Brown v. Yousif
| Decision Date | 31 May 1994 |
| Docket Number | A,Docket No. 96311,No. 4,4 |
| Citation | 517 N.W.2d 727,445 Mich. 222 |
| Parties | , 24 UCC Rep.Serv.2d 275 James J. BROWN, Plaintiff-Appellee, v. Fakhri J. YOUSIF, individually, and d/b/a Golden Rule Party Store, Defendant-Appellant, and Julius Prang, Beatrice Prang, Donald J. Prang, Jean Prang, and Prang Enterprises, Inc., Defendants. Calendarpril Term 1994. |
| Court | Michigan Supreme Court |
Stauch, Arabo, Dickow and Ward, P.C. by Mark B. Dickow, Farmington Hills, MI, for plaintiff/appellee.
Norman C. Farhat, Farmington Hills, MI, for defendant/appellant Fakhri J. Yousif and dba Golden Rule Party Store.
In this case, we must decide whether a person can have an enforceable security interest in a liquor license despite a Liquor Control Commission rule prohibiting the creation of a security interest in a liquor license. We hold the LCC rule ineffective with regard to a valid security interest under article 9 of the Uniform Commercial Code and therefore affirm the Court of Appeals decision.
In 1982, plaintiff James J. Brown sold his business, Lean and Tender Butcher Shop, to Prang Enterprise, Incorporated. Included in the sale was a specially designated distributor (SDD) and a specially designated merchant (SDM) liquor license. Prang paid part of the purchase price in cash and financed the remaining portion with a promissory note. However, in order to secure the payment of the note in the event of default, Prang gave plaintiff a security agreement with regard to fixtures, furniture, and equipment, as well as a reassignment of these items, including reassignment of the SDM and SDD liquor licenses, subject to approval by the LCC. Plaintiff then filed a financing statement in the appropriate offices covering "[a]ll the trade fixtures, furniture and equipment, ... including all the after acquired goods and chattels, which replace existing equipment only." However, it did not mention the liquor licenses or a like term, i.e., "general intangibles."
Subsequently, in 1984, Prang entered into negotiations with defendant Fakhri J. Yousif for the sale of the SDD liquor license. During this time, defendant had actual knowledge of the security interest as illustrated by defendant's attempt to obtain plaintiff's consent to the transfer before the sale. 1 Despite plaintiff's refusal to consent to the transfer, defendant purchased the license and transferred it to his store.
In 1986, Prang transferred the remaining license, the SDM, to a David Marriot by way of a promissory note. However, when Marriot filed for bankruptcy in 1987 and defaulted in his payments to Prang, Prang/Marriot stopped making payments to plaintiff. This gave rise to plaintiff's suit against Prang and defendant. With regard to Prang, plaintiff alleged six 2 theories of liability, most of which related to their contract. However, plaintiff eventually settled with Prang after accepting a mediated judgment for $25,000. On the other hand, plaintiff's suit against defendant sought to foreclose on the SDD liquor license pursuant to the security agreement and reassignment clause. In response, defendant moved for summary disposition relying on plaintiff's failure to comply with the statute of frauds, the statute of limitations, and, primarily, the LCC's rule (Rule 19) which stated:
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(3) (emphasis added). 3 ]
Relying on Rule 19, the trial judge granted defendant's motion for summary disposition. However, he rejected defendant's statute of frauds and statute of limitations arguments in addition to stating that the reassignment provision might have been enforceable between plaintiff and Prang, but not between plaintiff and defendant.
On appeal, the Court of Appeals reversed, reasoning that the LCC rule could not circumvent an article 9 security interest, that it held was validly perfected in the liquor license. Moreover, the Court relied on various bankruptcy court decisions in holding that the LCC does not have authority to circumvent the UCC. Alternatively, however, the Court held that plaintiff was entitled to relief by way of an equitable lien on the SDD license, which came directly from the reassignment clause of which defendant had knowledge. 198 Mich.App. 667, 499 N.W.2d 446 (1993).
We granted leave to appeal. 4
Before turning to the enforceability of Rule 19, we find it necessary to clarify plaintiff's right and priority to the liquor license under article 9. We begin by noting that defendant only attacks the perfection of this interest, i.e., plaintiff did not attach to the financing statement the reassignment agreement between plaintiff and Prang and the financing statement itself did not list the license or a general intangible as a collateral. 5 Defendant does not, nor did he below, contend that plaintiff did not have a valid security interest via the security agreement signed by Prang. 6 Nonetheless, we find that the security agreement created an effective security interest in the liquor license pursuant to M.C.L. § 440.9203(1); M.S.A. § 19.9203(1). 7
Having found a valid security interest in the liquor license, we turn to whether plaintiff was required to properly file a financing statement that either listed the license as collateral or listed the term general intangibles in order to enforce this agreement against defendant. While perfection is generally needed to enforce a security agreement covering general intangibles against other secured creditors, it is not needed against transferees who either did not give value or had knowledge 8 of the security interest. 9 See Felsenfeld, Knowledge as a factor in determining priorities under the Uniform Commercial Code, 42 NYULR 246 (1967). M.C.L. § 440.9301(1)(d); M.S.A. § 19.9301(1)(d) provides:
Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of ... [i]n the case of accounts and general intangibles, a person who is not a secured party and who is a transferee to the extent that the person gives value without knowledge of the security interest and before it is perfected. [Emphasis added.] 10
In the instant case, it is undisputed that a liquor license is a general intangible; 11 it certainly is personal property and something of value as evidenced by the sale of the license for $48,342.98. See, e.g., Bundo v. Walled Lake, 395 Mich. 679, 238 N.W.2d 154 (1976); Paramount Finance Co. v. United States, 379 F.2d 543 (C.A.6 1967). Indeed, defense counsel admitted at oral argument that a liquor license is a general intangible. Moreover, defendant is not a secured party, but is a transferee because of the transfer from Prang (transferor) to defendant (transferee). 12 Further, despite the giving of value, defendant had actual knowledge of the security interest as evidenced by his contact with plaintiff before the transfer. 13 Therefore, in accordance with the plain and unambiguous terms of § 9301(1)(d), plaintiff has an enforceable security interest against defendant despite his lack of proper perfection. 14
The question remains, however, whether a valid security interest under article 9 can be enforced in light of the LCC rule prohibiting a lien on a liquor license.
While several bankruptcy courts 15 in Michigan have addressed this issue, it is a question of first impression before this Court. Therefore, we begin by analyzing the LCC's authority which is derived from the Michigan Constitution and statute. Const. 1963, art. 4, § 40 provides in part:
Except as prohibited by this section, (t)he legislature may by law establish a liquor control commission which, subject to statutory limitations, shall exercise complete control of the alcoholic beverage traffic within this state, including retail sales thereof. The legislature may provide for an excise tax on such sales. Neither the legislature nor the commission may authorize the manufacture or sale of alcoholic beverages in any county in which a majority of the electors voting thereon shall prohibit the same.
Moreover, M.C.L. § 436.1(2); M.S.A. § 18.971(2) provides in part:
Except as otherwise provided in this act, the commission shall have the sole right, power, and duty to control the alcoholic beverage traffic and traffic in other alcoholic liquor within this state, including the manufacture, importation, possession, transportation and sale thereof.
Clearly, these provisions give the LCC exclusive authority to control liquor trafficking. However, the question in this case is whether the LCC has the authority to prohibit the creation of a security interest governed by article 9 of the UCC. Despite the LCC's plenary authority to regulate liquor trafficking, we are persuaded that this authority does not allow the LCC to invalidate by administrative rule a portion of another duly enacted law, i.e., the UCC. Indeed, the UCC was intended as a law of general applicability that cannot be impliedly repealed by statute, let alone by administrative rule:
This act being a general act intended as a unified coverage of its subject matter, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided. [M.C.L. § 440.1104; M.S.A. § 19.1104.]
Moreover, the clear language of article 9 indicates that the Legislature intended the law to be of general applicability, covering all forms of security interests in personal property, regardless of its form, except for those provided in M.C.L. § 440.9104; M.S.A. § 19.9104. 16 Indeed, the exceptions to article 9 as set forth in § 9104 do not include a liquor license and do not exclude rules set by the LCC. Moreover, § 9203(2), addressing the enforceability of a security interest and the applicability of other laws, does not specifically...
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