In re AJ Bayless Markets, Inc.
| Decision Date | 20 November 1989 |
| Docket Number | Bankruptcy No. 4-88-1515 PHX RGM. |
| Citation | 108 BR 721 |
| Parties | In re A.J. BAYLESS MARKETS, INC., Debtor. CITY OF PHOENIX, Plaintiff, v. A.J. BAYLESS MARKETS, INC., Defendant. |
| Court | U.S. Bankruptcy Court — District of Arizona |
James H. Hays, Office of the City Atty. and Roderick G. McDougall, City Atty., Phoenix, Ariz., for City of Phoenix.
James J. Belanger, Lewis & Roca, Phoenix, Ariz., for debtor.
Sally S. Neely, Sidley & Austin, Los Angeles, Cal., for Citicorp North America and Citibank N.A.
Michael W. Carmel, Phoenix, Ariz., for unsecured creditors committee.
Virginia O'Malley, Phoenix, Ariz., for Citibank.
AMENDED MEMORANDUM OF DECISION
The City of Phoenix, Arizona (the "City") seeks payment of $20,791.78 (the "Sequestered Funds") in proceeds from the sale of Debtor's liquor licenses (the "Liquor Licenses") in satisfaction of pre-petition sales tax (the "sales tax debt"). For the reasons set forth below, the Court finds for the City and orders the Debtor to turn over the Sequestered Funds to the City.
Prior to the commencement of this chapter 11 case on February 29, 1988, the Debtor operated food markets in Phoenix, Arizona. The Debtor sold liquor at its food markets under the authority of liquor licenses issued by the State of Arizona (the "State"). The Debtor incurred sales tax payable to the City from the sale of food, liquor, and other items at its food markets. On the petition date, Bayless owed the City a total of $20,791.78 in sales tax which was then less than 90 days past due.
On November 21, 1988, at a time when the sales tax debt was more than 90 days past due, the City notified the Department of Liquor Licenses and Control (the "Department") of the delinquency. As permitted by state law but without obtaining relief from the automatic stay, the Department filed administrative complaints to revoke the Liquor Licenses.1 Thereafter, the Department dismissed four of the complaints, held the fifth in abeyance, and sought relief from the automatic stay. At about the same time, the Debtor sought leave to sell the Liquor Licenses. The City opposed the proposed sale unless the sales tax debt was paid in full. The City represented that the Department exercised its right under A.R.S. § 4-210 to refuse to transfer the Liquor Licenses unless the sales tax debt were paid and that that right was enforceable in bankruptcy.2 The Bankruptcy Judge in charge of the case, the Honorable Robert Mooreman, took the City's motion for relief under submission and authorized the sale free and clear of the City's claims over the City's opposition, ordering the City's claims transferred to the Sequestered Funds.
Further hearing was held on the City's motion and the matter was submitted for decision to the undersigned Bankruptcy Judge, sitting for Judge Mooreman. This Court must now determine whether the City's claim to the Sequestered Funds is superior to the claim of the estate or whether the Sequestered Funds should be released to the estate and the City's claim relegated to the status of an unsecured priority claim. The Debtor's secured creditors, who claim a security interest in the Sequestered Funds, join with the Debtor in opposing the City's claim.
The City contends that it has a property interest in the Liquor Licenses under A.R.S. § 4-210 and that that property interest entitles it to payment of the Sequestered Funds in preference to the bankruptcy estate. The Debtor raises several arguments in opposition to this contention. Several of these arguments, the Court views as subsidiary: (1) that a post-petition borrowing order gave the post-petition lender an interest in the Liquor Licenses senior to any claim by the City under state law, (2) that the City's claim could only be enforced with respect to taxes arising from the sale of liquor, and (3) that only claims by the governmental agency that issues the license — in this instance, the State — can take precedence over the estate's claim to the Sequestered Funds. The Debtor's principal arguments are: (1) that Arizona law does not give the City a property interest in the Liquor Licenses, (2) that, if Arizona law does give the City a property interest in the Liquor Licenses, its interest is a statutory lien avoidable under 11 U.S.C. § 545(2), and (3) that, even if Arizona law does give the City a property interest in the Liquor Licenses which is not avoidable under 11 U.S.C. § 545(2), Arizona law is in conflict with and preempted by Section 507 of the Bankruptcy Code. The Court will address the Debtor's subsidiary arguments briefly before focussing on the Debtor's more difficult principal arguments.
The Debtor conceded at oral argument that its first subsidiary theory — that the City's interest in the Liquor Licenses was subordinated to the post-petition lender's security interest pursuant to a Court-approved borrowing order — was untenable. The Court thinks that this concession was wise.
The Debtor's second subsidiary argument should also have been withdrawn. The Debtor argues that the law in the Ninth Circuit is that the only condition on the transfer of a liquor license that survives in bankruptcy is the payment of claims arising directly from the sale of liquor. This argument is based on certain language found in In re Anchorage International Inn, Inc., 718 F.2d 1446 (9th Cir. 1983). In Anchorage, the Court found that the statute in question limited the claims to be paid to those arising from the licensed business and remanded the case to the lower court for a determination of the amount of those claims. In re Anchorage International Inn, Inc., 718 F.2d at 1452. Clearly, the Court in Anchorage was construing a limitation in the Alaska statute, not announcing a principle of federal law. Furthermore, the limitation in question was to claims arising from the licensed business, not claims directly related to the sale of liquor. In the instant case, the licensed businesses were food marts with liquor concessions. Thus, the entire sales tax debt arose from the licensed businesses.
Although slightly more substantial, the Debtor's third argument does not withstand scrutiny. The Debtor contends that, to survive in bankruptcy, the claims to be paid as a condition of the transfer must be owed to the same governmental agency that issued the license. For this argument, the Debtor relies on dicta in Max Sobel Wholesale Liquors v. Nolden (In re Leslie), 520 F.2d 761, 763 (9th Cir.1975). In In re Leslie, the Court refused to enforce in bankruptcy a California statute which gave certain private creditors a priority in payment from the sale proceeds of a liquor license and related business assets. The Court distinguished United States v. California, 281 F.2d 726 (9th Cir.1960), in which the transfer of a license was conditioned on payment of claims to the State, by noting, among other things, that the condition in the statute involved in its case did not seek to benefit the State, but rather a private group of creditors. In re Leslie, supra at 763.
The Debtor's reliance on In re Leslie is misplaced. First, even if the controlling law were that restrictions on the transfer of a liquor license are enforceable in bankruptcy only to the extent that they benefit the body issuing the license, that requirement would be satisfied under the circumstances of this case. The City is a political subdivision of the State. It cannot seriously be argued that the State is not benefitted when its political subdivision receives payment of its taxes. Moreover, the law in the Ninth Circuit is not so circumscribed. In Anchorage International Inn, supra, the Court expressly upheld a state law conditioning the transfer of a liquor license on the payment of private claims.
The Debtor contends that the Court in Anchorage International Inn did not pay proper heed to the distinction between public and private claims. This Court does not agree. The Court in Anchorage International Inn properly noted the principal distinction between the Alaska statute and the California statute denied enforcement in Leslie: that the latter statute permitted the sale of the license, even though the claims in question could not be paid in full, and then purported to establish a priority for a certain class of claims with respect to the sale proceeds. By contrast, like the Arizona statute addressed here, the Alaska statute upheld in Anchorage International Inn prohibited the transfer of the license unless the claims specified could be paid in full. Anchorage International Inn, supra at 1450. A Court might reasonably view the California statute addressed in In re Leslie as establishing a priority scheme in conflict with the Bankruptcy Code while viewing the Alaska statute as merely defining the nature of the licensee's property interest in the license.
The City contends that A.R.S. § 4-210(D) gives it a property interest in the Liquor Licenses which is enforceable in bankruptcy. The Debtor contends that A.R.S. § 4-210(D) does not give the City a property interest in the Liquor Licenses or that, if it does, that interest is a statutory lien avoidable under 11 U.S.C. § 545(2) under the circumstances of this case. Finally, the Debtor contends that to enforce A.R.S. § 4-210(D) in a bankruptcy case would violate the Supremacy Clause by permitting the State to establish a priority scheme inconsistent with that established by the Bankruptcy Code.
Existing Law. The Debtor acknowledges that, unless Arizona law or the facts of this case provide a basis for distinction, there is clear authority in the Ninth Circuit that such restrictions on the transfer of liquor licenses are enforceable in bankruptcy and do not violate the Supremacy Clause. Cf., In re Farmers Markets, Inc., 792 F.2d 1400 (9th Cir.1986) and In re Anchorage International Inn, Inc., supra, holding such restrictions to be enforceable...
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