In re Hoffman

• Decision Date: 22 October 1986
• Docket Number: Bankruptcy No. 8200631,Civ. A. No. 85-0094-S.
• Citation: 65 BR 985
• Parties: In re Robert HOFFMAN, d/b/a "Hoffman's Meat & Convenience Store," d/b/a "Hoffman's Steak House," Debtor. Appeal of R. Gary CLARK, Tax Administrator, State of Rhode Island.
• Court: U.S. District Court — District of Rhode Island

65 B.R. 985 (1986)

In re Robert HOFFMAN, d/b/a "Hoffman's Meat & Convenience Store," d/b/a "Hoffman's Steak House," Debtor Appeal of R. Gary CLARK, Tax Administrator, State of Rhode Island.

Bankruptcy No. 8200631, Civ. A. No. 85-0094-S.

United States District Court, D. Rhode Island.

October 22, 1986.

Arlene Violet, Atty. Gen., Marcia McGair Ippolito, William P. Tocco, III, Counsel, R.I. Div. of Taxation, Providence, R.I., for appellant R. Gary Clark, Tax Administrator.

Louis Geremia, Quinn, Cuzzone, Geremia & Pennacchia, Providence, R.I., for appellee debtor.

John Boyajian, Andrew S. Richardson, Boyajian, Coleman & Harrington, Providence, R.I., for appellee trustee in bankruptcy.

OPINION

SELYA, District Judge.

This appeal arises out of a Chapter 13 bankruptcy petition filed by Robert L. Hoffman on July 28, 1982, a matter subsequently converted to a case under Chapter 7 of Title 11 in 1984. The debtor, a sole proprietor doing business under several trade names including that of "Hoffman's Steak House" (Hoffman's), listed among his assets a Class B-V liquor license issued in his name by the Board of Licensing Commissioners for the City of Newport.

In December of 1984, the trustee in bankruptcy (trustee) filed a notice of intended sale pursuant to 11 U.S.C. § 363(b), in which the trustee (on behalf of the estate) forewarned all concerned that he proposed to sell the liquor license to a third party, Island Bridge Corporation, for a substantial sum. The notice further stated that such "sale will be free and clear of liens and encumbrances of record."

The Rhode Island Division of Taxation (Division), by its tax administrator, objected to the anticipated sale. The Division contended that it was owed $553.66 in state taxes by the debtor/licensee, and that state law required proof of payment of this debt prior to any valid transfer of the license. Following briefing and argument, the United States Bankruptcy Court for the District of Rhode Island (Votolato, J.) issued a written order on January 17, 1985 to the effect that the trustee could sell the subject liquor license free and clear of any outstanding tax obligations owing to the state. 53 B.R. 874. The instant appeal, which invoked 28 U.S.C. § 158(a) as its jurisdictional wellspring, ensued.¹

Refined to its barest essence, the issue that confronts this court is whether the state can condition the transferability of the debtor's liquor license on the payment of delinquent taxes. Inasmuch as none of the relevant facts are in dispute, it falls to this court to resolve this singular question as a matter of first impression in this district. Because purely legal issues are involved, no special deference is owed to the decision below. In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985); In re Roco Corporation, 64 B.R. 499, 500 (D.R.I.1986).

I.

We begin with an assay of the pertinent federal statutes. 11 U.S.C. § 541(a)(1) provides in part that the "estate is comprised of . . . all legal or equitable interests of the debtor in property as of the commencement of the case." Moreover, § 541(c)(1)(A) indicates that "an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law — (A) that restricts or conditions transfer of such interest by the debtor. . . ." Despite appellant's contentions to the contrary, it is clear beyond cavil that the debtor's liquor license, whatever may be its dimensions, see text post, constitutes "property" within the Bankruptcy Code's definition thereof. See In re Gencarelli, 14 B.R. 751, 752 (Bankr. D.R.I.1981). See also In re Aegean Fare, Inc., 35 B.R. 923, 927 (Bankr.D.Mass.1983); Harris v. Lamping, 12 B.R. 38, 40 (Bankr. E.D.Wis.1981); Matto's, Inc. v. Olde Colonie Place, 9 B.R. 89, 92 (Bankr.E.D.Mich. 1981). Note, too, that R.I.Gen.Laws § 3-5-19 provides that "no creditor shall be allowed to object to transfer of a liquor license by a receiver, trustee in bankruptcy, assignee for the benefit of creditors, executor, administrator, guardian or by any public officer under judicial process." At the least, this language unambiguously recognizes as a matter of state law the authority of a trustee in bankruptcy to transfer a liquor license as property of the estate.

Fundamentally, then, this appeal calls into question the relationship between the Bankruptcy Code's provisions regarding the disposition of estate property and a Rhode Island statute disallowing the transfer of a liquor license until the holder pays any state taxes which may be owing thereon. In order to discern the proper juxtaposition of these laws, the logical starting point is the state statute itself, viz., R.I. Gen.Laws § 3-7-24, which provides as follows:

Every licensee under this chapter, upon filing an application for renewal or transfer of such license, shall submit with such application a certificate executed by the tax administrator, or some employee designated by the tax administrator, that taxes due the state have been paid. For the purposes of this section, taxes due the state shall include contributions due including taxes, interest and penalties due to the Department of Employment Security pursuant to the Employment Security Act and Temporary Disability Insurance Act. No such license shall be renewed or transferred without such certificate.

The bankruptcy court ruled that, by virtue of the Supremacy Clause of the United States Constitution, U.S. Const. Art. VI, cl. 2,² various provisions of the Bankruptcy Code — namely, 11 U.S.C. §§ 363(f), 362(a)(1), 541(a)(1), and 525(a) — preempt and supersede, in the bankruptcy milieu, the state tax statute. Accordingly, the court found the Rhode Island statute to violate the automatic stay provisions of federal bankruptcy law, 11 U.S. § 362, as well as the broader policies of "discharge" and "fresh start" underlying the Code. The tax administrator's effort to deploy this statutory roadblock to the trustee's sale — by conditioning transfer of the license on payment of prepetition taxes — was held to be an impermissible derogation of the Bankruptcy Code's priority provisions.

Contracting the lens of inquiry further, the conflict can be brought into sharper focus. 11 U.S.C. § 362(a)(1) directs that:

a petition filed . . . operates as a stay, applicable to all entities, of — (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title. . . .

The shelter of the automatic stay is further extended by 11 U.S.C § 362(a)(6) to cover "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title." The automatic stay is, of course, the most basic protection afforded to a debtor by the Code, and its scope is deservedly broad. It applies to virtually any action — be it formal or informal — that could be taken against either the debtor or the property of the estate. 2 Collier on Bankruptcy ¶ 362.04 at 362-27 (15th ed. 1983). Therefore, it can hardly be gainsaid that the tax administrator's attempt to require the debtor to pay delinquent, prepetition taxes falls within the purview of the automatic stay.

II.

The appellant argues, however, that 11 U.S.C. § 362(b)(4) exempts the Division's actions from the automatic stay. That section provides that "the filing of a petition . . . does not operate as a stay — (4) under subsection (a)(1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power." But, not every maneuver by every arm of every sovereign qualifies for the balm of § 362(b)(4). In order to fall within the exception, the primary purpose of the state proceeding must be the conservation of the public safety, health, or welfare. The exemption will not lie if the objective of a given state law is the solvency of the public fisc or, put another way, the protection of a state's pecuniary interest in property. Missouri v. United States Bankr. Court, 647 F.2d 768, 775-76 (8th Cir.1981), cert. denied, 454 U.S. 1162, 102 S.Ct. 1035, 71 L.Ed. 2d 318 (1982); In re Thomassen, 15 B.R. 907, 909 (Bankr. 9th Cir.1981); In re Aegean Fare, Inc., supra, at 927-28; In re William Tell II, Inc., 38 B.R. 327, 329-30 (N.D.Ill.1983); In re Gencarelli, supra, at 752-53. See generally Annot., 58 A.L.R.Fed. 282 (1982).

The statute's legislative history tells us that § 362(b)(4) holds a governmental proceeding harmless from the automatic stay when — and only when — the action is taken against the debtor and/or the property of the estate "to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws. . . ." H.R.Rep. 595, 95th Cong., 1st Sess. 342-43 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 51-52 (1978), reprinted in 1978 U.S.Code Cong. and Ad. News 5787, 5837, 5838, 5963, 6299.

The distinction drawn between purposes "pecuniary" and those "police or regulatory" in nature finds its lodestar in Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971).³ In Perez, a husband and wife, both bankrupt, were denied certain driving privileges under an Arizona law which required them to satisfy a prepetition traffic accident judgment as a precondition to licensure. To the extent that this state statute had the effect of frustrating the discharge granted the debtors under the federal bankruptcy laws, the Perez Court held it to be at odds with the Supremacy Clause of the United States Constitution. The Court reiterated that, when assessing the validity of a state statute in light of a federal law touching upon the same subject matter, the judicial function is to determine whether the challenged (state) e...