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By Daniel Gill
Los Angeles County can’t enforce a lien on personal property of a Chapter 11 debtor because it failed to perfect the lien against a possible third-party purchaser, the Ninth Circuit Court of Appeals ruled ( Los Angeles Cty. Treasurer & Tax Collector v. Mainline Equip., Inc. (In re Mainline Equip., Inc.) , 2017 BL 264703, 9th Cir., No. 15-60069, 7/31/17 ).
The July 31 opinion authored by Circuit Judge Kim McLane Wardlaw clarified that the statutory tax liens aren’t enforceable against a purchaser for value without knowledge of the lien, according to the statute that created the liens.
The county would have had to have gotten a judgment and recorded it with the California secretary of state in order to perfect the liens against third-party purchasers. For liens to be enforceable, they need to be “perfected,” such that the public has notice of them.
Before ruling on the merits, the court established that the appeal was not rendered moot by the fact that the bankruptcy case was closed, and attorneys had received payment from estate assets. The court noted that it had the authority to order the attorneys to return their fees, so it was possible for the court to afford actual relief.
Mainline Equipment Inc filed a Chapter 11 bankruptcy case in 2012. Chapter 11 protects companies (or individuals) from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.
With no trustee being appointed in the case, Mainline functioned like a trustee, as a “debtor in possession.” It commenced an adversary proceeding, a civil action, against the county to set aside the county’s liens on Mainline’s personal property pursuant to Bankruptcy Code Section 545(2).
The county’s liens arose pursuant to a law, section 2191.4 of the California Revenue and Taxation Cod, after Mainline failed to pay property taxes. The county recorded a notice of the liens in Los Angeles County, but that action perfects liens only against real, not personal, property, the court said.
11 U.S.C. §545(2), made applicable to debtors in possession by §1107(a), allows a trustee to avoid a statutory lien that is not enforceable at the time the bankruptcy case is filed against a bona fide purchaser.
The subject liens were clearly statutory, and the statute itself (section 2191.4) provides that it is not enforceable against bona fide purchasers, the court explained. Therefore, the debtor could avoid the personal property liens.
Circuit Judge Consuelo M. Callahan and District Judge Gordon J. Quist, sitting by designation, were also on the panel hearing the case.
Barry S. Glaser, Los Angeles, represented Los Angeles County. Mainline was represented by Vanessa M. Haberbush, Long Beach, Calif.
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To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
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