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.
*
District Judge of the Western District of Louisiana,
sitting by designation.
1
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.
1
When 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.
2
The 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.
3
The 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
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.
4
Section 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).
5
When 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
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
6
Section 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).
7
Section 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 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
8
The 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
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
6
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.
9
Because 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