In re: Mainline Equipment, Inc.

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: September 30, 2015
• Docket: CC-14-1429-TaKuD
• Status: Published

Opinion

FILED 1 ORDERED PUBLISHED SEP 30 2015

2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. CC-14-1429-TaKuD ) 7 MAINLINE EQUIPMENT, INC., ) Bk. No. 2:12-bk-39746-WB ) 8 Debtor. ) Adv. No. 2:13-ap-01705-WB ______________________________) 9 ) LOS ANGELES COUNTY TREASURER ) 10 AND TAX COLLECTOR, ) ) 11 Appellant, ) ) 12 v. ) O P I N I O N ) 13 MAINLINE EQUIPMENT, INC., ) ) 14 Appellee. ) ______________________________) 15 16 Argued and Submitted on June 18, 2015 at Pasadena, California 17 Filed – September 30, 2015 18 Appeal from the United States Bankruptcy Court 19 for the Central District of California 20 Honorable Julia W. Brand, Bankruptcy Judge, Presiding 21 Appearances: Barry S. Glaser of Steckbauer Weinhart Jaffe, LLP 22 argued for appellant; Vanessa Marie Haberbush of Haberbush & Associates, LLP argued for appellee. 23 24 Before: TAYLOR, KURTZ, and DUNN, Bankruptcy Judges. 25 26 27 28 1 TAYLOR, Bankruptcy Judge: 2 3 The Los Angeles County Treasurer and Tax Collector 4 (“County”) appeals from a bankruptcy court order setting aside 5 its tax liens on personal property located in Los Angeles 6 County. We AFFIRM. 7 FACTS1 8 Debtor-in-possession Mainline Equipment, Inc., dba 9 Consolidated Repair Group, failed to pay property taxes assessed 10 by Los Angeles County. As a result, the County recorded 11 certificates of tax liens with the Los Angeles County Recorder 12 in 1993, 2010, and 2012. The filings created broad liens on all 13 personal property owned by Mainline and located in Los Angeles 14 County. See Cal. Rev. & T. Code § 2191.4 (“RTC § 2191.4”).2 15 The County did not otherwise take action to assert its claims or 16 to obtain liens. 17 Mainline eventually initiated a chapter 11 case.3 It 18 scheduled the County as an unsecured creditor and initiated an 19 adversary proceeding seeking to set aside the County’s personal 20 21 1 We exercise our discretion to take judicial notice of 22 documents electronically filed in the adversary proceeding and 23 in the underlying bankruptcy case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th 24 Cir. BAP 2003). 25 2 RTC § 2191.4 also creates a broad lien on real property located in a county. Mainline, however, did not schedule real 26 property in its bankruptcy case. 27 3 Unless otherwise indicated, all chapter and section 28 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

2 1 property tax liens under § 544(a)(1) and, as reflected in an 2 amended complaint, § 545(2). Mainline argued that the personal 3 property liens were not perfected against a bona fide purchaser 4 for value, that as a debtor-in-possession it was entitled to 5 assert the rights of a trustee to set aside such liens, and that 6 judgment in its favor was appropriate. 7 The parties filed cross-motions for summary judgment. 8 Ultimately, the bankruptcy court agreed with Mainline on its 9 § 545(2) claim. On August 19, 2014, it entered a judgment in 10 favor of Mainline and avoided the tax liens under § 545(2).4 11 The County timely appealed. 12 JURISDICTION 13 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 14 §§ 1334 and 157(b)(2)(K). We have jurisdiction under 28 U.S.C. 15 § 158. 16 ISSUE 17 Whether the bankruptcy court erred when it avoided the 18 County’s liens pursuant to § 545(2). 19 STANDARD OF REVIEW 20 We review the bankruptcy court’s legal conclusions, 21 including its interpretation of the Bankruptcy Code, de novo. 22 See Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi), 764 F.3d 23 1168, 1173 (9th Cir. 2014). 24 /// 25 /// 26 27 4 The bankruptcy court also granted judgment to the County 28 on Mainline’s § 544(a)(1) claim.

3 1 DISCUSSION5 2 The County makes several arguments on appeal; we find none 3 of them persuasive. 4 A. The plain language of the relevant statutes makes clear 5 that the liens were not properly perfected as to a good 6 faith purchaser of personal property for value and, thus, 7 were subject to set aside. 8 RTC § 2191.4 provides that: 9 From the time of filing the certificate for record pursuant to Section 2191.3, the amount required to be 10 paid together with interest and penalty constitutes a lien upon all personal and real property in the county 11 owned by and then assessed to and in the same name as the assessee named in the certificate or acquired by 12 him or her in that name before the lien expires, except that the lien upon unsecured property6 shall 13 not be valid against a purchaser for value or encumbrancer without actual knowledge of the lien when 14 he or she acquires his or her interest in the property. The lien has the force, effect, and 15 priority of a judgment lien . . . . 16 Emphasis added. 17 18 5 On February 2, 2015, a BAP motions panel granted the 19 County’s motion to submit letters from other California counties in support of its position on appeal, in lieu of amicus curiae 20 briefs. The County did so, submitting amici letters from the 21 counties of Alameda, Kern, San Diego, Sonoma, and Stanislaus. It also submitted a joinder letter from the California 22 Association of County Treasurers and Tax Collectors. The Association, however, is not a county within the state of 23 California. Thus, we do not consider its letter in lieu of an 24 amicus brief. 6 25 RTC § 2191.3 allows for recordation of a tax certificate upon a delinquency in payment of a tax on “[u]nsecured property 26 not secured by a lien on any real property . . . .” Cal. Rev. & 27 T. Code § 2191.3(a)(1)(E). RTC § 2191.4, thus, necessarily includes personal property within the definition of “unsecured 28 property.”

4 1 Thus, RTC § 2191.4 unambiguously provides that the County’s 2 tax lien, while valid against Mainline, was not valid as to a 3 third party who subsequently purchased Mainline’s personal 4 property in good faith for value.7 5 The relevant statute under the Bankruptcy Code is equally 6 clear. Section 545(2) allows a trustee to set aside a lien that 7 is not properly perfected as to a bona fide purchaser. As a 8 debtor-in-possession who enjoys the rights of a trustee, 9 Mainline could utilize § 545(2). See 11 U.S.C. § 1107. Thus, 10 the unambiguous language of the relevant statutes supports 11 affirmance. 12 B. Ninth Circuit authority is consistent with a plain language 13 interpretation of the relevant statutes and supports 14 affirmance. 15 In County of Humboldt v. Grover (In re Cummins), 656 F.2d 16 1262 (9th Cir. 1981), the Ninth Circuit considered the interplay 17 between RTC § 2191.4 and a provision of the Bankruptcy Act 18 analogous to § 545(2). It determined that Humboldt County’s 19 personal property tax lien was subject to set aside. Id. at 20 1265. The facts in Cummins and in the case at hand are 21 virtually identical. 22 That Cummins was a Bankruptcy Act case is of no moment; the 23 antecedent statutory language is substantively the same as 24 § 545. See Cummins, 656 F.2d at 1263 (“The substance of 25 [§ 67c(1)(B) of the Act] has been carried forward into sections 26 27 7 For ease of reference we use the shortened term “bona 28 fide purchaser” hereafter.

5 1 545(2) and 546(b) of the new Bankruptcy Code.”). In such 2 instances, the case law construing a provision of the Bankruptcy 3 Act remains authoritative in interpreting the corollary statute 4 under the Bankruptcy Code. See Lovell v. Stanifer (In re 5 Stanifer), 236 B.R. 709, 713 n.4 (9th Cir. BAP 1999). And, RTC 6 § 2191.4 remains unchanged. Thus, the statutes primarily at 7 issue in Cummins either mirror or are the same as those we 8 consider on appeal, and the Cummins plain language analysis 9 supports affirmance. 10 C. Changes in California judgment lien law do not compel 11 reversal. 12 The County argues, notwithstanding the plain language of 13 the statutes and the Ninth Circuit authority, that we must 14 determine that proper perfection as to a bona fide purchaser 15 existed or that Mainline, as a debtor-in-possession, was not 16 entitled to rely on § 545(2). We disagree with the County’s 17 arguments. 18 The County does not argue that the transition from the 19 Bankruptcy Act to the Bankruptcy Code is a basis for 20 disregarding Cummins. As previously noted, the statutory 21 language in § 545(2) mirrors the Bankruptcy Act provision 22 considered by the Cummins court. 23 And the County does not argue that the California statute 24 squarely at issue, RTC § 2191.4, has been modified since the 25 Cummins decision. The California statute analyzed in Cummins 26 remains exactly the same; it continues to state that a recording 27 with a county recorder does not create a lien that is valid 28 against a bona fide purchaser of personal property.

6 1 Instead, the County argues that because the California 2 legislature enacted a tangentially related statute, California 3 Code of Civil Procedure (“CCP”) § 697.510, this necessarily 4 undercuts the Ninth Circuit’s decision in Cummins and requires 5 that we disregard the limits on the RTC § 2191.4 lien imposed by 6 the statute itself. Again, we strongly disagree. 7 1. The California legislature expanded the ability to 8 obtain a judgment lien on personal property but did 9 not modify RTC § 2191.4. 10 In 1982, the California legislature enacted CCP § 697.510 11 and allowed the creation and perfection of judgment liens on 12 personal property through a filing with the Secretary of State 13 and without levy.8 See Cal. Code Civ. P. § 697.510(a). This 14 was a logical expansion of judgment creditor rights; under the 15 California Commercial Code, a secured creditor typically 16 perfects a security interest in personal property by filing a 17 document with the Secretary of State, and priority is based on 18 the time of such filings. See Tentative Recommendation 19 Proposing The Enforcement of Judgment Law, 15 Cal. L. Revision 20 21 8 The California legislature, however, did not totally do 22 away with the concept of levy. CCP § 699.010, et seq. continue to provide for execution of a judgment through levy. See Cal. 23 Code Civ. P. §§ 697.520 and 699.010, et seq. Further, while a 24 county recording creates a lien on all personal property located within the county, the Secretary of State filing arguably is not 25 so broad. See Cal. Code Civ. P. § 697.530(d) (listing exceptions to attachment). And finally, recordation is not a 26 perfection option available in all instances. A judgment lien 27 may not be created through a Secretary of State filing where the judgment is payable in installments in the future. See Cal. 28 Code Civ. P. § 697.510.

7 1 Comm’n Reports 2001, 2007, 2045-48 (1980). 2 The County, however, points to nothing in either case law 3 or relevant legislative history stating or even suggesting any 4 legislative intent to tie enactment of CCP § 697.510 to a change 5 in the interpretation of RTC § 2191.4. Certainly, there was no 6 modification to RTC § 2191.4 itself. Since this is the case, 7 there is nothing to suggest that the plain language analysis in 8 Cummins or the express limitations of RTC § 2191.4 are in any 9 way impacted by this later legislative enactment. 10 2. This legislative change does not undercut the binding 11 impact of Cummins. 12 The County does not directly challenge the Cummins plain 13 language discussion; it cannot do so as the plain language has 14 not changed. Instead, it focuses on a second aspect of the 15 Cummins decision. The Cummins court found Franchise Tax Board 16 v. Danning (In re Perry), 487 F.2d 84 (9th Cir. 1973), to be 17 controlling on an issue relating to the portion of § 67c(1)(B) 18 now contained in § 546(b). 656 F.2d at 1266. The County argues 19 that as a result of the enactment of CCP § 697.510, the Perry 20 analysis is now questionable and that Cummins, thus, no longer 21 controls. We reject both suggestions. 22 In Perry, the Ninth Circuit considered California tax 23 statutes that allowed creation of a lien following a failure to 24 pay personal income taxes. The statutes at issue, RTC §§ 18881 25 and 18882,9 provided that recordation of a certificate of non- 26 9 27 RTC §§ 18881 and 18882 were subsequently repealed by Stats. 1977, ch. 481, p. 1580, § 45, p. 1583, § 47, operative 28 (continued...)

8 1 payment with the county recorder created a broad lien on all 2 assets of the taxpayer located in the county. 487 F.2d at 85. 3 It further provided that the lien had the “force, effect, and 4 priority of a judgment lien.” Id. These statutes, however, did 5 not expressly discuss the impact of the statutory lien on the 6 claim of a bona fide purchaser of personal property. See id. 7 The Franchise Tax Board argued that the absence of an 8 express reservation of the rights of bona fide purchasers 9 required a determination that its RTC §§ 18881 and 18882 lien 10 was senior to the claims of a bona fide purchaser and not 11 subject to set aside in bankruptcy. Id. at 86. The Ninth 12 Circuit disagreed; it focused on the fact that, at that time, a 13 personal property judgment lien was not good against a bona fide 14 purchaser in the absence of enforcement by levy. Id. Thus, the 15 county filing created a lien vulnerable to a bona fide purchaser 16 even absent express language in the statute. Id. 17 The Cummins court did not find Perry controlling on the 18 issue of whether the RTC § 2191.4 lien defeated a bona fide 19 purchaser on the bankruptcy petition date; Humboldt County 20 conceded this issue, and the plain language of the statute 21 compelled this conclusion. 656 F.2d at 1265. Instead, it 22 relied on Perry in determining that Humboldt County could not 23 perfect its lien post-petition through notice to the bankruptcy 24 court. Id. at 1265-66. This issue arose under a portion of the 25 Bankruptcy Act now included in § 546(b). As a result, this 26 27 9 (...continued) 28 July 1, 1978.

9 1 portion of the Cummins decision is not relevant to the 2 determinations we reach here. 3 The County did not raise a § 546(b) defense in the summary 4 judgment proceedings and did not raise such a defense in its 5 arguments on appeal. And a review of § 546(b) makes clear that 6 such a defense is not available to the County. RTC § 2191.4 7 does not create a lien that is effective against a bona fide 8 purchaser who acquired Mainline’s assets prior to recordation of 9 the County’s tax lien. Thus, § 546(b)(1)(A) does not provide a 10 defense. And this is not a situation involving the maintenance 11 or continuation of a lien, so § 546(b)(1)(B) is also 12 inapplicable. Thus, even if Perry lacks vitality, a 13 determination we do not make, Cummins remains controlling. 14 3. Contrary to the County’s argument, there are 15 compelling reasons to determine that a filing with the 16 Secretary of State defeats a bona fide purchaser while 17 a filing with a county recorder does not. 18 CCP § 697.530, unlike RTC § 2191.4, has no language 19 limiting perfection against a bona fide purchaser. Thus, as the 20 County suggests, a notice of judgment lien filed with the 21 Secretary of State, just like a notice of security interest 22 filed with the Secretary of State, imparts constructive notice 23 of a lien and defeats a bankruptcy trustee’s claim based on 24 alleged bona fide purchaser status. The County misses the mark, 25 however, when it then argues that a county recording has or 26 should be deemed to have the same effect. 27 First, we note, yet again, that the plain language of RTC 28 § 2191.4 states to the contrary. We acknowledge that the

10 1 statute also has a general statement that it has the force, 2 effect, and priority of a judgment lien, but the express 3 exception to this broad statement is in the narrow circumstance 4 of a bona fide purchaser of personal property. In analyzing a 5 statute, this specific limitation must control over the broader 6 general statement. See San Francisco Taxpayers Ass’n v. Bd. of 7 Supervisors, 2 Cal. 4th 571, 577 (1992). 8 Second, we emphasize that this plain language 9 interpretation is reasonable. Real property liens of all types 10 are perfected through filings at the county level. Such a 11 filing provides constructive notice of the existence of the 12 lien; purchasers or encumbrancers of real property must search 13 the county records to ascertain whether real property liens 14 exist. 15 In connection with personal property, however, the 16 situation is completely the opposite. A purchaser (or 17 encumbrancer) of personal property must look to Secretary of 18 State records because it is there that one perfects security 19 interests in personal property through filing. See, e.g., Cal. 20 Com. Code §§ 9310(a), 9501. 21 Apparently, the California legislature, recognizing that 22 personal property liens were not typically recorded at the 23 county level, determined that it was inappropriate to infer 24 notice to third parties from a county level filing. Here, the 25 statutory language is clear, and the logic behind the statutory 26 scheme is sound. 27 Finally, we note that a bedrock fact considered in Cummins 28 has not changed; more than a county filing is necessary for

11 1 perfection that defeats the claims of a bona fide purchaser. At 2 the time of Cummins, it was levy. At this time it is either 3 levy or a Secretary of State filing. Put bluntly, the analysis 4 in Cummins remains sound and continues to control here. 5 4. To the extent there is unfairness or difficulty as a 6 result of the RTC § 2191.4 exception for bona fide 7 purchasers, the California legislature must resolve 8 the problem. 9 We acknowledge that a county must obtain a money judgment 10 prior to utilizing CCP § 697.510. We take no position regarding 11 the burden litigation would place on the County but note that by 12 virtue of RTC § 3101, et seq., a streamlined procedure appears 13 to be in place to acquire such a judgment. Once a Secretary of 14 State filing is available, such filing would not be unduly 15 oppressive to counties. Filing the notice of judgment lien 16 requires nothing more than filling out a form and mailing it 17 (with a nominal payment) to the Secretary of State. See 18 http://www.sos.ca.gov/business-programs/ucc/forms, Notice of 19 Judgment Lien & Addendum (Form JL1, rev. 06/2001). 20 We also acknowledge that the current statutory scheme 21 allows the filing of tax liens held at the state level to be 22 filed directly with the Secretary of State. Cal. Gov. Code 23 §§ 7171, 7220. The fact that the California legislature has not 24 allowed counties to take this route may be unfair, but 25 California statutes govern the priority and status of tax liens. 26 See In re Cummins, 656 F.2d at 1264. It is for the California 27 legislature, not the courts, to address any perceived or real 28 unfairness in the statutory scheme.

12 1 D. The legislative history of RTC § 2191.4 does not suggest a 2 different result. 3 The County asks that we review the legislative history of 4 RTC § 2191.4 and focus on the fact that it was intended to 5 provide counties with a broad and easily attainable lien. 6 First, where the statutory language is clear and does not lead 7 to an absurd result, we do not look to legislative history. See 8 Lamie v. U.S. Tr., 540 U.S. 526, 536 (2004). Here, the 9 statutory language expressly states that the statute creates a 10 lien on personal property that is not enforceable against a bona 11 fide purchaser; nothing could be clearer and, as noted, this 12 plain language interpretation does not lead to an absurd result. 13 Even if we consult legislative history, however, it would 14 not compel or even suggest a reversal. RTC § 2191.4 provided 15 the County with an easy way to create a broad lien on both 16 Mainline’s real and personal property. The only exception is 17 narrow; only a bona fide purchaser — not the taxpayer itself — 18 can defeat the personal property lien. We do not find the cited 19 legislative history problematic. 20 CONCLUSION 21 Based on the foregoing, we determine that the bankruptcy 22 court correctly set aside the lien, and we AFFIRM. 23 24 25 26 27 28