Court Opinion

ID: 4191147
Source: CourtListenerOpinion
Date Created: 2017-07-31 18:01:18.300144+00
Date Added: 2024-06-11T14:39:51.802317
License: Public Domain

FOR PUBLICATION

    UNITED STATES COURT OF APPEALS
         FOR THE NINTH CIRCUIT

 IN RE MAINLINE EQUIPMENT, INC.,                    No. 15-60069
 DBA Consolidated Repair Group,
                           Debtor,                     BAP No.
                                                       14-1429

 LOS ANGELES COUNTY TREASURER
 & TAX COLLECTOR,                                     OPINION
                      Appellant,

                      v.

 MAINLINE EQUIPMENT, INC.,
                         Appellee.

             Appeal from the Ninth Circuit
               Bankruptcy Appellate Panel
  Kurtz, Dunn, and Taylor, Bankruptcy Judges, Presiding

              Argued and Submitted April 5, 2017
                     Pasadena, California

                        Filed July 31, 2017

Before: Kim McLane Wardlaw and Consuelo M. Callahan,
   Circuit Judges, and Gordon J. Quist,* District Judge.

                   Opinion by Judge Wardlaw

   *
     The Honorable Gordon J. Quist, United States District Judge for the
Western District of Michigan, sitting by designation.
2               IN RE MAINLINE EQUIPMENT, INC.

                            SUMMARY**

                             Bankruptcy

    The panel affirmed the Bankruptcy Appellate Panel’s
affirmance of the bankruptcy court’s summary judgment in
favor 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 not mooted by the
disbursement of the debtor’s bankruptcy estate and the
dismissal of the Chapter 11 case.

   The panel held that under 11 U.S.C. § 545(2), the County
of Los Angeles could not enforce a lien on the personal
property of a Chapter 11 debtor in possession, when the
County had failed to perfect the lien as against a bona fide
purchaser. The panel concluded that Cty. of Humboldt v.
Grover (In re Cummins), 656 F.2d 1262 (9th Cir. 1981),
addressing the statutory antecedent to § 545(2), remained
good law. The debtor could set aside the County’s liens
because the liens were statutory and were unenforceable
against a hypothetical bona fide purchaser under California
law.

    **
       This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
             IN RE MAINLINE EQUIPMENT, INC.                   3

                         COUNSEL

Barry S. Glaser (argued), Susan M. Freedman, and Jacquelyn
H. Choi, Steckbauer Weinhart LLP, Los Angeles, California,
for Appellant.

Vanessa M. Haberbush (argued) and David R. Haberbush,
Haberbush & Associates LLP, Long Beach, California, for
Appellee.

Walter J. de Lorrell, III, Senior Deputy; Thomas E.
Montgomery, County Counsel; Office of County Counsel,
San Diego, California; for Amici Curiae California State
Association of Counties and California Association of County
Treasurers and Tax Collectors.

                          OPINION

WARDLAW, Circuit Judge:

    May the County of Los Angeles enforce a lien on the
personal property of a Chapter 11 debtor in possession, when
the County has failed to perfect the lien as against a bona fide
purchaser? Under 11 U.S.C. § 545(2), the answer is no, as
the Bankruptcy Appellate Panel (“BAP”) held in reliance on
our decision in County of Humboldt v. Grover (In re
Cummins), 656 F.2d 1262 (9th Cir. 1981), which remains
good law.

                               I.

   Mainline Equipment, Inc., dba Consolidated Repair
Group (“Mainline”) was in the business of manufacturing,
4             IN RE MAINLINE EQUIPMENT, INC.

repairing, and selling cable television equipment. It failed to
pay property taxes assessed by the Los Angeles County
Treasurer and Tax Collector (the “County”) on its personal,
or non-real estate, property. In response, the County recorded
tax delinquency certificates with the Los Angeles County
Recorder in 1993, 2010, and 2012. Pursuant to section
2191.4 of the California Revenue and Taxation Code, the
recording of the certificates created broad liens on all of
Mainline’s property in Los Angeles County. Section 2191.4
provides that “[f]rom the time of filing” tax delinquency
certificates, “the amount required to be paid together with
interest and penalty constitutes a lien upon all personal and
real property in the county” owned by the taxpayer. Though
section 2191.4 liens attach to both personal and real property,
Mainline owned only personal property during the relevant
time period. The County has conceded that it did not record
any of its liens with the Secretary of State of California; it
argues that it was not required to do so to perfect the liens.

    In 2012, Mainline filed a voluntary Chapter 11
bankruptcy petition, scheduling the County as an unsecured
creditor.    No trustee was appointed, and Mainline
administered its estate as a “debtor in possession.” It initiated
an adversary proceeding to set aside the County’s liens on its
personal property, maintaining that it had the power to do so
under 11 U.S.C. § 545(2). The bankruptcy court granted
summary judgment to Mainline because the liens were
statutory in nature and, under California law, had not been
perfected against a hypothetical bona fide purchaser of
                IN RE MAINLINE EQUIPMENT, INC.                           5

personal property. Therefore, Mainline was entitled to assert
the rights of a trustee to avoid the liens.1

    In 2015, the BAP affirmed the bankruptcy court’s
judgment, issuing a published opinion. L.A. Cty. Treasurer
& Tax Collector v. Mainline Equip., Inc. (In re Mainline
Equip., Inc.), 539 B.R. 165 (BAP 9th Cir. 2015). The BAP
found that our decision in Cummins, 656 F.2d 1262,
controlled the outcome of the case and that our reasoning in
that decision remains sound. In Cummins, we held that a
bankruptcy trustee could invalidate section 2191.4 liens on
personal property under the powers given to a trustee by the
statutory antecedent to § 545(2).

    After the BAP affirmed, the County appealed. During its
appeal to the BAP in the adversary proceeding, the County
sought and received a stay of the Chapter 11 bankruptcy case,
to ensure that Mainline’s assets would not be fully disbursed
before the County’s right to those assets was adjudicated.
After the BAP issued its decision, the County sought another
stay of the bankruptcy case during its appeal to us. The BAP
denied the motion, allowing the bankruptcy case to move
forward. Mainline’s attorneys then filed an application for
attorney’s fees and costs to be disbursed from Mainline’s
estate, and a motion to dismiss the bankruptcy case. On
March 9, 2016—while this appeal was pending—the
bankruptcy court dismissed the bankruptcy case and
authorized payment of attorney’s fees and costs from the

    1
       Mainline also contended that the liens were avoidable under
11 U.S.C. § 544. The bankruptcy court disagreed and granted judgment
to the County on that claim for relief. Only the § 545(2) claim is at issue
here.
6            IN RE MAINLINE EQUIPMENT, INC.

available cash, “subject to any disgorgement ordered by the
Ninth Circuit” in relation to this appeal.

                              II.

    We have jurisdiction under 28 U.S.C. § 158(d)(1) to
review decisions of the BAP. We review de novo a trustee’s
avoidance power under 11 U.S.C. § 545(2). See Saslow v.
Andrew (In re Loretto Winery Ltd.), 898 F.2d 715, 718 (9th
Cir. 1990).

                             III.

   We reject Mainline’s argument that this appeal was
mooted by the disbursal of Mainline’s bankruptcy estate and
dismissal of the Chapter 11 case.

     A bankruptcy appeal may become moot in two different
ways. First, it may become constitutionally moot if
intervening events make it “impossible for the appellate court
to fashion effective relief.” Focus Media, Inc. v. Nat’l Broad.
Co. (In re Focus Media, Inc.), 378 F.3d 916, 922 (9th Cir.
2004). Second, the appeal may become equitably moot if the
appellants failed to diligently pursue a stay of the bankruptcy
case and thus permitted “such a comprehensive change of
circumstances to occur as to render it inequitable” to hear the
appeal. Id. at 923 (quoting Trone v. Roberts Farms, Inc. (In
re Roberts Farms, Inc.), 652 F.2d 793, 798 (9th Cir. 1981)).

     This appeal is not constitutionally moot because we can
still provide “effective relief” to the County. In its order
awarding fees and costs to Mainline’s counsel and disbursing
the last of Mainline’s assets, the bankruptcy court expressly
made the payment “subject to any disgorgement” we might
             IN RE MAINLINE EQUIPMENT, INC.                   7

order in this appeal. The bankruptcy court correctly
interpreted our caselaw, which provides for an award of such
relief. See id. (noting that our court could “order the
disgorgement of attorney’s fees previously paid out of Focus’
estate to the [appellees’] attorneys”).

    Nor is this appeal equitably moot. The County diligently
pursued two stays to prevent disbursement of Mainline’s
remaining assets. In addition, though the bankruptcy case
moved forward, there has not been such a “comprehensive
change of circumstances” as to render it inequitable for us to
hear this appeal. This is not a complex case where it is
difficult to unwind the already-completed transactions. “[A]n
order compelling disgorgement of [attorney’s] fees and
expenses [does] not require the bankruptcy court to unravel
a complicated bankruptcy plan.” Id. at 923–24 (second
alteration in original) (quoting S.S. Retail Stores Corp. v.
Ekstrom (In re S.S. Retail Stores Corp.), 216 F.3d 882, 884
(9th Cir. 2000)). It requires “only that one party disgorge
money it has 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 reorganize its affairs and restore its finances. As
a “debtor in possession,” it creates a plan to satisfy its debts
while retaining control of its business operations and
property. See W. Homer Drake & Christopher S. Strickland,
Chapter 11 Reorganizations §§ 1:1, 1:7 (2d ed. 2017). It may
8            IN RE MAINLINE EQUIPMENT, INC.

also initiate separate “adversary proceedings” in bankruptcy
court—similar to civil lawsuits—to abrogate certain claims
on its assets. See Fed. R. Bankr. P. 7001; see also 8 William
L. Norton Jr. & William L. Norton III, Bankruptcy Law and
Practice § 160:4 (3d ed. 2017). Federal bankruptcy statutes
describe claims that may be avoided through an adversary
proceeding.

   11 U.S.C. § 545(2) is one of those statutes. It affords a
debtor in possession the power to invalidate liens on its
property, so long as the liens meet certain requirements:

       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 that
       purchases such property at the time of the
       commencement of the case, whether or not
       such a purchaser exists . . . .

Section 545(2) expressly applies to a “trustee” and does not
mention debtors in possession. However, a debtor in
possession has the same powers as a trustee and may
invalidate liens pursuant to § 545(2). See 11 U.S.C.
§ 1107(a); see also James Lockhart, Avoidance Under
§ 545(2) of Bankruptcy Code of 1978, 154 A.L.R. Fed. 1,
§ 2(a) (1999).

    Certain requirements must be met for the debtor in
possession to avoid a lien. First, a debtor in possession may
invalidate only statutory liens—liens arising “solely by force
of a statute on specified circumstances or conditions.” See
11 U.S.C. § 101(53). Liens arising out of the common law,
              IN RE MAINLINE EQUIPMENT, INC.                     9

a judicial proceeding, or a contract are not avoidable. See
4 Norton & Norton, supra § 64:1. Second, the lien must fail
what we have termed the “hypothetical bona fide purchaser
test.” See Loretto Winery, 898 F.2d at 718. Under that test,
the bankruptcy court must consider whether the lien would be
valid if the debtor sold the subject property to a bona fide
purchaser—a purchaser for value, in good faith, and without
notice of the lienholder’s rights in the property. See
Lockhart, supra § 12. If the lien would be valid against such
a purchaser, the lien is also valid against the estate. If not, the
lien may be invalidated. State law governs this analysis. See
Loretto Winery, 898 F.2d at 718.

    Congress passed § 545(2) to address state-created
“disguised priorities” which would “exhaust all of the
debtor’s estate, leaving little for general creditors.” Lockhart,
supra § 2(a). Section 545(2) placed restrictions on these
“spurious statutory liens” arising under state law to prevent
distortion of the federal bankruptcy distribution process. Id.
Congress determined that “if the lien created by state law is
so tenuous that it can be defeated by transfer of the subject
property to a bona fide purchaser, it should not be good
against the trustee in bankruptcy.” Id.

B. Under 11 U.S.C. § 545(2), Mainline May Avoid the
   County’s Liens.

    Section 545(2) allows Mainline to avoid liens that are
(1) statutory and (2) unenforceable against a hypothetical
bona fide purchaser under California law. We agree with the
10              IN RE MAINLINE EQUIPMENT, INC.

bankruptcy court and the BAP that our decision in Cummins
controls and that Mainline may set aside the County’s liens.2

     1. The County’s Liens Are Statutory.

    The Bankruptcy Code defines a statutory lien as one
“arising solely 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 with the Los Angeles County Recorder. Under
California Revenue and Tax Code section 2191.4, by filing
those certificates, the County obtained liens “upon all
personal and real property in the county” owned by Mainline.
Because the County’s liens arose “solely by force of statute,”
they meet § 545(2)’s first requirement for avoidance.

     2. The County’s Liens Are Invalid Against a Bona Fide
        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 are
enforceable against a bona fide purchaser. For purposes of
our analysis, we apply California’s definition of a bona fide
purchaser: one who purchases for “value, in good faith, and
without actual or constructive notice of another’s rights.”

     2
      The County argues that Cummins is inapposite because, in that case,
Humboldt County conceded that section 2191.4 liens are avoidable under
§ 545(2). But we did not rely on that concession. Rather, we analyzed the
statutory text and the legislative scheme to reach our decision. 656 F.2d
at 1264–65. Further, though Cummins involved the statutory predecessors
to § 545(2) and section 2191.4, the statutes at issue here are the same in
all material respects.
             IN RE MAINLINE EQUIPMENT, INC.              11

12 B.E. Witkin et al., Summary of California Law § 328 (10th
ed. 2016); see also Gates Rubber Co. v. Ulman, 214 Cal.
App. 3d 356, 364 (1989).

       a. The plain language of section 2191.4 establishes
          that the County’s liens are unenforceable against
          a bona fide purchaser.

    In Cummins, we held that section 2191.4 “expressly
ma[kes] invalid against a [bona fide purchaser]” personal
property liens obtained under the statute. 656 F.2d at 1265;
see also Franchise Tax Bd. v. Danning (In re Perry),
487 F.2d 84, 86 (9th Cir. 1973). Section 2191.4 has not
materially changed since that decision, and we reject the
County’s argument that our interpretation of the statute was
incorrect.

   Section 2191.4 provides in relevant part:

       From the time of filing the certificate for
       record pursuant to Section 2191.3, the amount
       required to be paid together with interest and
       penalty constitutes a lien upon all personal
       and real property in the county owned by and
       then assessed to and in the same name as the
       assessee named in the certificate or acquired
       by him or her in that name before the lien
       expires, except that the lien upon unsecured
       property shall not be valid against a
       purchaser for value or encumbrancer without
       actual knowledge of the lien when he or she
       acquires his or her interest in the property.
       The lien has the force, effect, and priority of
       a judgment lien and continues for 10 years
12             IN RE MAINLINE EQUIPMENT, INC.

         from the time of the recording of the
         certificate unless sooner released or otherwise
         discharged. (emphasis added)

The statute expressly provides that liens on personal property
are unenforceable against a bona fide purchaser. It states that
personal property liens are not “valid against a purchaser for
value or encumbrancer without actual knowledge of the lien
when he or she acquires his or her interest in the property.”
A bona fide purchaser lacks notice of anyone else’s rights in
the subject property. Without any notice, a bona fide
purchaser necessarily lacks knowledge of another’s rights.
Cf. 12 B.E. Witkin et al., supra § 331 (“[A] subsequent
purchaser may . . . have actual knowledge or constructive
notice . . . and, if so will not be a bona fide purchaser.”).
Therefore, a bona fide purchaser falls within the statute’s
exception to the enforceability of personal property liens.3

         b. That section 2191.4 liens generally have the force
            and effect of judgment liens does not make them
            enforceable against a bona fide purchaser of
            personal property.

    The County points out that section 2191.4 provides that
liens created by the statute have “the force, effect, and
priority of a judgment lien.” According to the County, this
“judgment lien” provision renders its liens enforceable

     3
      The County argues that, for purposes of our analysis, the
hypothetical bona fide purchaser should be defined as one with actual
knowledge of another’s rights in the subject property. However, that
argument runs headlong into California’s definition of a bona fide
purchaser, which explains that a bona fide purchaser lacks any notice of
another’s rights in the property.
             IN RE MAINLINE EQUIPMENT, INC.                13

against a bona fide purchaser. It relies on the fact that in
California some judgment liens—those that have been
recorded with the Secretary of State—are valid against a bona
fide purchaser of personal property. See Cal. Civ. Proc. Code
§ 697.510. We reject the County’s argument for two reasons.

    First, even if the County were correct that, construed by
itself, the judgment lien provision suggests that the County’s
liens are perfected against a bona fide purchaser, its reading
of section 2191.4 as a whole is untenable. “A specific
provision relating to a particular subject will govern in
respect to that subject, as against a general provision,
although the latter, standing alone, would be broad enough to
include the subject to which the more particular provision
relates.” S.F. Taxpayers Ass’n v. Bd. of Supervisors, 2 Cal.
4th 571, 577 (1992) (quoting Rose v. State, 19 Cal. 2d 713,
723–24 (1942)); see also Fox Ins. Co. v. Ctrs. for Medicare
& Medicaid Servs., 715 F.3d 1211, 1224 (9th Cir. 2013). As
we discuss above, there is an express exception to the
enforceability of liens created by section 2191.4—liens on
personal property are not perfected against bona fide
purchasers. That exception must control against the more
general judgment lien provision, which applies to both
personal and real property.

    Second, the County’s interpretation of the judgment lien
provision is incorrect. In Franchise Tax Board v. Danning
(In re Perry), 487 F.2d 84 (9th Cir. 1973), we were
confronted with an identical judgment lien provision in a
different tax lien statute. Judgment liens recorded with the
county were perfected against real property, and thus the Tax
Board’s liens were perfected against real property. Id.
However, the Tax Board’s liens were not perfected against
personal property. Id. To perfect a judgment lien against
14             IN RE MAINLINE EQUIPMENT, INC.

personal property, a lienholder had to “go[] further” than
recording with the county and “levy[] a warrant for the
collection of the tax.” Id. The Tax Board had not taken those
additional steps, and thus its liens were not perfected against
personal property. Id. Several years later, in Cummins, we
adopted the same interpretation of section 2191.4’s judgment
lien provision. 656 F.2d at 1265.

    Under Perry and Cummins, section 2191.4’s judgment
lien provision did not give the County’s liens the same
enforceability as any judgment lien. Rather, it gave the
County’s liens—which were recorded with the county—the
validity of a judgment lien recorded with the county.
Judgment liens recorded with the county are enforceable
against real, but not personal, property. See Cal. Civ. Proc.
Code §§ 697.310, 697.510. Though judgment liens recorded
with the Secretary of State are enforceable against personal
property, the County took no additional steps to perfect its
liens beyond recording them with the county.4

    The County argues that our interpretation of the judgment
lien provision in Perry and Cummins is no longer sound. At
the time those cases were decided, judgment liens could be
enforced against a bona fide purchaser of personal property
only by levying, or seizing, the property. Now, a judgment
lien on personal property can be perfected by recording it
with the Secretary of State. See Cal. Civ. Proc. Code
§ 697.510. But, as the BAP aptly noted, “[A] bedrock fact
considered in [those cases] has not changed; more than a

     4
      As the BAP recognized, to obtain liens valid against a bona fide
purchaser of personal property, the County would have needed to obtain
a money judgment against Mainline, and then record the judgment with
the Secretary of State.
             IN RE MAINLINE EQUIPMENT, INC.                  15

county filing is necessary for perfection that defeats the
claims of a bona fide purchaser.” Mainline Equip., 539 B.R.
at 171. Therefore, we reaffirm our holding that a county
filing, by itself, is insufficient to perfect a lien on personal
property against a bona fide purchaser. Our reasoning in
Perry and Cummins is not undercut by the intervening change
to California law. See TC Heartland LLC v. Kraft Foods
Grp. Brands 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 and subjected to
challenge whenever a related though not utterly inconsistent
provision is adopted in the same statute or even in an
affiliated statute.” (quoting A. Scalia & B. Garner, Reading
Law 331 (2012))).

                              V.

    The County obtained statutory liens on Mainline’s
personal property under section 2191.4. That statute
expressly provides that liens on personal property are invalid
against a bona fide purchaser. Therefore, the BAP and the
bankruptcy court correctly concluded that Mainline could
avoid the County’s liens under § 545(2), and properly relied
on our decision in Cummins.

   AFFIRMED.