Avoiding the Tax Lien on Personal Property
Virtually every state has created statutory property tax liens covering both real and personal property. The authority to assess and collect the tax is generally granted to local taxing jurisdictions. In addition, the Internal Revenue Service (IRS) may assert a tax lien under §6321 of the Internal Revenue Code (IRC). A variety of issues have arisen in actions seeking to avoid statutory tax liens on personal property. Three cases involving attempts to avoid the Texas statutory tax lien and the IRS tax lien address (i) the elements required for avoidance, (ii) standing to bring an avoidance action and (iii) using claim objection based on an avoidable transfer to deny the taxing unit's claim.
Personal Property Tax Liens
Each state has its own statutory scheme for creating tax liens, the property covered by the lien and the tax lien's priority with regard to other interests or liens. In Texas, Property Tax Code §32.01 creates a tax lien that attaches and is deemed perfected on Jan. 1 of each year. The lien covers all personal property, whether owned on Jan. 1 or subsequently acquired, and requires no further action for perfection. The Texas tax lien's priority is established in §32.05, which essentially provides that the tax lien takes priority over all other consensual or contractual liens, whether or not such liens were created and perfected before the tax lien was perfected.
Secured creditors are put in the precarious position of having their collateral being subject to a tax lien even though their lien was perfected before the tax lien. The taxing unit is not required to apportion its lien among all personal property, but may enforce the total lien amount against specific items or portions of personal property.
Most tax lien statutes contain limited exceptions or restrictions on enforcement against personal property sold to certain defined purchasers. Such exceptions are necessary to avoid disrupting normal commercial transactions where personal property is bought and sold. These restrictions appear in §6323 of the IRC and limit the IRS.
Avoidance in Bankruptcy
Avoiding statutory tax liens on personal property is predicated upon §545(2) of the Bankruptcy Code, which provides:
The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien—(2) 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.
The Texas statutory tax lien was at issue in City of Boerne v. Boerne Hills Leasing Corp. (In re Boerne Hills Leasing Corp.), 15 F.3d 57 (5th Cir. 1994). In Boerne, a priority dispute arose between Chrysler Credit Corp. and various governmental taxing units over inventory sales proceeds. Chrysler's perfected lien against personal property predated the tax lien. The bankruptcy court concluded that the tax lien was avoidable, and therefore Chrysler held a superior claim to the proceeds.
On appeal, the Fifth Circuit noted that the statute creating the tax lien provided that the tax lien would take priority "over the claim of any holder of a lien on property encumbered by the tax lien, whether or not the debtor lien existed before attachment of the tax lien," which would include Chrysler's secured claim. However, Property Tax Code §32.03 then in effect provided that tax liens were "unenforceable against personal property transferred to a bona fide purchaser for value who does not have actual notice of the existence of the lien." The court found that the restriction contained in §32.03 was expressly within the purview of §545(2) of the Bankruptcy Code. Since both statutes referred to a bona fide purchaser, the requirements of §545(2) were satisfied, and the tax lien was avoidable. The Fifth Circuit then held that the tax lien would not be avoided because Chrysler did not have standing to bring the avoidance action.
A Language Change Renders Different Result
After the decision in Boerne, the Texas legislature amended §32.03 and substituted the words "a buyer in the ordinary course of business" in place of "a bona fide purchaser." This amendment's impact was felt in In re Winn's Stores, 177 B.R. 253 (Bankr. W.D. Tex. 1995). The issue presented was whether the change in the exception language in §32.03 changed Boerne's result. The court determined that both phrases were terms of art and relatively well-defined.
A bona fide purchaser was defined by the court as (1) good faith, (2) purchase, (3) for value (not necessarily present consideration, i.e., antecedent debt qualifies) and (4) without notice (not knowledge). The court then found the elements required to qualify as a buyer in the ordinary course to be (1) good faith, (2) without knowledge (not notice), (3) buying, (4) in the ordinary course and (5) from a person in the business of selling such goods.
The court concluded that although the requirements are similar, they are not the same. Since a debtor is clothed only with the powers of a bona fide purchaser under §545(2) and has no greater rights than a trustee under §1107(a), the court ruled that Winn's was not empowered to avoid the tax liens since the additional requirements to qualify as a buyer in the ordinary course had not been bestowed upon Winn's by statute.
A similarly strict statutory construction involving IRC §6323 occurred in Stangel v. United States, 222 B.R. 289 (Bankr. N.D. Tex. 1998). The court determined that the term "bona fide purchaser" in §545 was not the same as the term "purchaser" used in §6323, and therefore the IRS tax lien could not be avoided. The court reviewed the split in authority that exists on this issue. On appeal to the Fifth Circuit, this issue was not considered because the case was disposed of on a standing issue.
It appears that courts are taking a more restrictive approach in determining whether the term used in a specific statutory exception or restriction on personal property for tax liens is satisfied by the bona fide purchaser status referred to in §545. Legislative bodies may continue modifying the terms used in tax lien statutes to preclude the application of §545(2).
Standing to Bring Avoidance Action
Standing to bring avoidance actions has created conflicting opinions, particularly regarding chapter 7 and 13 debtors. In Boerne Hills, a chapter 11 case, the Fifth Circuit ruled that the avoidance power set out in §545(2) of the Bankruptcy Code could only be exercised by a trustee or a debtor-in-possession. The court acknowledged that in appropriate circumstances, "a creditor may 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."1 Since Chrysler had not obtained such authorization, it did not have standing and could not bring an action to avoid the taxing units' lien. The taxing units therefore were awarded a superior claim to the proceeds of sale of the debtor's inventory.
In a chapter 11 or 12 case, it is clear that only the trustee or DIP is entitled to bring an avoidance action, unless a creditor or other party in interest has sought and received authorization from the court to assert such an action. In chapters 7 and 13, there is a split in authority on whether the debtor has standing to bring an action to avoid a statutory tax lien.
In Realty Portfolio v. Hamilton (In re Hamilton), 125 F.3d 292 (5th Cir. 1997), the court reviewed the split in authority regarding a chapter 13 debtor's standing to exercise avoidance powers. The court concluded that a chapter 13 debtor held only a narrow exception under §522(h) to avoid transfers related to exempt property if the trustee did not attempt to avoid the transfer. The Fifth Circuit revisited the issue in Stangel v. United States (In re Stangel), supra, and concluded that a chapter 13 debtor does not have standing to assert an avoidance action under §545(2). The court, in reliance on the Supreme Court opinion in Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed 2d 1 (2000), held that since only the trustee is named in §545, a chapter 13 debtor had no standing.
The split in authority regarding a chapter 7 debtor's authority is analyzed in Mulligan v. United States (In re Mulligan), 234 B.R. 229 (Bankr. D. N.H. 1999). The reasoning set forth in Stangel by the Fifth Circuit would appear to apply to a chapter 7 debtor if the issue were presented. The majority opinion and direction of the courts is to significantly restrict, if not eliminate, the authority of a chapter 7 or 13 debtor to bring an avoidance action.
Claim Objection to Tax Claim
In El Paso vs. America West Airlines Inc. (In re America West Airlines Inc.), 217 F.3d 1161 (9th Cir. 2000), the statute of limitations had expired to bring an avoidance action, so the debtor filed an objection to the proof of claim filed by the taxing unit. The city of El Paso asserted a statutory tax lien against the personal property of the debtor. El Paso filed a proof of claim asserting its secured status. The debtor objected to the proof of claim based on §502(d), which provides that "the court shall disallow any claim of any entity from which property is recoverable under §542, 543, 550 or 553 of this title or that is a transferee of a transfer avoidable under §522(f), 522(h), 544, 545, 547, 548, 549 or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under §522(i), 542, 543, 550 or 553 of this title."
Although the time period for bringing an action to avoid the tax lien had passed, the court determined that such did not impair objecting to the proof of claim on the basis of receiving an avoidable transfer that had not been turned over. The court held that the statutory tax lien's attachment constituted a transfer and that the transfer was avoidable under the Boerne decision (the tax lien was subject to the earlier version of §32.03). Since El Paso had not voluntarily released or relinquished its tax lien, the court sustained the objection and disallowed the entire claim filed by El Paso. Debtors and taxing units should be aware of this circumstance, which may completely disallow any claim, secured or unsecured, by a taxing unit.