State v. Hi-Lo Foods, Inc.

• Decision Date: 18 July 1963
• Docket Number: HI-LO,No. 36230,36230
• Citation: 383 P.2d 910,62 Wn.2d 534
• Court: Washington Supreme Court
• Parties: The STATE of Washington, Appellant, v.FOODS, INC., a Washington corporation, Tacoma Association of Credit Men, a Washington corporation, and Jack Frost Company, Inc., a Washington corporation, Respondents.

Page 534

62 Wn.2d 534

383 P.2d 910

The STATE of Washington, Appellant, v. HI-LO FOODS, INC., a Washington corporation, Tacoma

Association of Credit Men, a Washington

corporation, and Jack Frost Company,

Inc., a Washington

corporation, Respondents.

No. 36230.

Supreme Court of Washington, En Banc.

July 18, 1963.

John J. O'Connell Atty. Gen., John W. Riley, Henry W. Wager, Asst. Attys. Gen., Olympia, for appellant.

Lester Seinfeld, McGavick & Sauriol, Donald H. McGavick, Tacoma, for respondents.

Croson, Johnson & Wheelon, Seattle, amicus curiae.

HALE, Judge.

The trial court held a tax lien priority statute to be discriminatory and, therefore, unconstitutional. The state appeals.

Hi-Lo Foods, Inc., a corporation operating a general grocery store in Tacoma, Washington, took steps to placate its creditors and avert insolvency proceedings by giving a mortgage for the security and benefit of its creditors. This mortgage, executed May 18, 1956, and delivered to the Tacoma Association of Credit Men, Inc., as mortgagee and trustee, was for the benefit of all Hi-Lo's creditors otherwise unsecured as of that date.

By its terms, the mortgage intended to cover and encumber everything that the grocery company owned: shifting stock of merchandise, after-acquired property, fixtures, appliances and vehicles--in short, all personal property then owned or which Hi-Lo Foods might in the future acquire.

The mortgage instrument authorized Hi-Lo Foods to continue business under certain conditions, among which were:

(1) Power was vested in the mortgagee, Tacoma Association of Credit Men, to select the manager, auditor, bookkeeper, clerks or cashier at its option;

(2) In case of default in the mortgage payments, the association was empowered to supervise and control the business in any manner it deemed best to secure the claims of the creditors for whose benefit the mortgage was given (3) Power was vested in the mortgagee, Tacoma Association of Credit Men, to assume possession of the business and property in case of abandonment, default, insecurity or if the mortgagors permitted any taxes to become delinquent.

Thus it was that the debtor, Hi-Lo Foods, Inc., was permitted, by its creditors, to continue in the grocery business under what the parties have designated as a mortgage trust agreement. The Tacoma Association of Credit Men, as mortgagee, was permitted to apply any payments made by Hi-Lo Foods on the mortgage, first to the costs of setting up and administering the trust, including attorneys' fees, and thereafter to distribute the residue to the creditors for whose benefit the mortgage trust agreement had been set up.

Hi-Lo Foods continued in the grocery business at the same location under this mortgage of May 18, 1956. In the course of its business operations following that date, it incurred liabilities for unpaid business and occupation taxes and retail sales taxes for the period of September through December, 1958, in the amount of $6,526.11. Warrants for the collection of these taxes were issued by the State Tax Commission (RCW 82.32.210) and filed by the Sheriff of Pierce County with the Clerk of Court on January 12, 1959, and February 10, 1959. A warrant so filed constitutes a judgment against the tax debtor under RCW 82.32.220--the very section of the tax statutes in issue here.

Hi-Lo Foods continued to operate its grocery store under the mortgage trust arrangement until March 29, 1959, when, hopelessly insolvent, it closed its doors and tendered possession of its business premises and stock of merchandise to the mortgagee, Tacoma Association of Credit Men, Inc. The trial court found that the trust mortgage was in default with a balance due of $19,274.79.

A receiver was appointed to conserve the assets and wind up the affairs of the debtor company. All parties agreed that the value of the assets on liquidation would be insufficient to pay off both the tax liens and the trust mortgage. Tacoma Association of Credit Men, as mortgagee and trustee for the otherwise unsecured creditors, Hi-Lo Foods as mortgagor concurring, claims priority of its claims over the tax liens under RCW 82.32.220, and the State of Washington claims priority of its tax liens under a proviso to the same section. The learned trial judge held the proviso to be discriminatory, a denial of due process of law and equal protection of the laws to the Tacoma Association of Credit Men, Inc., and a grant of special immunities and privileges to others than, but within the same class as, the association. Accordingly, it ruled the proviso to be unconstitutional, and adjudged the mortgage lien superior and prior to the lien of the state for excise taxes. From this judgment the state appeals.

RCW 82.32.210 empowers the State Tax Commission to issue warrants for the collection of unpaid taxes. Such warrants direct the sheriff to levy upon the real and personal property of the tax debtor. That the warrants, when pursuant to the statute are filed by the sheriff with the clerk of the superior court, shall constitute judgments, is clear from both the statute and our decision construing it Weitz v. Electrovation, Inc., 48 Wash.2d 604, 295 P.2d 728.

Pertinent parts of RCW 82.32.220 read:

'The sheriff shall file with the clerk of the superior court of his county a copy of the warrant, and thereupon the clerk shall enter [it] in * * * and thereupon the amount of such warrant so docketed shall become a specific lien upon all goods, wares, merchandise, fixtures, equipment, or other personal property used in the conduct of the business of the taxpayer against whom such warrant is issued, including property owned by third persons who have a beneficial interest, direct or indirect, in the operation of the business, and no sale or transfer of such personal property shall in any way affect such lien. The lien shall not be superior, however, to bona fide interests of third persons which had vested prior to the filing of the warrant when such third persons do not have a beneficial interest, direct or indirect, in the operation of the business, other than the securing of the payment of a debt or the receiving of a regular rental on equipment: Provided, however, That the phrase 'bona fide interests of third persons' shall not include any mortgage of real or personal property or any other credit transaction that result in the mortgagee or the holder of the security acting as trustee for unsecured creditors of the taxpayer mentioned in the warrant who executed such chattel or real property mortgage or the document evidencing such credit transaction. The amount of such warrant so docketed shall thereupon also become a lien upon the title to and interest in all other real and personal property of the taxpayer against whom it is issued the same as a judgment in a civil case duly docketed in the office of such clerk * * *.' (Italics ours.)

Deemed unconstitutional by the trial court, the italicized proviso was held invalid, which presents the only question in this appeal. The trial court declared the proviso invalid under Art. 1, § 12 of the Washington State Constitution:

'No law shall be passed granting to any citizen, class of citizens, or corporation other than municipal, privileges or immunities which upon the same terms shall not equally belong to all citizens, or corporations.'

and U.S.Const. Fourteenth Amendment, § 1, the pertinent part of which reads:

'* * * No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.'

Our first approach takes us to the act itself which simply declares, by explicit language, that the state in its undoubted power to fix priority in liens, and representing, as it does, all of the people of the state, has permitted secured creditors having no interest in the operation of the business other than their own security, to come first and ahead of subsequently incurred tax liabilities. Then, in the exercise of this same power on behalf of all of the people of the state, it asserts that unsecured creditors who raise their security to a higher plateau on a going business, cannot elevate their lien above that of the state for taxes either withheld from the state, or incurred in the subsequent operation of the business.

The proviso is designed to prevent the very thing here sought to be done by the unsecured creditors of Hi-Lo; its language could hardly be more appropriate to the occasion. Strike out the proviso, and the state's property, retail sales taxes collected by Hi-Lo, will be distributed to creditors secured under the trust mortgage. This in itself involves constitutional doctrines not yet injected into the case, and we do not bring them in by invitation.

Taking the direct lien priority approach, we avoid the problems of classification and simply assess the state's undoubted power to fix priority in liens as is done in other areas, and assume that this power quite logically can be said to extend to the state itself to declare its tax liens superior to all liens incurred in the operation or conduct of a business or occupation without regard to the element of time as was done in Roeblings Sons Co. v. Frederickson Logging & Timber Co., 153 Wash. 580, 280 P. 93. Problems of constitutional limitations were studiously avoided in that case where premiums for industrial insurance incurred in the operation of a business were declared superior to chattel mortgages earlier made and established as liens. Constitutional provisions...