.03 of the Texas Tax

Code provided, "A tax lien may not be enforced against personal

property transferred to a bona fide purchaser for value who does

not have actual notice of the existence of the lien." Tex.Tax

Code Ann. § 32.03 (West 1988) (amended 1991). 

3

At the hearing, the taxing units alleged that under the Texas

Tax Code their liens had priority over the liens of consensual

creditors, such as Chrysler, and that they therefore had superior

claims to the sale proceeds.4 In response, Chrysler noted that the

taxing units' liens were unenforceable against a bona fide

purchaser, without actual notice, at the time the debtor filed

bankruptcy5 and argued, therefore, that the taxing units' liens

were unperfected and subordinate to its properly perfected lien

under Texas law. Chrysler urged the bankruptcy court to deny the

taxing units' objections.

The bankruptcy court denied the taxing units' objections in a

published opinion. In re Boerne Hills Leasing Corp., 117 B.R. 264

(Bankr.W.D.Tex.1990). Adopting Chrysler's reasoning, the

bankruptcy court found that since the taxing units' liens were

unenforceable against a bona fide purchaser, they were unperfected

and subordinate to Chrysler's properly perfected lien under Texas

law. Finding further that the taxing units could not perfect their

liens in bankruptcy, the bankruptcy court concluded the Chrysler

had a superior claim to the sale proceeds.
 

6Section 546(b) of the Bankruptcy Code provides:

The [trustee's avoidance power under, inter alia, §

545(2) is] subject to any generally applicable law that

permits perfection of an interest in property to be

effective against an entity that acquires rights in

such property before the date of such perfection. If

such law requires seizure of such property or

commencement of an action to accomplish such

perfection, and such property has not been seized or

such action commenced before the date of the filing of

the petition, such interest in such property shall be

perfected by notice within the time fixed by such law

for such seizure or commencement.

11 U.S.C. § 546(b) (1988) (emphasis added). The district

court found that the taxing units' objections constituted

"notice" under § 546(b). 

 

7Section 545(2) of the Bankruptcy Code provides, in part: 

"The trustee may avoid the fixing of a statutory lien on property

of the debtor to the extent that such lien ... is not perfected

or enforceable at the time of the commencement of the case

against a bona fide purchaser ... whether or not such purchaser

exists." 11 U.S.C. § 545(2) (1988). Pursuant to § 1107 of the

Bankruptcy Code, the debtor-in-possession is authorized to

exercise the trustee's avoidance power under § 545(2). See id. §

1107. 

4

The taxing units appealed to the district court. Like the

bankruptcy court, the district court found that the taxing units'

liens were unperfected under Texas law. Unlike the bankruptcy

court, the district court concluded that the taxing units could

"perfect" their liens in bankruptcy—by filing notice pursuant to §

546(b) of the Bankruptcy Code.6 Even as perfected, however, the

district court found that the taxing units' liens were still

"unenforceable against a bona fide purchaser, without actual

notice, at the time the debtor filed bankruptcy." Therefore, the

district court concluded that the taxing units' liens were

avoidable under § 545(2) of the Bankruptcy Code.7
 

8The debtor-in-possession filed responses to the taxing

units' objections and appeared at the hearing on the priority

dispute; he did not argue for avoidance, however.

The trustee filed a two-paragraph "joinder in brief" in

connection with Chrysler's district court brief. Chrysler's

brief also did not argue for avoidance, stating "It is not

necessary to file an adversary proceeding to avoid the

[taxing units'] liens because [Chrysler's] lien is [ ]

superior." 

5

The district court noted that neither the debtor-in-possession

nor the trustee, upon appointment, had initiated an adversary

proceeding to avoid the taxing units' liens.8 The court found,

however, that Chrysler had standing to exercise the

debtor-in-possession's avoidance power and that the present action

was sufficient to accomplish avoidance. The district court

concluded that Chrysler's liens were superior to the taxing units'

avoided liens and affirmed the bankruptcy court's order.

The taxing units appealed to this court, arguing that their

liens have priority over Chrysler's liens under Texas law, that

their liens were not avoided under bankruptcy law, and that they

therefore possess superior claims to the proceeds of sale of the

debtor's inventory.

II.

This appeal is limited to issues of statutory construction.

Therefore, we review the bankruptcy and district courts' decisions

de novo. In re Young, 995 F.2d 547, 548 (5th Cir.1993).

 The first issue we consider is the relative priority of the

taxing units' liens under state law. Section 32.05 of the Texas

Tax Code explicitly states that a tax lien, such as those of the
6

taxing units, takes priority "over the claim of any holder of a

lien on property encumbered by the tax lien, whether or not the

debt or lien existed before attachment of the tax lien."

Therefore, the taxing units' liens have priority over Chrysler's

lien under state law. See Grand Prairie Indep. Sch. Dist. v.

Southern Parts Imports, Inc., 803 S.W.2d 762, 764 (Tex.Ct.App.),

aff'd in part, rev'd in part, 813 S.W.2d 499 (Tex.1991).

Next, we consider whether the taxing units' liens were

avoidable under bankruptcy law. Under the Texas Tax Code, the

taxing units' liens were explicitly "[un]enforce[able] against

personal property transferred to a bona fide purchaser for value

who does not have actual notice of the existence of the lien."

Tex.Tax Code § 32.03 (West 1988) (amended 1991). Therefore, under

§ 545(2) of the Bankruptcy Code, the taxing units' liens were

avoidable. County of Humboldt v. Grover (In re Cummins), 656 F.2d

1262, 1265 (9th Cir.1981) (interpreting predecessor to § 545(2)).

Finally, we must determine whether the taxing units' liens

were avoided under bankruptcy law. As a general rule, the

avoidance power set out in § 545(2) of the Bankruptcy Code may only

be exercised by the trustee or the debtor-in-possession. See 11

U.S.C. § 545(2) ("the trustee may avoid ..."); 11 U.S.C. § 1107

(debtor-in-possession authorized to exercise trustee's avoidance

powers); see also City of Farmers Branch v. Pointer (In re

Pointer), 952 F.2d 82, 88 (5th Cir.) (interpreting § 549 avoidance

power), cert. denied, --- U.S. ----, 112 S.Ct. 3035, 120 L.Ed.2d

904 (1992). In appropriate circumstances, however, a creditor may
 

9Because we conclude that the taxing units' liens were not

avoided, we do not reach the issue whether Chrysler's liens would

have priority over the taxing units' avoided liens. See 11

U.S.C. § 551 (1988) (avoided liens preserved for the benefit of

the bankruptcy estate). 

7

be permitted to initiate avoidance—"but only after moving the

bankruptcy court for authorization to act on behalf of the trustee

or debtor-in-possession." See Farmers Branch, 952 F.2d at 88;

Lilly v. FDIC (In re Natchez Corp.), 953 F.2d 184, 187 (5th

Cir.1992).

In the instant case, it is undisputed that Chrysler failed to

seek such authorization, relying instead on the clearly mistaken

notion that its liens took priority over the taxing units' liens

under Texas law. Although the district court managed to construct

an argument in favor of Chrysler's standing to pursue avoidance, it

could not substitute its will for Chrysler's. Chrysler did not

seek authorization to pursue avoidance; therefore, the taxing

units' liens were not avoided.9 See Farmers Branch, 952 F.2d at

88; Lilly, 953 F.2d at 187. Accordingly, the taxing units possess

superior claims to the proceeds of sale of the debtor's inventory.

III.

For the foregoing reasons, we conclude that the taxing units

are entitled to distribution of the proceeds of sale of the

debtor's inventory in satisfaction of their secured claims.

Accordingly, the bankruptcy court's order, as affirmed by the

district court, is REVERSED. This matter is REMANDED to the

bankruptcy court for administration consistent with this opinion.