Anchorage Intern. Inn, Inc., In re

• Decision Date: 15 September 1983
• Docket Number: No. 82-3635,82-3635
• Citation: 718 F.2d 1446
• Parties: 9 Collier Bankr.Cas.2d 422 In re ANCHORAGE INTERNATIONAL INN, INC., et al., Bankrupts. Mary Beth ARTUS, Trustee, Plaintiff-Appellee, v. ALASKA DEPARTMENT OF LABOR, EMPLOYMENT SECURITY DIVISION, and Alaska Hotel & Restaurant Employees Health and Welfare Trust and Pension Trust, Defendants- Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1446

718 F.2d 1446

9 Collier Bankr.Cas.2d 422

In re ANCHORAGE INTERNATIONAL INN, INC., et al., Bankrupts.

Mary Beth ARTUS, Trustee, Plaintiff-Appellee, v. ALASKA DEPARTMENT OF LABOR, EMPLOYMENT SECURITY DIVISION, and Alaska Hotel & Restaurant Employees Health and Welfare Trust and Pension Trust,

Defendants- Appellants.

No. 82-3635.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 7, 1983.

Decided Sept. 15, 1983.

William D. Artus, Artus & Choquette, P.C., Anchorage, Alaska, for plaintiff-appellee.

Randall Simpson, Jermain, Dunnagan & Owens, Anchorage, Alaska, for defendants-appellants.

Appeal from the United States District Court for the District of Alaska.

Before ANDERSON and FLETCHER, Circuit Judges, and TAYLOR, ^* District Judge.

FLETCHER, Circuit Judge:

This appeal is from the bankruptcy court's ruling (affirmed by the district court) that the provisions of an Alaska statute requiring payment of creditors of a liquor establishment before transfer of a liquor license are preempted by federal bankruptcy law. We have jurisdiction under 11 U.S.C. Sec. 47(a) (1976) (repealed 1978) and reverse. ¹

I

On March 28, 1979, Anchorage International Inn, Inc. (Inn), the owner of an Alaska liquor license, was adjudicated a bankrupt. Prior to bankruptcy, the Inn had incurred two substantial debts arising out of the operation of a tavern connected to the Inn: (1) approximately $20,000 in taxes and employee withholding contributions due the State of Alaska, Department of Labor; and (2) approximately $143,000 in employee benefit contributions owed to the Alaska Hotel and Restaurant Employees Health & Welfare Trust and Pension Trust (Trust Funds).

During the bankruptcy proceedings, the trustee of the Inn arranged and secured the bankruptcy court's approval of the sale of the assets of the Inn, contingent upon approval of the transfer of the liquor license by the Alaska Alcoholic Beverage Control Board (ABC Board). Under Alaska law, the ABC Board has sole authority to issue and transfer liquor licenses; no license may be transferred without ABC Board approval. The Alaska statute requires that approval of a transfer be denied if

(4) The transferor has not paid all debts or taxes arising from the conduct of the business licensed under [the] title [governing alcoholic beverages] unless

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

Alaska Stat. Sec. 04.11.360(4)(A) (1982) (emphasis added).

Relying on section 04.11.360(4)(A), the ABC Board initially denied the trustee's request for a license transfer because no arrangement had been made to pay the creditors of the liquor-related portion of the business. In order to facilitate sale of the assets of the Inn on the favorable terms arranged, the Trust Funds, the State, and the trustee entered into a stipulation under which the trustee promised to hold the proceeds from the sale of the license pending a judicial determination of their proper distribution. This stipulation constituted "security ... satisfactory to the creditors" as required under section 04.11.360(4)(A), permitting the ABC Board to approve transfer of the license to the purchaser. The proceeds are presently held by the trustee, to abide the result of this appeal.

On December 31, 1981, the bankruptcy court ordered that the $20,000 in state tax and contribution claims be paid first from the license sale proceeds, but denied any preferred right to payments from the sale proceeds to other liquor-related creditors of the debtor, including the Trust Funds. The court concluded that, because the license had been created by the State of Alaska, the Alaska statute did not conflict with federal law insofar as the statute required payment of state tax claims prior to transfer of the license.

As to the claims of the Trust Funds, however, the court ruled that the requirement of section 04.11.360(4) "that all general debts of the business be paid before a license may be transferred ... interfere[s] with the Bankruptcy Act's priority distribution scheme." The court concluded that under the Supremacy Clause, the Alaska statute "may not be enforced where the transferor has initiated bankruptcy proceedings." The court ruled that application of the statute "in bankruptcy situations would frustrate the Bankruptcy Act's purpose of providing an equitable distribution of the bankrupt's non-exempt property to all creditors of the same class" and "would also frustrate the purpose of Congress to establish unified federal priorities."

The district court affirmed the bankruptcy court's decision. The Trust Funds timely took this further appeal. The trustee has not cross-appealed from the decision in favor of the State of Alaska.

II

Appellants challenge the judgment below asserting that the Alaska statute does not "establish priorities" in contravention of the general system of priorities pertaining to unsecured claims against the bankrupt estate. Rather, they argue, section 04.11.360(4) simply establishes in effect a lien on one asset of the bankrupt (the liquor license), in favor of those creditors whose claims arose out of the use of the license. This "lien," like any encumbrance, reduces the value of the asset and diminishes what is available for distribution in accordance with the general priority scheme of the federal bankruptcy law. But, liens are not void in bankruptcy simply because they favor secured creditors at the expense of general creditors.

The trustee, in defense of the judgment, argues that the state cannot substitute its distribution scheme for that established under the Bankruptcy Act. According to the trustee, permitting payment of the claims related to the liquor business prior to payment of other claims would unconstitutionally frustrate the "primary" objective of the Bankruptcy Act: to provide for an equitable distribution of assets among all creditors. See, e.g., Hassen v. Jonas, 373 F.2d 880, 881, 884 (9th Cir.1967). She decries the notion of permitting some creditors of the bankrupt (e.g., persons earning wages in the operation of the tavern) to be paid ahead of other creditors (e.g., bedding manufacturers). She relies on In re Leslie, 520 F.2d 761 (9th Cir.1975).

A

As a preliminary matter, we must determine whether the Alaska statute gives the creditors of the licensed business a claim against the liquor license superior to that of other creditors of the bankrupt or whether it seeks simply to regulate license transfers without providing priority to the creditors of the liquor business. If the Alaska statute does not create a priority, the Trust Funds would have no superior right in bankruptcy to payment from the license sale proceeds. We would stop our analysis there.

The creditor of an owner of an Alaska liquor license, unlike the holder of a security interest or a mechanic's lien, cannot enforce the lien by self-help or by execution on the license. See C.Y., Inc. v. Brown, 574 P.2d 1274, 1277 (Alaska 1978). Nevertheless, the creditor's interest in the license is an encumbrance superior to the rights of others. The Alaska statute assures the liquor-related creditor that the sale of the license will not occur until his debt is paid or security satisfactory to him is provided. Other creditors whose debts are not related to the licensed business receive no similar assurances. Under Alaska law, the creditors of the liquor business do have a superior right to payment from the license sale proceeds. ²

Although the lien interest created by Alaska Stat. Sec. 04.11.360(4) differs in form from other more typical creditor-protection devices such as a security interest or a materialman's lien, all serve the same function. Regardless of its label, each encourages the extension of credit by providing that, upon the occurrence of certain conditions, the creditor has a priority right to payment from a particular asset.

B

Ordinarily, an asset subject to a lien such as the license in this case passes into the hands of the trustee on the date of filing subject to the lien. In this case, however, the bankruptcy court concluded that, since the Alaska statute "creates statutory priorities, not statutory liens or encumbrances on property," the license passed into the estate unencumbered except for the taxes due the State of Alaska. This was error.

For its rationale, the bankruptcy court relied heavily on In re Leslie, in which we stated in broad terms that "[c]onflicting priorities established by state law must yield upon the intervention of bankruptcy to superior federal law" and ruled that a California statute regulating the transfer of California liquor licenses "creates statutory priorities, not statutory liens." 520 F.2d 761, 762 (9th Cir.1975). We directed that the proceeds of the sale of a liquor business (the assets of which included a liquor license) be paid according to the distribution scheme for general unsecured claims established by the Bankruptcy Act and not according to the California statutory scheme for allocation of proceeds among creditors when a California liquor business is sold. Id. See also In re Professional Bar Co., 537 F.2d 339, 340 (9th Cir.1976).

Although Leslie and this case seem similar, there are significant differences. In Leslie, at the time the petition in bankruptcy was filed, the liquor license (as well as the related business assets of the debtor) had already been sold and the proceeds placed in an escrow account. See 520 F.2d at 762. Under California law, consent to the sale of the license by the liquor-related creditors is not required. Thus, what the trustee received in Leslie was the cash proceeds from a sale of a liquor business, not a license transferable only on the approval of creditors. Since, at the time of filing, creditors of the debtor were free to attach or levy against the proceeds, see id. at 763, the Leslie court correctly concluded that the trustee took unencumbered...