In re Kramer

• Decision Date: 02 May 1986
• Docket Number: Bankruptcy No. 85-05106K,Adv. No. 86-0009K.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
• Parties: In re Kerry KRAMER, Debtor. Edwin T. JOHNSON & David R. Johnson, Plaintiffs, v. Kerry KRAMER, Debtor and Stephen Raslavich, Esquire, Trustee, Defendants.

71 B.R. 2 (1986)

In re Kerry KRAMER, Debtor.

Edwin T. JOHNSON & David R. Johnson, Plaintiffs, v. Kerry KRAMER, Debtor and Stephen Raslavich, Esquire, Trustee, Defendants.

Bankruptcy No. 85-05106K, Adv. No. 86-0009K.

United States Bankruptcy Court, E.D. Pennsylvania.

May 2, 1986.

Steven Raslavich, Philadelphia, Pa., trustee.

Michael H. Kaliner, Philadelphia, Pa., for defendant/trustee.

Robert G. Rosen, Lansdale, Pa., for defendant/debtor.

Steven H. Sailer, Newtown, Pa., for plaintiff.

OPINION

WILLIAM A. KING, Jr., Bankruptcy Judge.

The plaintiffs in this adversary action contend that they are the owners of a Pennsylvania liquor license as a result of a default by the debtor under a pre-petition agreement between the plaintiffs, as sellers, and the debtor and a third party, as purchasers of the license. Plaintiffs seek relief from the automatic stay and a declaratory judgment in order to proceed with an application for the transfer of the license back to them. The debtor and the Trustee oppose the requested relief.

For the reasons stated herein, we conclude that the plaintiffs are not entitled to modification of the stay or a declaratory judgment.

The relevant facts are as follows:¹

Prior to September 14, 1984, Edwin and David Johnsons ("the Johnsons") were the owners of a liquor license. On September 14, 1984, the Johnsons entered into an agreement ("the License Agreement") for the sale of the license to Kerry Kramer ("Kramer" or "debtor") and Erwin Nase ("Nase"). The purchase price was $30,000.00 to be paid as follows:

(1) $1,500.00 when the transfer of the license was approved by the Pennsylvania Liquor Control Board ("PLCB");

(2) $3,500.00 thirty (30) days after the transfer; and

(3) $25,000.00 to be paid in installments over a thirty-month period from the effective date of the transfer, as evidenced by a non-interest bearing note in the same amount. The transfer of the license was approved by the PLCB in October, 1984. Kramer and Nase were named as licensees on the license.

The parties also entered into a Lease Agreement with regard to real estate located in Perkasie, Bucks County, Pennsylvania. The Lease Agreement provided for rental payments of $2,500.00 per month by the lessees, Kramer and Nase; however, Kramer and Nase were to pay $1,200.00 per month for the first six (6) months, plus utilities and taxes.

The License Agreement provided that upon default under either the License or Lease Agreement, the license would be reconveyed to the Johnsons. On September 14, 1984, Kramer and Nase signed an irrevocable Power of Attorney that allowed the Johnsons to execute whatever documents were necessary to have the license conveyed back to them in the event that Kramer and Nase defaulted under the provisions of the License Agreement and/or the Lease Agreement. Kramer and Nase borrowed an additional $5,000.00 from the Johnsons in order to purchase liquor and to pay for insurance on the property. Subsequently, one (1) payment in the amount of $5,000.00 was made to the Johnsons in April, 1985. The $5,000.00 payment was applied as follows:

(1) $2,500.00 against the $5,000.00 loan; and

(2) $2,500.00 toward the insurance premiums.

Kramer and Nase defaulted under the License Agreement and Lease Agreement. In July, 1985, the Johnsons took possession of the real estate, sent the liquor license to the PLCB for safekeeping, and instituted the process to have the license reconveyed to them.

Kramer filed a petition for relief under Chapter 7 of the Bankruptcy Code ("Code") on November 16, 1984. Immediately upon the filing of a petition, an automatic stay arises which generally bars the commencement or continuation of any debt collection efforts against the debtor or property of the debtor's bankruptcy estate. 11 U.S.C. § 362(a).

The Johnsons now seek to modify the stay for "cause", pursuant to 11 U.S.C. § 362(d)(1), in order to have the liquor license reconveyed to them. They contend that they have an ownership interest in the license, and that their interest is superior to the debtor's interest or Nase's interest in the license. They also filed a complaint for declaratory judgment. If granted, the declaratory judgment would state that the Johnsons' interest in the license was not altered by the filing of the bankruptcy petition, that the license is not an asset of the debtor's estate, and that the PLCB can proceed with the transfer of the license from the names of the debtor and Nase to their own names.

On almost identical facts, a party with a pre-petition agreement providing for the re-transfer of a liquor license in the event of default was held not entitled to relief from the automatic stay in Miller v. Hodges (In re Hodges), 33 B.R. 51 (Bankr.E.D. Pa.1983). The plaintiffs were the former owners of a bar and restaurant business. They sold the assets of the business, including a Pennsylvania liquor license, to the debtor, pursuant to a sale/lease agreement. The agreement provided that the parties would execute a Power of Attorney, which would permit the plaintiffs to obtain the re-transfer of the license from the debtor should the debtor default under the terms of the agreement. The Power of Attorney was executed approximately one (1) month after the agreement was signed. The debtor defaulted under the agreement but refused to return possession of the license to the plaintiffs. When the debtor filed a petition in bankruptcy, the license was sent to the PLCB for safekeeping. However, it remained titled in the debtor's name. The plaintiffs filed an action in equity in the Common Pleas Court of Lancaster County. The Court subsequently entered a final decree directing the debtor to return the license to the plaintiffs. The Bankruptcy Court, however, observed that the final decree was of no effect because it was entered in violation of the automatic stay.

The plaintiffs in Hodges argued that they were entitled to the benefit of their bargain with the debtor (i.e., re-transfer of the liquor license) in accordance with their agreement and Power of Attorney. First, the Court noted that the plaintiffs could not be secured creditors because they did not, and could not, obtain a security interest in the liquor license under Pennsylvania law. The law in Pennsylvania is that a liquor license is not personal property for security interest purposes and cannot properly be the subject of a security agreement. In re Revocation of Liquor License No. R-2193, 72 Pa.Commw. 367, 456 A.2d 709 (1983); see also 1412 Spruce, Inc. v. Commonwealth, Pennsylvania Liquor Control Board, 70 Pa.Commw. 501, 453 A.2d 382 (1982) (holding that a liquor license, while in safekeeping with the PLCB, was not subject to the execution process in Pennsylvania because it constituted a personal privilege rather than personal property).

The plaintiffs also argued that they were entitled to relief from the automatic stay for "cause" under 11 U.S.C. § 362(d)(1). Section 362(d)(1) of the Code provides:

On request of a party in interest and after notice and a hearing, the

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