21 West Lancaster Corp. v. Main Line Restaurant, Inc.

Decision Date12 May 1986
Docket NumberNo. 85-1554,85-1554
Parties-1423, 86-2 USTC P 9516, 1 UCC Rep.Serv.2d 230 21 WEST LANCASTER CORP. v. MAIN LINE RESTAURANT, INC., Plaginos, William, Plaginos, Maria, the United States of America Internal Revenue Service, and Commonwealth of Pennsylvania Department of Revenue. Appeal of The UNITED STATES of America (being the same as the named defendant United States Internal Revenue Service).
CourtU.S. Court of Appeals — Third Circuit

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, William S. Estabrook, Lisa A. Prager (argued), attorneys, Tax Div., Dept. of Justice, Washington, D.C., Edward S.G. Dennis, Jr., U.S. Atty. of counsel, Philadelphia, Pa., for appellants.

Michael H. Kaliner, Davis S. Fishbone (argued), Ciardi, Fishbone & DiDonato, Philadelphia, Pa., for appellees.

Before ADAMS, GIBBONS and WEIS, Circuit Judges

OPINION OF THE COURT

ADAMS, Circuit Judge.

This appeal arises out of conflicting claims to a liquor license. A restaurant operator borrowed money and gave the lender a security interest in the restaurant equipment and its liquor license. Subsequently, the Internal Revenue Service (IRS) filed a lien on the license to recover taxes owed by the restaurant operator. The district court, 614 F.Supp. 202, held that the prior security interest defeated the claim of the IRS. Because we conclude that a Pennsylvania liquor license is not "property" subject to a valid security interest filed under state law, but is "property" subject to a federal tax lien, we will reverse.

I.

The liquor license at issue in this case was originally owned by Main Line Restaurant, Inc. (Main Line), a restaurant operator in suburban Philadelphia. In June, 1980, Main Line borrowed $60,000 from Jaybee Loan Company (Jaybee), and in exchange granted Jaybee a security interest in its restaurant equipment and its liquor license. Apparently as a result of financial difficulties, Main Line failed to pay taxes due the IRS in the latter part of 1980. The following year, 1981, the IRS made assessments against Main Line for unpaid federal employment taxes and interest for the third and fourth quarters of 1980 and for 1981.

In May, 1983, 21 West Lancaster Corporation (21 West) purchased all of Main Line's assets, including its liquor license. Several days later, on May 23, 1983, Jaybee, the $60,000 creditor, assigned its security interest in the liquor license to William and Maria Plaginos. In June, 1983, in response to the assignment of the security interest to the Plaginos, 21 West and Main Line revised the agreement by which 21 West was to buy Main Line's assets. The revision divided the purchase into two transactions, one for the liquor license and one for the remaining assets. Main Line sold the liquor license to 21 West for $60,000, which was to be paid by the buyer directly to the Plaginos, as assignees of Jaybee's security interest in the license. In the second part of the sale, Main Line transferred the remainder of the assets to 21 West for $115,000, also to be paid directly to the Plaginos.

On August 17, 1983, the IRS served a notice of levy upon 21 West seeking $65,729.21 in unpaid tax assessments owed by Main Line. As a result, 21 West was faced with conflicting demands: it owed the Plaginos $60,000 for the liquor license, and the IRS was seeking from it an almost identical amount to satisfy the tax lien. To resolve the situation, on June 18, 1984, 21 West deposited $62,283.12 into the registry of the district court, representing the $60,000 owed to the Plaginos, plus interest earned on that sum from December 20, 1983. Thereafter, 21 West filed an interpleader action in the district court, seeking an adjudication of the competing claims to the fund by the IRS and the Plaginos.

The district court ruled that the security interest granted in 1980 to Jaybee, into whose position the Plaginos stepped, took precedence over the subsequent IRS tax lien. It first acknowledged that under Pennsylvania law a liquor license is not property and cannot be subject to a security interest. 1412 Spruce, Inc. v. Pennsylvania Liquor Control Board, 504 Pa. 394, 474 A.2d 280 (1984); In re Revocation of Liquor License No. R-2193, 72 Pa.Commw. 367, 456 A.2d 709 (1983). Noting, however, that the license does enhance the value of the licensee's business, the district court ruled that this "value enhancement component" could be subject to a security interest. Accordingly, it held that the security interest assigned by Main Line to Jaybee in 1980 was valid, and that it was senior to the subsequent lien held by the IRS. The government filed a timely appeal.

II.

Under the Internal Revenue Code, a federal tax lien is created in the amount of any unpaid tax on "all property and rights to property, whether real or personal, belonging to the delinquent taxpayer." 26 U.S.C. Sec. 6321 (1982). The lien arises automatically when the outstanding taxes are assessed, 26 U.S.C. Sec. 6322, and extends to all property belonging to the taxpayer, Glass City Bank v. United States, 326 U.S. 265, 267-68, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945) (interpreting predecessor section of Sec. 6321). A lien arising under Sec. 6321 is afforded priority over all other unperfected liens or claims asserted against the taxpayer's property. Sec. 6323(a). An IRS lien is ineffective against certain parties, including a "purchaser, holder of a security interest, mechanic's lien or judgment lien creditor," until the notice of the lien has been properly filed by the government. Id.

Thus the threshold question here is whether Main Line, as owner of the liquor license, possessed "property" or "rights to property" within Sec. 6321 such that an IRS lien could attach to it. 1 If the license is property, and an IRS lien did attach to it, we must then determine whether the IRS lien is ineffective under Sec. 6323(a) because of a prior lien or claim.

Determining whether an IRS lien attaches to property rights entails inquiry into both state and federal law. The Internal Revenue Code itself "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 78 S.Ct. 1054 (1958). A court therefore must look first to state law to ascertain the existence and nature of the interests against which an IRS lien has been asserted. See, e.g., Aquilino v. United States, 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1279-81, 4 L.Ed.2d 1365 (1960); Rodriguez v. Escambron Development Corp., 740 F.2d 92, 97 (1st Cir.1984). While state law creates legal interests and defines their incidents, "the ultimate question whether an interest thus created and defined falls within a category stated by a Federal statute requires an interpretation of that statute, which is a Federal question." In re Halprin, 280 F.2d 407, 409 (3d Cir.1960); see Bess, 357 U.S. at 56-57, 78 S.Ct. at 1057-58; Rodriguez, 740 F.2d at 97 (federal law governs whether state-created "rights are 'rights to property' to which a tax lien may attach"); JFWIRS Ltd. v. United States, 607 F.Supp. 566 (M.D.Pa.1985). See also Young, Priority of The Federal Tax Lien, 34 U.Chi.L.Rev. 723, 726-28 (1967).

We turn to the status of a liquor license under the Pennsylvania Liquor Code. Once granted a liquor license may not be revoked arbitrarily by the state, 47 Pa.Stat.Ann. Sec. 4-464 (Purdon 1985 Supp.), and the state may not arbitrarily interfere with the transfer of the license. Id. Moreover, while the Pennsylvania Liquor Code bars a licensee from directly assigning or transferring the license to another, the Liquor Control Board may transfer the license from one person to another solely upon payment of the transfer filing fee and the execution of a new bond. 47 Pa.Stat.Ann. 4-468(a). As a result, in practice a liquor license "is subject to bargain and sale in the marketplace." 1412 Spruce Inc. v. Pennsylvania Liquor Control Board, 504 Pa. 394, 405, 474 A.2d 280, 286 (1984) (Larsen, J., dissenting).

Pennsylvania courts have repeatedly recognized the additional value that a liquor license creates for a licensee. Thus, a condemnee whose license lost value as a result of the condemnation of his premises was held entitled to just compensation for the license. Redevelopment Authority of Philadelphia v. Lieberman, 461 Pa. 208, 336 A.2d 249 (1975). When a licensee dies, the Liquor Control Board may transfer the license to the licensee's surviving spouse or a person designated by the licensee. Thus, "the right to apply for such transfer is a right which possesses value," and the right to apply for transfer is includable in the valuation of decedent's estate. In re Feitz' Estate, 402 Pa. 437, 445, 167 A.2d 504, 508 (1961).

There is no bright-line rule or mechanical definition to guide us in determining whether a Pennsylvania liquor license, given the foregoing attributes, constitutes property or rights to property for federal tax lien purposes. Neither Congress nor the Supreme Court has essayed a broad rule of classification. In enacting Sec. 6321, Congress "was perfectly willing to let contemporary transactions be analyzed to determine whether or not the delinquent taxpayer had any part of a bundle of rights of commercial value, to which the tax lien would attach." Randall v. H. Nakashima & Co., Ltd., 542 F.2d 270, 278 (5th Cir.1976). Courts confronting the question have generally classified as property or rights to property interests which can generate pecuniary value and are transferrable. See, e.g., Bess, 357 U.S. at 55, 78 S.Ct. at 1057 (for tax lien purposes, life insurance policies are property to the extent of their cash surrender value, since policy holder could compel payment of that amount); Note, Property Subject to the Federal Tax Lien, 77 Harv.L.Rev. 1485, 1486-87 (1964) (federal classifications have focused on transferability and leviability of interest). In the...

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