Queen of the North, Inc. v. Legrue
| Decision Date | 21 July 1978 |
| Docket Number | No. 3512,3512 |
| Citation | 582 P.2d 144 |
| Parties | 24 UCC Rep.Serv. 1301 QUEEN OF THE NORTH, INC., an Alaskan Corporation, James Williams and Guy Bassett, Appellants, v. Henry J. LeGRUE and Etta C. LeGrue, Appellees. |
| Court | Alaska Supreme Court |
Before BOOCHEVER, C. J., and CONNOR, BURKE, and MATTHEWS, JJ.
This case raises the issue of the propriety of a foreclosure sale in which a liquor license was ordered foreclosed by the trial court but was never sold. We reverse the decision of the trial court confirming the sale and establishing a deficiency judgment and remand to give the LeGrues the option of selling the license or waiving the deficiency judgment.
In 1974, James Williams and Guy Bassett, incorporated as Queen of the North, Inc., 1 purchased the Beachcombers, a Kodiak restaurant, bar and hotel established in a renovated ferry boat placed on dry land. The agreed purchase price for the business was $350,000.00. The corporation paid $40,000.00 down, assumed an $185,000.00 Small Business Administration note secured by a first deed of trust and issued a promissory note for $125,000.00 secured by a second deed of trust to the owners, Henry and Etta LeGrue.
The buyers made repairs ordered by the State Fire Marshal and began to operate the Beachcombers. There was a dispute about the payment of the bill for the repairs necessitated by the Fire Marshal's order, and Queen of the North, claiming that the LeGrues had refused to honor their written promise to reimburse the corporation for certain repairs, failed to make payments on the second deed of trust.
The LeGrues filed a claim for foreclosure on the second deed of trust on March 7, 1975, alleging that the corporation had defaulted and was committing waste of the assets. Queen of the North continued to operate the Beachcombers until January of 1976, 2 at which time the establishment was left vacant. 3
Superior Court Judge Carlson, on October 22, 1976, in a memorandum decision, found that the LeGrues were entitled to foreclose against "the premises, liquor licenses and personalty secured by the second deed of trust." The court also awarded punitive damages of $15,000.00 against Williams and $5,000.00 against Bassett for "permitting . . . great waste."
A few days later, the LeGrues filed a motion for summary judgment against the Alcoholic Beverage Control Board. The LeGrues claimed: (1) that AS 04.10.330, which precludes the transfer of any license until all creditors are paid or satisfied, was inapplicable to foreclosure cases; (2) that they, as secured creditors, had precedence over general creditors; and (3) that the court had the authority to direct the Alcoholic Beverage Control Board to transfer the license. The Board responded that the question of whether the LeGrues had a security interest in the liquor license presented a genuine issue of fact. In opposition to the motion for summary judgment, the Board argued that the second deed of trust, upon which the LeGrues foreclosed, did not grant them an interest in the liquor license.
Judge Carlson, on November 3, 1976, granted the LeGrues' motion for summary judgment and directed the Board to "immediately issue the license to plaintiffs at a suitable location." 4 He noted that the matter was of "some urgency" since the Beachcomber's liquor license had not been exercised, as required by statute, for thirty days during the calendar year. Under AS 04.10.350(b), a license lapses if it is not exercised for that minimum time each year.
While finding that the LeGrues could not consider the liquor license as part of the collateral covered by the formal security agreement, Judge Carlson found "a security interest . . . in the nature of an equitable lien" in the license. He found an intent between the LeGrues and the corporation that "the entire Beachcomber business, including the liquor license, serve as security for payment of the debt."
In support of his finding that the LeGrues held a security interest in the form of an equitable lien in the license, Judge Carlson pointed to an escrow arrangement in which the LeGrues had deposited with the bank holding the second deed in trust several documents to be delivered to the LeGrues in the event of default. 5 One of the documents was an Alcoholic Beverage Control Board form on which Queen of the North consented to a transfer of liquor license to the LeGrues. The application is dated April 12, 1974, indicating that the parties signed the purported transfer at the time Queen of the North was buying the Beachcombers from the LeGrues. 6
The court, on November 26, 1976, issued a judgment and decree of foreclosure ordering that:
. . . the real and personal property described in the attached Exhibit "A" and "B" . . . The liquor license, or so much thereof as may be sufficient to satisfy the amount found to be due plaintiffs, and which may be sold separately without material injury to the parties in interest, be foreclosed and sold at public auction according to law. (emphasis added)
The decree further directed:
That plaintiffs' deed of trust, (s)ecurity agreement and liquor license are hereby foreclosed and that the property be sold to satisfy said obligations.
The decree also stated that the proceeds of the sale would be applied first to sale expenses and secondly to the LeGrues in satisfaction of their lien, costs, and attorney's fees; and that "the plaintiffs or any of the parties to this suit may purchase at such sale."
The notice of public sale advertised only "the following described personal property, to wit 'the Beachcombers' along with all equipment and lots of land belonging to Queen of the North, Inc." There was no public notice that the liquor license was to be sold.
The LeGrues were the only bidder for the property and paid $100,000.00, assuming the first deed of trust held by the Small Business Administration for $178,000.00.
The LeGrues then moved, under AS 09.35.180, 7 for an order confirming the sale and establishing a deficiency against Queen of the North for $41,937.69. Judge Carlson granted the motion on May 13, 1977.
Queen of the North filed a timely appeal from the order of confirmation. 8
AS 09.35.180(a) provides that a judgment creditor may, upon motion, apply for an order confirming the sale, and:
(t)he judgment debtor may object to the confirmation of the sale on the grounds that there were substantial irregularities in the proceedings of sale which caused probable loss or injury to the judgment debtor.
If the court finds substantial irregularity and probable injury, "it shall deny the motion and direct that the property be resold in whole or in part as upon an execution." 9 The statute specifies no standard for appellate review of a trial court confirmation of sale.
The substantive provisions of this statute have been interpreted only once in the past fifty years. 10 In Lunsford v. Kaiser Gypsum Co., Inc., 516 P.2d 151, 152 (Alaska 1973), we held that:
(t)he effect of a valid confirmation order is to insulate the sale procedure from subsequent challenge based upon a mere irregularity in the conduct of the sale. 11
We find that the failure to list the liquor license in the public notice of sale 12 and the failure to sell the license as directed by the decree of foreclosure constitute a substantial irregularity in the sale for purposes of AS 09.35.180. 13 Had the license been sold as ordered, the purchase price might have been greater than the $100,000.00 and perhaps sufficient to cover the deficiency awarded against Queen of the North. 14 This suffices for the "probable loss or injury to the judgment debtor" 15 requisite to the declaration of substantial irregularity under the statute. 16
The LeGrues elected to proceed as to both the real and personal property under the provisions for foreclosure of real property securing a court order of sale. AS 45.05.782(d) provides:
If the security agreement covers both real and personal property, the secured party may proceed under §§ 782-794 of this chapter as to the personal property or he may proceed as to both the real and the personal property in accordance with his rights and remedies in respect of the real property in which case the provisions of §§ 782-794 of this chapter do not apply. 17
Nevertheless, it must be determined whether there was a secured interest established in the liquor license, so that it was legally subject to disposition with the real property.
Under Alaska's codification of the U.C.C., a security interest attaches only where: (1) there exists a written security agreement; (2) value is given by the creditor; and (3) the debtor has rights in the collateral. 18 Additionally, AS 45.05.020(37) defines "security interest" as "an interest in personal property or fixtures which secures payment or performance of an obligation."
The test under which a document is determined to be a security agreement is one of intent to create a security interest in the collateral. AS 45.05.698(8) defines "security agreement" as "an agreement which creates or provides for a security interest." See Coogan, "A Suggested Analytical Approach to Article 9 of the Uniform Commercial Code," 63 Col.L.Rev. 1, 6-7 (1963).
The Official Comment to the U.C.C., § 9-102 (AS 45.05.692), states:
(T)he principal test whether a transaction comes under this Article is: is the transaction intended to have effect as security?
When it is found that a security interest as defined in Section 1-201(37) was intended, this Article applies regardless of the form of the transaction or the name by which the parties may have christened it. 19
A liquor license qualifies as a "general intangible," defined in AS 45.05.700 as:
personal property (including a thing in action) other than goods, accounts, contract rights, chattel paper, documents, and instruments. 20
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