In re Main Street Beverage Corp.
| Decision Date | 28 September 1998 |
| Docket Number | 94-10204 JHW.,Civ.A. No. 97-6123(JBS),Bankruptcy No. 94-13991 JHW |
| Citation | 232 BR 303 |
| Parties | In re MAIN STREET BEVERAGE CORPORATION, et al., Debtor. |
| Court | U.S. District Court — District of New Jersey |
Roy E. Scheider, Chester, New Jersey, Jeremy Galton, Frizell, Clarkson & Jaffe, Metuchen, New Jersey, for Chrysler Capital Corporation.
Faith S. Hochberg, United States Attorney, Loretta C. Argrett, Assistant Attorney General, By: Samuel A. Mitchell, Trial Attorney, Tax Division, United States Department of Justice, Washington, D.C., for Internal Revenue Service.
This matter is before the court on the appeal by Chrysler Capital Corporation ("Chrysler") of the November 21, 1997 Order for Distribution of Sales Proceeds of Debtor's Liquor License of the United States Bankruptcy Court, which provides that the proceeds from the sale of the debtor's New Jersey liquor license, less certain necessary and reasonable sales expenses, shall be distributed to the Internal Revenue Service ("IRS") because the IRS's valid and subsisting federal tax lien has priority over Chrysler's competing lien interest. Chrysler contends that, having found that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds from the sale of the debtor's liquor license, the bankruptcy court should have applied the "First in Time, First in Right" principle and determined that Chrysler's security interest had priority over the IRS's later-filed federal tax lien. For the following reasons, the court rejects Chrysler's argument and affirms the bankruptcy court's November 21, 1997 Order.
The parties to this appeal do not dispute the underlying facts. In January 1990, Chrysler loaned $1,000,000 to debtor, Main Street Beverage Corporation ("Main Street"). In December 1990, Chrysler loaned Main Street an additional $1,608,000. As security for these loans, Main Street granted Chrysler a first priority security interest in all of its present and after-acquired furniture, equipment and fixtures and proceeds thereof.
On June 21, 1991, as further security for the prompt payment and performance of its existing and future liabilities and obligations to Chrysler, Main Street granted Chrysler an additional first priority security interest in its right to payment of "all proceeds arising from the sale or other disposition of Main Street's interest in that certain Plenary Retail Consumption License. . . . issued by or through Voorhees Township to Main Street . . ." (Chrysler App. at Exhibit A.) Chrysler filed UCC Financing Statements with the Secretary of State of New Jersey on November 27, 1990 and August 31, 1991 and with the Clerk of Camden County on November 27, 1990.
On September 7, 1993, the IRS filed a Notice of Federal Tax Lien with respect to Main Street's unpaid payroll tax liabilities for the quarters ending June 30, 1992 and March 31, 1993. On October 5, 1993, the IRS filed an additional Notice of Federal Tax Lien with respect to Main Street's unpaid payroll tax liabilities for the quarter ending June 30, 1993. There is no dispute that the amount of the federal tax liens exceeds the value of the liquor license proceeds at issue in this case.
On January 19, 1994, Main Street filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. Chrysler filed a secured proof of claim on June 4, 1994. On March 29, 1995, Main Street's Second Amended Joint Plan of Reorganization ("the Plan") was confirmed. The Plan reflected that Main Street owed Chrysler $924,389.32. Chrysler filed continuation statements with the Secretary of State on December 6, 1994 and August 1, 1995 and with the Clerk of Camden County on November 18, 1994 and September 6, 1995.
Main Street eventually defaulted under the Plan. On April 30, 1997, the bankruptcy court ordered that Main Street's liquor license be sold at a public auction, with the preservation of existing liens. On May 27, 1997, Progress Bank purchased the liquor license at a public auction conducted by the bankruptcy court for the minimum bid of $200,000. The bankruptcy court confirmed the sale on June 25, 1997.
On July 14, 1997, the bankruptcy court conducted a hearing with regard to the distribution of the proceeds of the sale of Main Street's liquor license. On July 31, 1997, the bankruptcy court entered two orders, each of which provided: (1) that the right to receive payment from the proceeds of a municipal authorized sale of a liquor license is a general intangible under the Uniform Commercial Code, as adopted in New Jersey; (2) that Chrysler has a valid security interest in the proceeds received from the sale of Main Street's liquor license that was perfected as of June 23, 1996 and that was not prohibited by N.J.S.A. 33:1-26; (3) that Chrysler has a valid lien in the general intangible and in the proceeds of the sale of Main Street's liquor license; (4) that the IRS had a duly perfected and filed federal tax lien on Main Street's liquor license; and (5) that the IRS's federal tax lien is entitled to priority over Chrysler's security interest. Accordingly, the bankruptcy court ordered that the remainder of the proceeds of the sale of Main Street's liquor license after deduction of certain necessary and reasonable costs be distributed to the IRS.
On August 6, 1997, Chrysler filed a Notice of Appeal of the July 31, 1997 Orders. That same day, Chrysler also moved before the bankruptcy court for an order staying distribution of the proceeds from the sale of Main Street's liquor license, as directed by the July 31, 1997 Orders.
On August 8, 1997, during a telephone conference call regarding Chrysler's motion to stay the July 31, 1997 Orders, Chrysler persuaded the bankruptcy court to reconsider that portion of the July 31, 1997 Orders regarding the extent, validity and priority of the federal tax lien held by the IRS. The bankruptcy court entered an order to that effect on August 22, 1997, but the IRS objected to the form of the Order. After conducting a telephone conference call on September 25, 1997 regarding the IRS's objection to the form of the August 22, 1997 Order, the bankruptcy court issued another Order on October 8, 1997 clarifying the issues it intended to reconsider.
On October 21, 1997, the bankruptcy court heard oral argument in connection with its reconsideration of that portion of the July 31, 1997 Orders regarding the extent and priority of the federal tax lien held by the IRS and essentially decided to reaffirm the July 31, 1997 Orders.
On November 21, 1997, the bankruptcy court entered an Order for Distribution of Sales Proceeds of Debtor's Liquor License providing for distribution of the proceeds of the sale of Main Street's liquor license to the IRS after deduction of certain necessary and reasonable expenses.
Chrysler filed its Notice of Appeal of the November 21, 1997 Order on November 28, 1997. By Order dated December 8, 1997, the bankruptcy court stayed distribution in accordance with the November 21, 1997 Order pending the outcome of this appeal.
This court has jurisdiction over Chrysler's appeal of a final order of the bankruptcy court under 28 U.S.C. § 158(a)(1). On appeal, a district court applies a clearly erroneous standard to the bankruptcy court's findings of fact, conducts plenary review of the bankruptcy court's conclusions of law, and reduces mixed questions of law and fact into their component parts, applying the appropriate standard to each component. Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir.1992).
This appeal arises from the seeming inconsistency of the bankruptcy court's decision that the IRS's federal tax lien on Main Street's liquor license is entitled to priority over Chrysler's security interest in the right to payment from the proceeds of the sale of Main Street's liquor license, which the bankruptcy court found Chrysler had perfected more than two years before the IRS filed notice of its federal tax lien.
"Federal tax liens do not automatically have priority over all other liens." United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993). "Absent provision to the contrary, priority for purposes of federal law is governed by the common law principle that `the first in time is the first in right.'" Id. (quoting United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 98 L.Ed. 520 (1954)). Under 26 U.S.C. § 6323(a), a federal tax lien is not valid against any holder of a security interest until notice of the tax lien has been filed. Thus, Chrysler contends that, having found that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds from the sale of Main Street's liquor license, the bankruptcy court should have applied the "First in Time, First in Right" principle and determined that Chrysler's security interest had priority over the IRS's later-filed federal tax liens.
The IRS defends the correctness of the bankruptcy court's distribution order by challenging the bankruptcy court's conclusion that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds of the sale of Main Street's liquor license. The IRS maintains that the "First in Time, First in Right" principle never comes into play in this case because its federal tax lien is the only valid lien in existence.
As an initial matter, therefore, this court must address Chrysler's contention that the IRS waived its right to challenge the correctness of the bankruptcy court's conclusion that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds of the sale of the liquor license by not filing a cross-appeal.
It is well-settled that "an appellee may, without taking a cross-appeal, urge in support of any decree any matter appearing in the record, although his argument may involve an attack upon...
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