Kimura, In re

• Decision Date: 10 July 1992
• Docket Number: No. 91-35010,91-35010
• Parties: -5414, 92-2 USTC P 50,397, Bankr. L. Rep. P 74,773 In re Roger George KIMURA and Donna Louise Kimura, Debtors. UNITED STATES of America, Appellant, v. Kenneth BATTLEY, Trustee; Alaska Hotel & Restaurant Employee Trust Funds; Alaska Distributors; K & L Distributors, Inc.; Municipality of Anchorage, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 806

969 F.2d 806

70 A.F.T.R.2d 92-5414, 92-2 USTC P 50,397,

Bankr. L. Rep. P 74,773

In re Roger George KIMURA and Donna Louise Kimura, Debtors.

UNITED STATES of America, Appellant, v. Kenneth BATTLEY, Trustee; Alaska Hotel & Restaurant

Employee Trust Funds; Alaska Distributors; K & L

Distributors, Inc.; Municipality of

Anchorage, Appellees.

No. 91-35010.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Aug. 21, 1991.

Decided July 10, 1992.

Gary R. Allen, Tax Div., U.S. Dept. of Justice, Washington, D.C., for appellant.

Roy Longacre, Longacre & Associates, Anchorage, Alaska, for appellee, K & L Distributors.

Peter W. Giannini, Giannini & Associates, Anchorage, Alaska, for appellee, Alaska Distributors.

Scott Brandt-Erichsen, Asst. Mun. Atty., Anchorage, Alaska, for appellee, Anchorage.

Gary Sleeper, Jermain, Dunnagan & Owens, Anchorage, Alaska, for appellee, Alaska Hotel-Trust.

Teresa Williams, Asst. Atty. Gen., Anchorage, Alaska, for amicus, State of Alaska.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before: TANG, REINHARDT, and RYMER, Circuit Judges.

TANG, Circuit Judge:

This appeal requires us to reconcile the operation of state and federal law in the context of a federal tax lien and a competing state lien-like interest created in favor of trade creditors who have extended credit to a business licensed by the State of Alaska to sell liquor. Alaska law provides that, before a liquor license may be transferred, objecting trade creditors must be satisfied. Both the bankruptcy court and the Bankruptcy Appellate Panel ("BAP") determined that trade creditors are entitled to priority payment from proceeds received upon transfer of an Alaskan liquor license, even if the competing claim is a federal tax lien.

The Internal Revenue Service ("IRS") appeals. We reverse the decision of the bankruptcy court and of the BAP.

FACTUAL AND PROCEDURAL BACKGROUND

During the second and fourth quarters of 1986 and the first quarter of 1987, Roger Kimura and Donna Kimura, as "responsible persons" of Nikko Garden, Inc., failed to pay over to the United States income Almost a year later, on April 22, 1988, the Kimuras filed a Chapter 7 bankruptcy petition. Eventually, the bankruptcy trustee sought to liquidate the Kimuras' liquor license, issued by the Alaska Alcoholic Beverage Control Board ("ABC Board"). On January 9, 1989, the bankruptcy trustee gave notice to all creditors of its application for authorization to sell the liquor license, subject to prepetition liens or claims on file with the ABC Board, and also to a sales commission. On April 4, 1989, the bankruptcy court approved the sale of the Kimuras' interest in the liquor license for $82,500.

                and federal FICA taxes due.   On May 19, 1987, the Internal Revenue Service ("IRS"), assessed a civil penalty against the Kimuras in the amount of $103,617 for the taxes owed, pursuant to 26 U.S.C. § 6672.   As a result of the assessed and unpaid federal taxes, a federal tax lien attached to all of the Kimuras' property pursuant to 26 U.S.C. § 6321.   Notice of the federal tax lien was filed on June 3, 1987
                

Alaska law provides that a liquor license may not be transferred to another person without the consent of the ABC Board. Alaska Stat. § 04.11.040. Furthermore, the ABC Board may not consent to the transfer of a liquor license if

the transferor has not paid all debts or taxes arising from the conduct of the business licensed under this title unless

(A) the transferor gives security for the payment of the debts or taxes satisfactory to the creditor or taxing authority.

Id. § 04.11.360(4). Objecting creditors, whose debts arise from the liquor-licensed business, may block the proposed transfer of the license.

Three of the Kimuras' trade creditors initially objected to the proposed sale of the liquor license. In September 1989, however, they stipulated to an amended order which approved the sale and provided "[t]he claims of all creditors who under state law may object to the approval of the sale, transfer and renewal of the license may be asserted against the cash proceeds of the sale." The amended order further provided that all liens and encumbrances upon the liquor license would be transferred to the proceeds of the sale.

On February 2, 1990, the trustee filed a notice of final accounting in which he proposed to distribute the funds in the following order: (1) administrative expenses, including a broker's commission, incurred in the sale of the license; (2) $15,528.87 to the Municipality of Anchorage for local taxes; and (3) the balance of the proceeds on a pro rata basis to creditors who had liens against the liquor license recognized by the ABC Board. The IRS objected to this proposed distribution, arguing that it was entitled to receive the entire balance after the payment of taxes to the Municipality of Anchorage. The bankruptcy court overruled the objection.

The IRS filed an appeal to the Bankruptcy Appellate Panel ("BAP"), which affirmed the bankruptcy court. The BAP stated that the appeal turned upon the issue of what property interest was "created in the debtor pursuant to Alaska state laws governing the creation and transfer of state liquor licenses." Relying on Queen of the North, Inc. v. LeGrue, 582 P.2d 144, 149 (Alaska 1978) and Sulmeyer v. California Dept. of Employment Dev. (In re Professional Bar Co.), 537 F.2d 339, 340 (9th Cir.1976) (per curiam) ("The bankrupt estate, insofar as it includes liquor licenses, has only the limited value of the licenses encumbered as they may be by the terms of the statutes which create the licenses and provide the conditions of their transfer.") the BAP concluded that the IRS's tax lien only attached to the debtors' right to petition the ABC Board for the transfer of the liquor license. By implication, the BAP reasoned that the federal tax lien could not take priority over the interests of the Kimuras' creditors because these interests were not part of the Kimuras' property right in the liquor license; the creditors' interests therefore never became part of the bankruptcy estate.

Concerning the relative priority of the IRS tax lien as against the claims of the trade creditors arising from the conduct of the licensed business, the BAP relied on Artus v. Alaska Dept. of Labor (In re The IRS timely noticed its appeal to this court.

                Anchorage Int'l Inn, Inc.), 718 F.2d 1446, 1451 (9th Cir.1983), and concluded that there was no basis under Alaska law for treating the IRS tax lien differently from the liens of other creditors.   The BAP accordingly held that the IRS was only entitled to its pro rata share of the proceeds
                

STANDARD OF REVIEW

This court independently reviews the bankruptcy court's decision, because this court is in as good a position as the Bankruptcy Appellate Panel to review the bankruptcy court's findings. Anderson-Walker Indus., Inc. v. Lafayette Metals, Inc., 798 F.2d 1285, 1287 (9th Cir.1986). The court reviews the bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law de novo. Pizza of Hawaii, Inc. v. Shakey's, Inc. (Matter of Pizza of Hawaii, Inc.), 761 F.2d 1374, 1377 (9th Cir.1985).

DISCUSSION

I. Creation of the Property Interest

The Internal Revenue Code provides in relevant part that 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 taxpayer]." 26 U.S.C. § 6321. The broad language of the statute reveals that Congress meant to reach every interest in property that a taxpayer might have. United States v. National Bank of Commerce, 472 U.S. 713, 720-21, 105 S.Ct. 2919, 2924-25, 86 L.Ed.2d 565 (1985). Property is generally characterized as an aggregate of rights; "the right to dispose of a thing in every legal way, to possess it, to use it, and to exclude everyone else from interfering with it." Black's Law Dictionary 1095 (5th ed. 1979). "This bundle of rights and powers can be divided among a number of persons, each of whom then possesses an interest that is less than absolute ownership." In re Terwilliger's Catering Plus, Inc., 911 F.2d 1168, 1178 (6th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 2815, 115 L.Ed.2d 987 (1991).

Amicus State of Alaska alleges that an Alaska liquor license does not have sufficient attributes of property to be the subject of a federal tax lien. Cf. id. at 1170 ("if the [liquor] license is not property within the meaning of the tax lien statute ... then the federal government's tax lien is invalid."). Alaska argues that any liquor license transfer is subject to approval of the ABC Board and cannot take place if there are unsatisfied creditors. Under such circumstances, Alaska contends the license itself has no independent financial value.

Our initial task is to understand and define the bundle of rights and privileges that Alaska law has created in favor of the holder of a liquor license. See United States v. Bess, 357 U.S. 51, 55, 57, 78 S.Ct. 1054, 1057, 1058, 2 L.Ed.2d 1135 (1958) (holding that because the federal tax lien attaches to the debtor's interest in property, the initial inquiry is to examine state law to determine the interests created and defined).

Concomitant with our state law inquiry, we must determine, as a matter of federal law, whether the interest created by the state is "property" or a "right to property" to which the federal tax lien can attach. See National Bank of Commerce, 472 U.S. at 727, 105 S.Ct. at 2927 ("The question whether a state-law right constitutes 'property' or 'rights to property' is a matter of federal law."); Terwilliger's Catering, 911 F.2d at 1171 (holding that federal law determines whether state-created interests constitute property to which the federal tax lien can attach); 21 West Lancaster Corp. v. Main Line Restaurant, Inc., 790 F.2d 354, 356 (3rd Cir.1986) (same); Rodriguez v. Escambron Dev. Corp., 740 F.2d 92, 97 (1st...