In re Pike, M85-254 CA2.

• Decision Date: 09 June 1986
• Docket Number: No. M85-254 CA2.,M85-254 CA2.
• Citation: 62 BR 765
• Parties: In re Alan K. PIKE, d/b/a Daisey Mae's and Pine Village Apartments, Debtor. ANDRIACCHI'S, INC., a Michigan Corporation, and Miners' First National Bank & Trust Company of Ishpeming, Michigan, a National Banking Association, v. Alan K. PIKE and Stephen S. Johnson, Trustee.
• Court: U.S. District Court — Western District of Michigan

62 B.R. 765 (1986)

In re Alan K. PIKE, d/b/a Daisey Mae's and Pine Village Apartments, Debtor ANDRIACCHI'S, INC., a Michigan Corporation, and Miners' First National Bank & Trust Company of Ishpeming, Michigan, a National Banking Association, v. Alan K. PIKE and Stephen S. Johnson, Trustee.

No. M85-254 CA2.

United States District Court, W.D. Michigan, N.D.

June 9, 1986.

Raoul G. Robar, Ishpeming, Mich., for Andriacchi's.

James R. Jessup, Marquette, Mich., for Miners'.

Donald W. Bays, Marquette, Mich., for Alan K. Pike.

Stephen S. Johnson, Marquette, Mich., Trustee.

OPINION

MILES, Senior District Judge.

This appeal arises from a final order of the bankruptcy court dated August 13, 1985. That order granted the appellees superior and prior rights to liquor licenses of the debtor and ordered the trustee to abandon the licenses.

On November 14, 1983, the debtor, Alan K. Pike, entered into a purchase agreement with Andriacchi's Inc., one of the appellees. The agreement was for the sale of a bar and restaurant. Pike purchased the real property on a land contract and the personal property by way of a promissory note. Both the note and the contract were secured by an agreement stating that default on either the note or the contract would be construed as a default on both documents. Upon such default, the agreement provided that the debtor would reassign the liquor licenses to Andriacchi's. This agreement between Andriacchi's and the debtor was never recorded in the Marquette County Register of Deeds, or with the State of Michigan.

The personal property of the debtor was also subject to a security interest held by the Miner's First National Bank & Trust of Ishpeming (hereinafter the "bank"). The bank is also an appellee in this action.

On November 30, 1984, the debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code with the United States Bankruptcy Court for the Western District of Michigan, Northern Division. In the bankruptcy court, appellees Andriacchi's and the bank commenced an adversary proceeding against the debtor and Stephen S. Johnson, the duly appointed and qualified trustee of the bankrupt's assets. Appellees sought a determination that their purported interests in the liquor licenses were superior to any claim that the trustee may have had in the liquor license. In a brief opinion and order dated August 13, 1985, the bankruptcy court ruled that neither the bank nor Andriacchi's were required to perfect their security interests in the liquor licenses.

In order to have lien rights superior to the trustee, perfection is required pursuant to article 9 of the Uniform Commercial Code (U.C.C., codified at Mich.Comp.Laws Ann. § 440.9101 et seq.). The bankruptcy court's decision relied on a regulation of the Michigan Liquor Control Commission (M.L.C.C.) and a prior holding by the bankruptcy court in the Southern Division of the Western District of Michigan, In The Matter of Beefeaters Inc., 27 B.R. 848 (Bkrtcy.W.D.Mi.1983). The Beefeaters case had adhered to the questioned regulation. That regulation is Rule 19 which in relevant part provides as follows:

A security agreement between a buyer and a seller of a licensed retail business, or between a debtor and a secured party, shall not include the license or alcoholic liquor.

Michigan Administrative Rule 436.1119(e).

The facts in this case are undisputed, and as such the fact findings made by the bankruptcy court will not be reviewed de novo, but will be accepted on their face. However, the legal question presented by this case will be scrutinized by this Court.

Discussion

The problem presented in this case is simply that Rule 19 runs directly contrary to the priority provisions of the U.C.C. See Mich.Comp.Laws Ann. § 440.9101 et seq. The U.C.C. requires perfection of security interests in accordance with statutory guidelines, which includes the requirement that a financing statement be filed with the county clerk or with the Secretary of State detailing the interest secured. Rule 19 appears specifically designed to exempt liquor licenses from the purview of article 9 of the U.C.C.

Michigan law clearly holds that a liquor license represents a property interest. Bundo v. Walled Lake, 395 Mich. 679, 238 N.W.2d 154 (1976); Mallchock v. Liquor Control Commission, 72 Mich.App. 341, 249 N.W.2d 415 (1976). As a property interest, a liquor license falls within the ambit of the U.C.C. Article 9 of the U.C.C. applies to any transaction which is intended to create a security interest in personal property. See Mich.Comp.Laws Ann. § 440.9102(1)(a). Personal property includes "general intangibles." A liquor license constitutes a general intangible, and therefore is property within the meaning of Article 9. Paramount Finance Co. v. United States, 379 F.2d 543 (6th Cir.1967); In re Matto's Inc., 9 B.R. 89 (Bkrtcy.E.D. Mi.1981); Bundo v. Walled Lake, supra. Thus, according to the U.C.C. as adopted by the Michigan Legislature, a security interest in a liquor license must be properly perfected in order to be secure. Proper perfection includes making a public filing of a financing statement. Without taking these necessary steps, anyone holding a security interest in a liquor license would hold the status of an unsecured creditor.

In the present case, the trustee is afforded the rights of a lien creditor pursuant to 11 U.S.C. § 544(a)(1). That means that his rights to the assets of the estate are superior to that of unsecured creditors. Thus, a plain reading of article 9 of the U.C.C. and of section 544 of the bankruptcy code dictates that the trustee would have, in this case, superior rights to the liquor license over a "secret" creditor with an unrecorded interest. However, the impact of Rule 19 makes the trustee's rights in the licenses inferior to those persons holding interests through these "secret," unrecorded agreements.

It is obvious that Rule 19 has the clear effect of circumventing the perfection rules as set forth in the U.C.C. Life cannot be given to both Rule 19 and the priority provisions of the U.C.C. Thus, the Court is required to focus in on Rule 19 and determine whether it can be allowed to impinge upon article 9 of the U.C.C.

The M.L.C.C. was created by the Michigan Legislature pursuant to the Michigan Liquor Control Act of 1933. See Mich. Comp.Laws Ann. § 436.1 et seq. The M.L.C.C. is charged with the responsibility of regulating the traffic and sale of alcoholic beverages throughout the State of Michigan. The authority of the M.L.C.C. to regulate this traffic is plenary. Zukaitis v. Fitzgerald, 18 F.Supp. 1000 (1937); Mutchall v. City of Kalamazoo, 323 Mich. 215, 35 N.W.2d 245 (1948). However, the M.L.C.C.'s authority is limited to the regulation of alcohol. Bundo v. Liquor Control Commission, 92 Mich.App. 20, 283 N.W.2d 860 (1979). The bankruptcy court commented upon the scope of the M.L.C.C.'s authority in The Matter of Ratcliff Enterprises, 44 B.R. 778 (Bkrtcy.E.D.Mi.1984):

If therefore, the aim of Rule 19 is to regulate the perfection of a security interest which is controlled by Michigan Statute, the regulation would be preempted.

That court went on to describe the harmful impact upon the economic process caused by allowing Rule 19 to encroach upon the U.C.C. The Court noted that the most significant impact would be felt by

Businesses, small bars, taverns and enterprises in the State of Michigan which are often owned by sole proprietors whose very existence hinges upon the possession of a liquor license.

Ratcliff at 780.

That court further noted that without the ability to provide a security interest in a liquor license, the opportunity for these small businesses to obtain financing is "substantially impaired." Id. at 781. The Ratcliff court concluded that a security interest, properly perfected pursuant to the U.C.C. would have superiority over other interests in the liquor license. In so holding, the court specifically stated that it was not passing upon the validity of Rule 19. The Court believed that job was best left with the Michigan Supreme Court.¹ Nonetheless, the Ratcliff court stressed that it was placing greater emphasis upon the Michigan Supreme Court's previous ruling in Bundo v. Walled Lake, supra, and upon the Michigan legislature's adoption of the U.C.C. than upon Rule 19. Accordingly, the Ratcliff court suppressed the impact of Rule 19 upon secured transactions involving liquor licenses. This Court agrees with the Ratcliff court's statement that,

regardless of the form, if the parties intend to create a security interest in a liquor license it comes within the ambit of article 9.

44 B.R. at 780.

Unfortunately, Rule 19 changes all this uniformity and clarity in the law. This Court holds that such a "change" was undertaken without proper legislative authority. The M.L.C.C. is only empowered to promulgate rules relating to the traffic and sale of alcoholic beverages. To the extent that Rule 19 suspends the law in Michigan on perfection of security interests it must be held invalid.

The Michigan legislature may authorize administrative agencies, charged with the administration of a particular enactment, to adopt rules and regulations designed to effectuate the purposes of the enactment. Coffman v. State Board of Examiners, 331 Mich. 582, 590, 50 N.W.2d 322 (1951); Sterling Secret Service v. State Police, 20 Mich.App. 502, 513, 174 N.W.2d 298 (1969). The purpose of the Michigan Liquor Control Act is embodied in Mich.Comp.Laws Ann. § 436.1 which in pertinent part provides as follows:

It shall be lawful to manufacture for sale, sell, offer for sale, keep for sale, possess and/or transport any alcoholic liquor, as hereinafter defined, including alcoholic liquor used for medicinal, mechanical, chemical or scientific purposes and wine for sacramental purposes, subject to the terms, conditions, limitations and restrictions contained herein, and only as provided for in this act.

Pursuant to that same secti...