Business Title Corp. v. Division of Labor Law Enforcement

• Decision Date: 02 September 1976
• Citation: 17 Cal.3d 878,132 Cal.Rptr. 454
• Court: California Supreme Court
• Parties: , 553 P.2d 614, 38 A.F.T.R.2d 76-5734, 76-2 USTC P 9644 BUSINESS TITLE CORPORATION, Plaintiff, v. DIVISION OF LABOR LAW ENFORCEMENT et al., Defendants and Appellants, United States of America, Defendant and Respondent. L.A. 30558. In Bank

Page 454

132 Cal.Rptr. 454

17 Cal.3d 878, 553 P.2d 614, 38 A.F.T.R.2d 76-5734,

76-2 USTC P 9644

BUSINESS TITLE CORPORATION, Plaintiff, v. DIVISION OF LABOR LAW ENFORCEMENT et al., Defendants and Appellants United States of America, Defendant and Respondent.

L.A. 30558.

Supreme Court of California,

In Bank.

Sept. 2, 1976.

Lipsig, Rosenfield, Temkin & Leff, Robert G. Leff, Beverly Hills, Denison & Kightlinger, John P. Kightlinger, Los Angeles, Evelle J. Younger, Atty. Gen., Thomas Scheerer and Martin Milas, Deputy Attys. Gen., Lazar, Friedman, Stahl & Jabin, Los Angeles, for defendants and appellants.

Edward H. Levi, Atty. Gen., Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Crombie J. D. Garrett, Stephen M. Gelber, Washington, D.C., William D. Keller, U.S. Atty., Los Angeles, and Charles H. Magnuson, Asst. U.S. Atty., Washington, D.C., for defendant and respondent.

Coulter, Vernoff & Brewer and George P. Coulter, Pasadena, as amici curiae.

SULLIVAN, Justice.

In this interpleader action brought by an escrow holder to resolve conflicting claims to proceeds of the sale of a liquor license, various wage claimant creditors of the seller appeal from the judgment entered in favor of defendant United States of America for unpaid taxes and penalties.

On September 24, 1971, the District Director of Internal Revenue made an assessment against Mating Game, Inc. for unpaid federal withholding and Federal Insurance Contributions Act (F.I.C.A.) taxes together with penalties and interest in the total amount of $3,170.88. Notice and demand for payment of this assessment was made at the same time.

On October 6, 1971, Mating Game, Inc. entered into a written escrow agreement with 12319 Corporation to sell to the latter for the sum of $10,500 its on sale general liquor license issued for certain premises in Los Angeles. Plaintiff in interpleader, Business Title Corporation (Business Title) acted as escrow holder under this agreement. The full purchase price was deposited in the escrow by the buyer.

During the course of the escrow various creditors of Mating Game, Inc. notified plaintiff escrow holder of unpaid claims. On October 21, 1971, the Internal Revenue Service filed with the Recorder of Los Angeles County notice of its lien for the assessed taxes and on January 5, 1972. served on the escrow holder notice of levy pursuant to this perfected lien for $3,170.88 in previously assessed taxes, penalties and interest. Defendant Division of Labor Law Enforcement, State of California, presented a wage claim in the sum of $1,418.85; defendant Los Angeles Hotel-Restaurant Employer Union Welfare Fund presented a wage claim for $1,650; and defendants William H. Temkin, Jr., Sanford Orling and Peter Rooney presented similar claims for $3,952.19, $575, and $575 respectively.

Business Title as escrow holder determined that the $10,500 was insufficient to satisfy all of the above claims and the amount due under the federal tax lien. Pursuant to section 24049 of the Business and Professions Code ¹ and in order to make actual transfer of the liquor license possible, the escrow holder made payments from this fund to the State Board of Equalization and the Department of Human Resources Development to satisfy outstanding tax liabilities of the State of California. On May 24, 1972, Business Title received notice from the Department of Alcoholic Beverage Control (Department) that the liquor license had been transferred. Accordingly pursuant to section 24074.1 ² it advised each creditor who had filed a claim against the escrow that there were insufficient assets in the escrow to pay all creditors in full.

On July 25, 1972, Business Title brought the instant action in interpleader asking the court to require the claimant defendants to litigate among themselves their respective rights to the funds in escrow since the total of the claims filed exceeded the sum held in escrow. Each of the defendants answered. Plaintiff escrow holder was ordered to deposit with the court the sum of $7,699.04, the amount remaining in its hands after payment of the abovementioned state taxes and of the attorney's fees and costs incurred by it and allowed by the court. Upon making such deposit Business Title was discharged from the action. Defendant Mating Game was also dismissed from the action pursuant to a default entered on May 16, 1973. Defendant United States of America (United States), which pursuant to stipulation had been substituted as defendant in place of the originally named United States Department of the Treasury--Internal Revenue Service, moved for partial summary judgment and defendants Temkin, Orling and Rooney also moved for summary judgment.

The trial court filed findings of fact and conclusions of law ³ in which it found the facts to be substantially as we have set them forth. From these findings it concluded that the title to the interpleaded sum of $7,699.04 was in the defaulting defendant Mating Game, that the supremacy clause of the United States Constitution (art. VI, cl. 2) ⁴ made the priorities accorded defendant United States under sections 6321 and 6323(a) of title 26, United States Code, control over any priority scheme contained in section 24074 of the Business and Professions Code and that the claim of defendant United States constituted a priority lien claim for unpaid taxes, interest and penalties upon the sum interpleaded and deposited in court and was entitled to be paid from the fund before the claims of the other defendants. Judgment was entered accordingly. ⁵ These appeals by the several defendants (except defendant United States) followed.

Section 24074 ⁶ prescribes certain procedures and requirements in connection with the transfer of a liquor license: The establishment of an escrow, the deposit of the purchase price therein, and the payment from the purchase price of all bona fide creditors who file claims with the escrow holder. If the purchase price or consideration is not sufficient to pay the claims in full, then the escrow holder is to distribute the consideration, so far as is here material, as follows: First to the payment of claims for wages, salary, or fringe benefits of employees of the seller; second to the payment of claims of secured creditors; and 'Third, to the United States for claims based on income or withholding taxes.' Thus, the statutory language would appear to give priority to defendants' wage and salary claims over defendant United States' claim for unpaid taxes.

However, this conferral of priority is illusory and dissolves before the paramount commands of federal law. It is now well settled and indeed beyond argument that federal law rather than state law determines the priority of competing liens where one of them is a tax lien asserted by the United States. ⁷ (Aquilino v. United States (1960) 363 U.S. 509, 513--514, 80 S.Ct. 1277, 4 L.Ed.2d 1365; United States v. Acri (1955) 348 U.S. 211, 213, 75 S.Ct. 239, 99 L.Ed. 264; United States v. Security Trust & Sav. B. (1940) 340 U.S. 47, 49--50, 71 S.Ct. 111, 95 L.Ed. 53; United States v. Trigg (8th Cir. 1972) 465 F.2d 1264, 1269.) In Acri the high court observed that the 'relative priority of the lien of the United States for unpaid taxes is . . . always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this Court.' (348 U.S. at p. 213, 75 S.Ct. at p. 241.) In the case at bench, as the trial court properly determined, defendant United States acquired pursuant to 26 United States Code section 6321, ⁸ a lien 'in favor of the United States upon all property and rights to property, whether real or personal, belonging to . . .' Mating Game. This lien arose on September 24, 1971, the date of the assessment (26 U.S.C. § 6322) and was perfected by filing notice of lien with the Recorder of Los Angeles County. (26 U.S.C. § 6323(f).) Under 26 United States Code section 6323 ⁹ the lien was superior to all unperfected claims and all later perfected claims, such as those of defendants.

On the other hand, state law, not federal law, determines whether the tax payer has 'property and rights to property' (26 U.S.C. § 6321; see fn. 8, Ante) to which the federal lien can attach. (Aquilino v. United States, supra, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365.) Therefore, '(t)he threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.' . . . However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property. " (Aquilino, supra, at pp. 512--514, 80 S.Ct. at p. 1280; United States v. Bess (1958) 357 U.S. 51, 55, 78 S.Ct. 1054, 2 L.Ed.2d 1135; Avco Delta Corporation Canada Ltd. v. United States (7th Cir. 1973) 484 F.2d 692, 697.)

Thus, the question presented to us in the instant case narrows to whether Mating Game according to California law had 'property' or 'rights to property' in the funds held by the escrow agent to which the lien of defendant United States could attach. Defendant wage claimants contend that Mating Game was not entitled to the proceeds of the sale held in escrow until the liquor license was transferred, that the liquor license could not be transferred until all the bona fide creditors were paid in accordance with section 24074...