In re Pompeo

• Decision Date: 24 April 1996
• Docket Number: Bankruptcy No. 93-21058-MBM. Adv. No. 95-02275-MBM.
• Citation: 195 BR 43
• Parties: In re Mark D. POMPEO, Debtor. Mary REITMEYER, Trustee, Plaintiff, v. PENNSYLVANIA DEPT. OF REVENUE, Pennsylvania Dept. of Labor & Industry, and Pennsylvania Liquor Control Board, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

195 B.R. 43 (1996)

In re Mark D. POMPEO, Debtor Mary REITMEYER, Trustee, Plaintiff, v. PENNSYLVANIA DEPT. OF REVENUE, Pennsylvania Dept. of Labor & Industry, and Pennsylvania Liquor Control Board, Defendants.

Bankruptcy No. 93-21058-MBM. Adv. No. 95-02275-MBM.

United States Bankruptcy Court, W.D. Pennsylvania.

April 24, 1996.

Mary Reitmeyer, Trustee, Pittsburgh, PA.

A. Jay Molluso, Office of Attorney General, Financial Enforcement Section, Pittsburgh, PA, for Pennsylvania Liquor Control Board and Pennsylvania Department of Revenue.

Deborah C. Phillips, Commonwealth of Pennsylvania, Department of Labor & Industry, Office of Employment Security, Pittsburgh, PA.

MEMORANDUM OPINION

By M. BRUCE McCULLOUGH, Bankruptcy Judge, for the Court en banc with BERNARD MARKOVITZ, Chief Judge, and WARREN W. BENTZ, JUDITH K. FITZGERALD and JOSEPH L. COSETTI, Bankruptcy Judges.

STATEMENT OF FACTS

This adversary proceeding is decided collectively by the judges of the Bankruptcy Court for the Western District of Pennsylvania sitting en banc. The proceeding determines the priority in bankruptcy of a reserved interest allegedly retained by the Pennsylvania Departments of Revenue and Labor & Industry and the Pennsylvania Liquor Control Board (PLCB) (hereafter collectively referred to as "the Commonwealth of Pennsylvania") in a liquor license. The proceeding is part of a Chapter 7 bankruptcy case for Mark D. Pompeo, who initially filed a voluntary petition under Chapter 13 on May 29, 1993. The case was converted to a Chapter 7 case on October 13, 1993, and Mary Reitmeyer, plaintiff in this proceeding, was then appointed as trustee.

On May 26, 1995, plaintiff filed a motion to sell the debtor's Pennsylvania liquor license free and clear of any liens and encumbrances. Plaintiff's motion indicates that plaintiff had received an offer of $30,000 for debtor's liquor license. At all times, plaintiff has maintained that such license is the sole property of the bankruptcy estate. Defendants objected to plaintiff's outright sale of the license,¹ asserting that plaintiff could not sell such license unless, pursuant to 47 Pa. Cons.Stat.Ann. § 4-477(d)(3) (Purdon 1995),² payment was made of outstanding taxes owed by the debtor to the Commonwealth. Therefore, defendants initially sought to condition such sale upon plaintiff's payment of such taxes at closing. However, defendants ultimately consented to the sale outright of the license. Each side also agreed to preserve for future disposition the issues raised by defendants' objections, with satisfaction of said taxes, if defendants were ultimately successful, from the proceeds of the sale.

Because these facts were not in dispute, both parties brought motions for summary judgment with respect to their positions. Subsequent proceedings have not revealed any further factual disputes. Plaintiff seeks a declaratory judgment to the effect that defendants' claims for outstanding taxes only be satisfied to the extent, and according to the priorities, as set forth in the Bankruptcy Code. Defendants' motion seeks an order to the effect that they are entitled to as much of the proceeds from the sale of the liquor license as are necessary to satisfy the debtor's preexisting outstanding state taxes.

Plaintiff asserts the following in support of its motion for summary judgment:

1. Pursuant to 47 Pa.S.A. § 4-477(d)(3), defendant Pennsylvania Liquor Control Board ("PLCB") may allow the transfer of a liquor license without payment of outstanding state taxes if such taxes are "subject to a duly authorized deferred payment plan." Distribution pursuant to Chapter 7 of the Bankruptcy Code constitutes a "duly authorized deferred payment plan" with respect to defendants\' claims for outstanding state taxes. Therefore, as defendants\' claims will be satisfied through such "plan," they should not have their claims satisfied immediately out of proceeds from the sale of the license.

2. If distribution pursuant to Chapter 7 of the Bankruptcy Code does not constitute a "duly authorized deferred payment plan," 47 Pa.S.A. § 4-477(d)(3) is preempted to the extent that it grants to the Commonwealth an immediate and superior right to satisfy its tax claims from the proceeds of the license transfer unaffected by the distribution and priority provisions of the Bankruptcy Code. Although the Pennsylvania statute appears to provide the Commonwealth with such an unaffected priority even in a bankruptcy setting, such right results in the payment of their tax claims in a manner other than that envisioned by the Bankruptcy Code. Pursuant to article VI, clause 2 of the U.S. Constitution (the Supremacy Clause), such statute, even if a proper exercise of defendants\' police power, must be rendered void to the extent of any direct conflict with federal law.

In support of their motion for summary judgment, defendants make the following assertions:

1. A Chapter 7 distribution to defendants does not constitute a "duly authorized deferred payment plan" such that the PLCB, in its discretion, may permit the transfer by plaintiff of debtor\'s liquor license without immediate satisfaction of outstanding state tax claims from sales proceeds. Such a distribution does not constitute a deferred payment plan, nor is it authorized as contemplated by 47 Pa. S.A. § 4-477(d)(3). Such phrase refers to a plan instituted internally within the Pennsylvania state government by appropriate state officials.

2. State law determines the extent of a debtor\'s interest in property. A bankruptcy estate\'s interest in a debtor\'s liquor license, which is precisely equivalent to the interest that the debtor had in such license, is limited in that it is subject to 47 Pa.S.A. § 4-477(d)(3). Because 47 Pa.S.A. § 4-477(d)(3) requires the payment of outstanding state taxes by a licensee prior to the PLCB\'s approval of a license transfer, the value of the bankruptcy estate\'s interest in the license is equal to only that portion of any proceeds from its sale after satisfaction of outstanding state taxes therefrom. Because the bankruptcy estate\'s interest in the license is so constricted, immediate payment of defendants\' tax claims from the proceeds of its sale will not conflict with the distribution structure of Chapter 7 of the Bankruptcy Code. Therefore, 47 Pa.S.A. § 4-477(d)(3) is not, in any way, preempted by federal law pursuant to article VI, clause 2 of the U.S. Constitution (the Supremacy Clause).³

Plaintiff, in its complaint, also asserted that defendants had violated the automatic stay by threatening to disrupt the outright sale of the debtor's liquor license. However, subsequent to defendants' consent to the outright sale of the license, plaintiff withdrew its request for sanctions regarding defendants' alleged violation of the automatic stay.⁴

For the reasons set forth hereinafter, we find for the Trustee and against the Commonwealth regarding their motions for summary judgment. We note at the same time that the Commonwealth has not asserted thus far, either at any of the hearings on this matter nor in any of its filed motions or briefs, its tax lien on the license sale proceeds pursuant to 72 Pa.S.A. § 1401. This statute grants to the Commonwealth "a first lien" upon property⁵ of a taxpayer "from the date of settlement, assessment, or determination" of "all state taxes." An examination of the Commonwealth's filed proof of claims appears to indicate that the Commonwealth has filed copies of such lien in the appropriate locations. This lien, even if unfiled, is free from the reach of a trustee in bankruptcy's avoidance powers under either § 544 or § 545 of the Bankruptcy Code. In the Matter of Regal Petroleum Products Company, 287 F.Supp. 458, 461-62 (E.D.Pa. 1968), aff'd, 413 F.2d 299 (3rd Cir.1969); In re Century Vault Company, 416 F.2d 1035, 1037-38 (3rd Cir.1969); see also In re Universal Minerals, Inc., 25 B.R. 799, 804 (Bankr.W.D.Pa.1982). However, because this interest is clearly a lien, it would be subordinated to any priority claims under 11 U.S.C. § 724(b)(2). Perhaps for this reason, the Commonwealth has yet to mention in any of its arguments this particular lien, instead proceeding only with respect to its claim of a reserved interest in the license itself.

DISCUSSION

I. Whether a Chapter 7 distribution constitutes a "duly authorized deferred payment plan" under 47 Pa.S.A. § 4-477(d)(3)?

Plaintiff's contention that a Chapter 7 distribution automatically qualifies as a duly authorized deferred payment plan called for under 47 Pa.S.A. § 4-477(d)(3) is incorrect and not supported by case authority. Language in the bankruptcy court opinion for In re Daniel Nejberger, 112 B.R. 714 (Bankr.E.D.Pa.1990), aff'd, 120 B.R. 21 (E.D.Pa.1990), aff'd on other grounds, 934 F.2d 1300 (3rd Cir.1991), indicates that a provision in a confirmed Chapter 11 plan for payment of outstanding state taxes would constitute an acceptable deferred payment plan under the Pennsylvania statute. Id. at 722. However, the bankruptcy court in Nejberger also noted that "11 U.S.C. § 1129(a)(9)(C) would require the debtor to repay the state tax obligation in full, with interest, over not more than a six year period." Id. at 723 (emphasis added). Distribution under Chapter 7 of the Bankruptcy Code, in contrast, does not necessarily result in full payment of a claim and, in fact, will likely not result in full payment of the Commonwealth's claim in this proceeding.⁶ For this reason, a Chapter 7 distribution, as opposed to a repayment scheme included in a confirmed Chapter 11 reorganization plan, should not constitute a "duly authorized deferred payment plan" unless full payment of the Commonwealth's tax claim can be assured. It seems clear that the Commonwealth could not have contemplated as a "duly authorized deferred payment plan" a scheme which did not ultimately result in full payment of its tax claim.

II. Is 47 Pa.S.A. § 4-477(d)(3) in direct conflict with the...