21 West Lancaster Corp. v. Main Line Restaurant

• Decision Date: 10 July 1985
• Docket Number: Civ. A. No. 84-2005.
• Parties: 21 WEST LANCASTER CORP. v. MAIN LINE RESTAURANT, INC., William Plaginos, Maria Plaginos, the United States Internal Revenue Service, and the Commonwealth of Pennsylvania Department of Revenue.
• Court: U.S. District Court — Eastern District of Pennsylvania

614 F. Supp. 202

21 WEST LANCASTER CORP. v. MAIN LINE RESTAURANT, INC., William Plaginos, Maria Plaginos, the United States Internal Revenue Service, and the Commonwealth of Pennsylvania Department of Revenue.

Civ. A. No. 84-2005.

United States District Court, E.D. Pennsylvania.

July 10, 1985.

Ronald N. Rutenberg, Philadelphia, Pa., for 21 West Lancaster Corp.

Edward S.G. Dennis, Jr., U.S. Atty., Rachel Shao, Asst. U.S. Atty., Philadelphia, Pa., Hunt, U.S. Dept. of Justice, Washington, D.C., for U.S. of America and Internal Revenue Service.

David S. Fishbone, Michael Kaliner, Philadelphia, Pa., for William and Maria Plaginos.

MEMORANDUM AND ORDER

BECHTLE, District Judge.

Presently before the court is a motion for summary judgment filed by defendants William and Maris Plaginos ("Plaginos"), and a motion for summary judgment filed by defendant United States Internal Revenue Service (the "government"). Briefly stated, the moving parties here call upon the court to resolve the validity and priority of an assignment of a Pennsylvania liquor license to the Plaginos and of a subsequently filed federal tax lien on that liquor license. For the reasons stated herein, the motion of the government will be denied, and the motion of the Plaginos will be granted.

FACTS

The parties have stipulated to all of the material facts.

On June 5, 1980, Main Line Restaurants, Inc. ("Main Line") borrowed $60,000.00 from Jaybee Loan Company ("Jaybee"). Main Line gave Jaybee a security interest in all of its restaurant equipment, including Restaurant Liquor License No. R-12993. Subsequently, financial statements were timely filed covering the equipment, including the liquor license, with the Recorder of Deeds of Montgomery County, the Prothonotary of Montgomery County, and the Secretary of the Commonwealth of Pennsylvania. Presumably Jaybee also took possession of the liquor license.

On April 13, 1981, April 20, 1981, and August 3, 1981, the Commissioner of the Internal Revenue Service (the "Commissioner") assessed against, gave notice to, and demanded payment from Main Line for unpaid trust fund federal employment taxes and interest for the third and fourth quarters of 1980 and the first quarter of 1981. On July 20, 1981, the Commissioner assessed against, gave notice to, and demanded payment from Main Line for unpaid federal unemployment taxes and interest for 1981. These assessments remain unsatisfied, and additional amounts have accrued since the date of notice and demand. The government filed notices of a federal tax lien under the Internal Revenue Code with the Prothonotary of Montgomery County on July 15, 1981, September 1, 1981, and June 22, 1983.¹

During the month of May, 1981,² Main Line and 21 West Lancaster Corp. ("21 West") signed an agreement of sale ("May agreement") which purported to transfer the assets of Main Line's liquor and restaurant business to 21 West. In this May agreement Main Line agreed to sell the liquor license to 21 West in accordance with the rules and regulations of the Pennsylvania Liquor Control Board (the "board").

On May 23, 1983, Jaybee assigned its title and interest in the liquor license to the Plaginos.³ The appropriate financing statements were timely filed with the Recorder of Deeds of Montgomery County, the Prothonotary of Montgomery County, and the Secretary of the Commonwealth of Pennsylvania. Presumably the Plaginos also took possession of the liquor license.

On June 23, 1983, the May agreement was revised by supplemental agreement ("June agreement") between Main Line, the Plaginos, and 21 West. In the June agreement Main Line agreed to transfer the liquor license directly to 21 West for a consideration of $60,000.00,⁴ and the Plaginos agreed to sell the other liquor and restaurant assets of Main Line, excluding those for which the May agreement directed an inventory to be taken,⁵ to 21 West for a consideration of $115,000.00. Payment of the consideration for the liquor license and the $115,000.00 inventory was to be made directly to the Plaginos.

On August 17, 1983, the government served notice on 21 West seeking all property of Main Line which was in 21 West's possession, plus statutory additions. This amount totaled $60,359.58. On June 18, 1984, 21 West, pursuant to a court Order, deposited the sum of $62,283.12 with the Registry of the Court which represents the sum of $60,000.00 plus interest thereon from December 20, 1983. From this fund, 21 West was awarded costs of $30.50.

The Plaginos and the government are now before the court claiming the interest in the fund. The parties stipulate that no funds have been turned over to the government.

Main Line, 21 West, and the Commonwealth of Pennsylvania disclaim all further interest in the fund.

The Plaginos argue: (1) the government's execution on a Pennsylvania liquor license is wrongful because the federal statute permits the government to levy upon property only as defined by state law and a liquor license is not property under Pennsylvania law; (2) execution on the liquor license by the government is wrongful because the execution would impair the Plaginos' property interest in the license; and (3) execution on the liquor license by the government is wrongful because the execution would impair the Plaginos' property interest.

The government argues on the contrary that: (1) the Plaginos acquired no property right directly in or collateral to the liquor license; and (2) the Internal Revenue Code authorizes the Commissioner to lien and levy upon property, including a Pennsylvania liquor license.

DISCUSSION

At the heart of this case is the validity of the government's claim and the Plaginos' claim. Determination of the validity of the claims involves a two-prong analysis. In re Halprin, 280 F.2d 407 (3d Cir.1960). The first prong is merely an examination of the "incidences" of a Pennsylvania liquor license under Pennsylvania law. The second prong is "whether an interest thus created and defined falls within the `property or rights to property' category" under the federal statute or the "property" category under the Uniform Commercial Code ("UCC"), which authorizes federal and UCC liens on property.

A. Validity of Private Creditor's Claim

With respect to the Plaginos' claim, the court turns to the first prong of the analysis. A summary of the relevant principles of the Pennsylvania Liquor Code, 47 Pa. Cons.Stat.Ann. 1-101, et seq. (Purdon 1984) (the "Code"), is appropriate here.

The Code creates the Pennsylvania Liquor Control Board, Code § 2-201, and authorizes the board to issue retail liquor licenses for premises kept or operated by a restaurant. Code § 4-401(a). A liquor license is a privilege. It does not constitute property in the hands of the licensee. Code § 4-468(b.1); 1412 Spruce v. Pennsylvania Liquor Control Board, 504 Pa. 394, 474 A.2d 280 (1984). A restaurant liquor license entitles the restaurateur to purchase liquor from Pennsylvania liquor stores and sell, on the restaurant premises, liquor to patrons.

The Code bars the restaurateur from assigning or transferring a restaurant liquor license directly to another person. Code § 4-468(a). The Code, however, permits the board to transfer a license issued by it from one person to another "upon payment of the transfer filing fee and the execution of a new bond." Code § 4-468(a). The board has the exclusive power to fix the time of transfer of liquor licenses "except in cases of emergency such as death, serious illness, or certain circumstances beyond the control of the licensee." Id. In the case of death of a licensee, the board may transfer the license to the surviving spouse or personal representative or a person designated by him. Id.

It is well settled in Pennsylvania that a liquor license cannot be subject to the execution process, 1412 Spruce, supra, nor can it be subject to a valid security interest. In re Revocation of Liquor License No. R-2193, 456 A.2d 709 (Pa. Commw.Ct.1983). The rationale underlying this rule is that the "Uniform Commercial Code — Secured Transactions," 13 Pa. Cons.Stat.Ann. § 9101, et seq. (Purdon 1984), which provides for the attachment and enforceability of security interests, permits only attachment and enforcement of security interests upon collateral. 13 Pa.Cons.Stat.Ann. § 9203. Collateral is defined as "the property subject to a security interest...." 13 Pa.Cons.Stat.Ann. § 9105(a). Since, under the Code, a liquor license is expressly not property, a liquor license cannot be collateral under the UCC. It cannot be attached nor can a lien upon it be enforced under the UCC by a private creditor.⁶

Although a liquor license is not assignable, the license does enhance the value of the licensee's business. A liquor license is not without value. Due process requires the state to pay the licensee just compensation for the liquor license in the context of condemnation proceedings. Redevelopment Authority of Philadelphia v. Lieberman, 461 Pa. 208, 338 A.2d 249 (1975). Also, after the licensee's death the statutory right to apply for transfer of the liquor license is includable in decedent's estate for Pennsylvania inheritance tax purposes, even though the value of a liquor license is not includable in the decedent's estate. See In re Feitz Estate, 402 Pa. 437, 167 A.2d 504 (1961). Therefore the court concludes that although the Code bars assignment of the license, it does not bar assignment of the value enhancement component of the license. See Branding Iron, Inc. v. Business Loans, Inc., 7 B.R. 729 (Bankr.E.D.Pa.1980). The "assignee" cannot transfer or assign the license nor can he initiate execution proceedings. The "assignee" can, however, claim a prior right to the proceeds in the event that the liquor license is transferred by the board. Id.

In the present case, Main Line intended to assign and did assign its interest in the liquor license to Jaybee, which in turn intended to and did assign its interest to the...