Brown v. Yousif

• Decision Date: 15 March 1993
• Docket Number: Docket No. 135903
• Citation: 499 N.W.2d 446,198 Mich.App. 667
• Parties: , 20 UCC Rep.Serv.2d 1074 James J. BROWN, Plaintiff-Appellant, v. Fakhri J. YOUSIF, d/b/a Golden Rule Party Store, Defendant-Appellee, and Donald J. Prang, Jean Prang, Julius Prang, Beatrice Prang, and Prang Enterprises, Incorporated, a former Michigan corporation, Defendants.
• Court: Court of Appeal of Michigan — District of US

Page 446

499 N.W.2d 446

198 Mich.App. 667, 20 UCC Rep.Serv.2d 1074

James J. BROWN, Plaintiff-Appellant, v. Fakhri J. YOUSIF, d/b/a Golden Rule Party Store, Defendant-Appellee and Donald J. Prang, Jean Prang, Julius Prang, Beatrice Prang and Prang Enterprises, Incorporated, a former Michigan corporation, Defendants.

Docket No. 135903.

Court of Appeals of Michigan.

Submitted Dec. 8, 1992, at Detroit.

Decided March 15, 1993, at 9:40 a.m.

Released for Publication May 24, 1993.

Stauch, Arabo & Dickow, P.C. by Mark B. Dickow, Southfield, for plaintiff-appellant.

Norman C. Farhat & Associates, P.C. by Lester A. Owczarski, Farmington Hills, for defendant-appellee.

Before SHEPHERD, P.J., and BRENNAN and BORRELLO, ^* JJ.

BORRELLO, Judge.

Plaintiff, James J. Brown, appeals as of right from a November 21, 1990, order of summary disposition for defendant Fakhri J. Yousif, granted pursuant to MCR 2.116(C)(10). ¹ We reverse the trial court's decision and remand for additional proceedings.

On December 6, 1982, plaintiff, James J. Brown, sold his business, the Lean and Tender Butcher Shop, Incorporated (Lean and Tender), to Prang Enterprises, Incorporated (Prang). The sale included a specially designated distributor (SDD) and a specially designated merchant (SDM) liquor license. Prang gave Brown a promissory note for a portion of the price, which was to be paid off in monthly installments. The promissory note provided for a reassignment of the liquor licenses to Lean and Tender in the event of default. Prang also issued a security agreement and a reassignment agreement as security for Lean and Tender in the event of default. Lean and Tender filed financing statements for both agreements with the county and the state, perfecting its interest on December 8, 1982.

On November 15, 1984, Prang sold the SDD liquor license to defendant Fakhri Yousif. Yousif had contacted plaintiff a number of times in order to obtain his consent to the sale, but went ahead with the purchase without plaintiff's consent. The license was transferred to Yousif's store.

In June 1986, Prang sold the SDM license to another individual, David Marriot, whose bankruptcy in 1987 triggered a default in the payments to plaintiff.

In October 1988, plaintiff filed suit against defendants. The only count relevant here involved foreclosure of a secured asset, the SDD liquor license, brought against Yousif.

On November 21, 1990, the trial court granted Yousif's motion for summary disposition, finding that 1979 AC, R 436.1119 (Rule 19), prevented plaintiff from holding a security interest in the liquor license. The trial court further found that the reassignment agreement did not prevent Yousif from purchasing the license, because the agreement was only binding between Lean and Tender and Prang, and there was no default in payments at the time of the sale to Yousif.

On appeal, the trial court's grant of summary disposition is reviewed de novo, because this Court must review the record to determine whether Yousif was entitled to judgment as a matter of law. Adkins v. Thomas Solvent Co., 440 Mich. 293, 302, 487 N.W.2d 715 (1992).

Plaintiff argues on appeal that Michigan law allows a security interest in a liquor license. Plaintiff points out that the Liquor Control Commission (LCC) has recently amended Rule 19 so that it no longer prohibits the creation of a security interest in a liquor license. Plaintiff argues that the LCC has tacitly agreed through that amendment that Article 9 of the Uniform Commercial Code, M.C.L. Sec. 440.9101 et seq.; M.S.A. Sec. 19.9101 et seq., governs the creation of security interests in liquor licenses.

We agree with plaintiff's position, and hold that Yousif's knowledge of the security interest and reassignment agreement defeats his claim to the SDD liquor license.

Before 1987, Rule 19 prohibited the creation of a security interest in a liquor license, as follows:

R 436.1119 Retail license; agreements or contracts.

* * * * * *

(3) A security agreement between a buyer and a seller of a licensed retail business, or between a debtor and a secured party, shall not include the license or alcoholic liquor. [1979 AC, R 436.1119.]

In 1987, Rule 19 was amended to read as follows:

R 436.1119 Retail license; agreements.

Rule 19. (1) An agreement to buy and sell a business licensed to sell alcoholic liquor at retail, wherein there is not a total cash transaction, and which includes both the personal property and the real estate, shall include a separate statement listing the personal property and the real estate and the terms and price of each.

(2) A retail licensee shall not include alcoholic liquor in a security agreement or in a financing statement filed pursuant to Act No. 174 of the Public Acts of 1962, as amended, being Sec. 440.1101 et seq. of the Michigan Compiled Laws, and known as the uniform commercial code. [1987 AACS, R 436.1119.]

Thus, the current version of Rule 19 no longer prohibits a liquor license from being the subject of a security interest.

Although we will not apply the new version of Rule 19 retroactively, ² we do believe that the revision may signal a change of interpretation by the LCC. There have been a number of federal bankruptcy cases that have challenged the authority of the LCC to remove liquor licenses from the orbit of the Uniform Commercial Code. See, e.g., In re Falbe, 83 B.R. 436, 439 (Bankr.E.D.Mich., 1988); In re Pike, 62 B.R. 765, 767-769 (W.D.Mich., 1986). The district court in Pike even went so far as to note:

To the extent that Rule 19 suspends the law in Michigan on perfection of security interests it must be held invalid. [Id., at 768-769.]

The district court in the case of In re Gullifor, 47 B.R. 450 (E.D.Mich., 1985) took a different approach, finding that although Rule 19 prevented the creation of a security interest in a liquor license, the holder of a reassignment agreement had an "equitable lien" on the license. Id. at 452-453. This approach was criticized in Pike, supra at 769-770, n. 2, for being too circuitous. ³

This Court in Stegenga v. Dep't of Treasury, 179 Mich.App. 307, 311, 445 N.W.2d 495 (1989), upheld the validity of former Rule 19, with some reservations, noting that the rule had recently been changed. Stegenga involved a question concerning the priority between a tax lien and an interest in a reassignment agreement. To enforce Rule 19 would have prevented the private party from creating a security interest, and would have given priority to the tax lien. This Court held that although Rule 19 was valid generally, the Department of Treasury would not be allowed to benefit from the LCC's promulgation of that rule because both divisions were part of the executive branch of the government of the State of Michigan. We disagree with that panel concerning the validity of Rule 19.

In an attempt to remove some of the uncertainty in this area of the law, we hold that the LCC did not have the authority to remove liquor licenses from the reach of the Uniform Commercial Code when it promulgated Rule 19 in 1979. Therefore, plaintiff's security interest in the liquor license was valid and enforceable against Yousif. Further, under the reassignment agreement, plaintiff also held an equitable lien superior to any interest of Yousif. Yousif's knowledge of the reassignment agreement defeats his claim to the liquor license.

In reaching our conclusion, we follow the reasoning of those courts that have held liquor licenses to be within the reach of the Uniform Commercial Code. That is, Article 9 applies to any transaction that is intended to create a security interest in personal property. M.C.L. Sec. 440.9102(1)(a); M.S.A. Sec. 19.9102(1)(a). Personal property includes general intangibles. Pike, supra at 767; Paramount Finance Co. v. United States, 379 F.2d 543, 544 (CA 6, 1967). A liquor license is a property interest, Bundo v. Walled Lake, 395 Mich. 679, 238 N.W.2d 154 (1976), that is subject to the UCC as a general intangible. Pike, supra at 767; Paramount, supra at 544; Falbe, supra at 439; Underground Flint, Inc. v. Viro, Inc., 80 B.R. 87, 89 (E.D.Mich., 1982). Thus, the creation and perfection of a security interest in a liquor license is governed by the UCC. Falbe, supra; Pike, supra.

Although the LCC has been given the authority to control the traffic of alcoholic beverages in Michigan, M.C.L. Sec. 436.1; M.S.A. Sec. 18.971, it was not given the...