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In re Mainline Equipment, Inc.

United States Court of Appeals, Ninth Circuit

July 31, 2017

In re Mainline Equipment, Inc., DBA Consolidated Repair Group, Debtor,
v.
Mainline Equipment, Inc., Appellee. Los Angeles County Treasurer & Tax Collector, Appellant,

          Submitted April 5, 2017 Pasadena, California

         Appeal from the Ninth Circuit Bankruptcy Appellate Panel No. 14-1429 Kurtz, Dunn, and Taylor, Bankruptcy Judges, Presiding Argued and

          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.

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

         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.

          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, 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 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 ...


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