In Re Anchorage International Inn, Inc.
Randall Simpson, Jermain, Dunnagan & Owens, Anchorage, Alaska, for defendants-appellants.
Appeal from the United States District Court for the District of Alaska.
FLETCHER, Circuit Judge:
1 This appeal is from the bankruptcy court‘s ruling (affirmed by the district court) that the provisions of an Alaska statute requiring payment of creditors of a liquor establishment before transfer of a liquor license are preempted by federal bankruptcy law. We have jurisdiction under
I
2 On March 28, 1979, Anchorage International Inn, Inc. (Inn), the owner of an Alaska liquor license, was adjudicated a bankrupt. Prior to bankruptcy, the Inn had incurred two substantial debts arising out of the operation of a tavern connected to the Inn: (1) approximately $20,000 in taxes and employee withholding contributions due the State of Alaska, Department of Labor; and (2) approximately $143,000 in employee benefit contributions owed to the Alaska Hotel and Restaurant Employees Health & Welfare Trust and Pension Trust (Trust Funds).
3 During the bankruptcy proceedings, the trustee of the Inn arranged and secured the bankruptcy court‘s approval of the sale of the assets of the Inn, contingent upon approval of the transfer of the liquor license by the Alaska Alcoholic Beverage Control Board (ABC Board). Under Alaska law, the ABC Board has sole authority to issue and transfer liquor licenses; no license may be transferred without ABC Board approval. The Alaska statute requires that approval of a transfer be denied if
4 (4) The transferor has not paid all debts or taxes arising from the conduct of the business licensed under [the] title [governing alcoholic beverages] unless
5 (A) he gives security for the payment of the debts or taxes satisfactory to the creditors or taxing authority.
6
7 Relying on
8 On December 31, 1981, the bankruptcy court ordered that the $20,000 in state tax and contribution claims be paid first from the license sale proceeds, but denied any preferred right to payments from the sale proceeds to other liquor-related creditors of the debtor, including the Trust Funds. The court concluded that, because the license had been created by the State of Alaska, the Alaska statute did not conflict with federal law insofar as the statute required payment of state tax claims prior to transfer of the license.
9 As to the claims of the Trust Funds, however, the court ruled that the requirement of
10 The district court affirmed the bankruptcy court‘s decision. The Trust Funds timely took this further appeal. The trustee has not cross-appealed from the decision in favor of the State of Alaska.
11 Appellants challenge the judgment below asserting that the Alaska statute does not “establish priorities” in contravention of the general system of priorities pertaining to unsecured claims against the bankrupt estate. Rather, they argue,
12 The trustee, in defense of the judgment, argues that the state cannot substitute its distribution scheme for that established under the Bankruptcy Act. According to the trustee, permitting payment of the claims related to the liquor business prior to payment of other claims would unconstitutionally frustrate the “primary” objective of the Bankruptcy Act: to provide for an equitable distribution of assets among all creditors. See, e.g., Hassen v. Jonas, 373 F.2d 880, 881, 884 (9th Cir.1967). She decries the notion of permitting some creditors of the bankrupt (e.g., persons earning wages in the operation of the tavern) to be paid ahead of other creditors (e.g., bedding manufacturers). She relies on In re Leslie, 520 F.2d 761 (9th Cir.1975).
A
13 As a preliminary matter, we must determine whether the Alaska statute gives the creditors of the licensed business a claim against the liquor license superior to that of other creditors of the bankrupt or whether it seeks simply to regulate license transfers without providing priority to the creditors of the liquor business. If the Alaska statute does not create a priority, the Trust Funds would have no superior right in bankruptcy to payment from the license sale proceeds. We would stop our analysis there.
14 The creditor of an owner of an Alaska liquor license, unlike the holder of a security interest or a mechanic‘s lien, cannot enforce the lien by self-help or by execution on the license. See C.Y., Inc. v. Brown, 574 P.2d 1274, 1277 (Alaska 1978). Nevertheless, the creditor‘s interest in the license is an encumbrance superior to the rights of others. The Alaska statute assures the liquor-related creditor that the sale of the license will not occur until his debt is paid or security satisfactory to him is provided. Other creditors whose debts are not related to the licensed business receive no similar assurances. Under Alaska law, the creditors of the liquor business do have a superior right to payment from the license sale proceeds.2
15 Although the lien interest created by
B
16 Ordinarily, an asset subject to a lien such as the license in this case passes into the hands of the trustee on the date of filing subject to the lien. In this case, however, the bankruptcy court concluded that, since the Alaska statute “creates statutory priorities, not statutory liens or encumbrances on property,” the license passed into the estate unencumbered except for the taxes due the State of Alaska. This was error.
17 For its rationale, the bankruptcy court relied heavily on In re Leslie, in which we stated in broad terms that “[c]onflicting priorities established by state law must yield upon the intervention of bankruptcy to superior federal law” and ruled that a California statute regulating the transfer of California liquor licenses “creates statutory priorities, not statutory liens.” 520 F.2d 761, 762 (9th Cir.1975). We directed that the proceeds of the sale of a liquor business (the assets of which included a liquor license) be paid according to the distribution scheme for general unsecured claims established by the Bankruptcy Act and not according to the California statutory scheme for allocation of proceeds among creditors when a California liquor business is sold. Id. See also In re Professional Bar Co., 537 F.2d 339, 340 (9th Cir.1976).
18 Although Leslie and this case seem similar, there are significant differences. In Leslie, at the time the petition in bankruptcy was filed, the liquor license (as well as the related business assets of the debtor) had already been sold and the proceeds placed in an escrow account. See 520 F.2d at 762. Under California law, consent to the sale of the license by the liquor-related creditors is not required. Thus, what the trustee received in Leslie was the cash proceeds from a sale of a liquor business, not a license transferable only on the approval of creditors. Since, at the time of filing, creditors of the debtor were free to attach or levy against the proceeds, see id. at 763, the Leslie court correctly concluded that the trustee took unencumbered title to the proceeds, id. at 762; see
19 The California statute differs from the Alaska statute in two other regards. The California statute attempted to determine priorities in the distribution of the proceeds of the sale not only of the liquor license but also of all other assets of the licensed business. See 520 F.2d at 762-63;
20 By contrast, the Alaska statute establishes priority for one particular group of creditors in one specific asset. See
21 Given the significant differences in scope and effect between the California and Alaska statutes, we do not find the holding in Leslie controlling.3 See In re Professional Bar Co., 537 F.2d 339, 340 (9th Cir.1976) (creditor that state authorizes to prevent license transfer has valid preferred right in bankruptcy). Nothing in Leslie compels us to strike down the Alaska statute simply because it attempts to give certain creditors a preferred right in a particular asset.4
22 We recognize, of course, that Congress has the authority to make uniform laws governing the subject of bankruptcies, see
23 Perez v. Campbell, 402 U.S. 637, 649, 91 S.Ct. 1704, 1711, 29 L.Ed.2d 233 (1971), which holds that a state statute is invalid if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” does not contradict our conclusion. In Perez, an Arizona statute, which conditioned the issuance of a driver‘s license to a discharged debtor on the payment of pre-bankruptcy debts, was held to be preempted. Id. at 652, 91 S.Ct. at 1712. The Arizona statute directly conflicted with the discharge provisions of federal bankruptcy law. Id. at 648, 652, 91 S.Ct. at 1710, 1713.
24 Here, by contrast, the Alaska statute does not conflict with the federal distribution scheme because there is no general federal policy against state-created liens that favor one class of creditors over others.
C
25 Since federal bankruptcy law does override state-created priorities that apply only in the event of bankruptcy, we must examine the statute to determine whether it in fact has force and effect independent of the bankruptcy proceeding.7 See
26 Regardless of when a license holder seeks to transfer an Alaska liquor license, all liquor-related claims must be paid first. See C.Y., Inc. v. Brown, 574 P.2d 1274, 1277 (Alaska 1978). The transfer caused by the trustee‘s need to liquidate the assets of the estate is no different from any other transfer in or outside of bankruptcy. Under Alaska law, the encumbrance has its full restrictive effect on the transfer of the underlying security (the liquor license) regardless of whether the transferor is or is not insolvent or undergoing a general distribution or liquidation of his property. The Alaska statute is not a bankruptcy distribution scheme in disguise.
27 Therefore, we hold that the Trust Funds have a prior right to the proceeds of the license sale to the extent of claims arising from the conduct of the licensed business.9
III
28 We reverse the district court‘s ruling that the Bankruptcy Act preempts
29 REVERSED and REMANDED.
Notes
Certain suggestively broad language in Leslie might be misread to the effect that state law can never alter the order of distribution to creditors prescribed by the bankruptcy statutes. Such a proposition, not necessary to the decision presented by the peculiar California statute at issue in Leslie, does not comport with the general principles of federal bankruptcy law. State law often vests some creditors with special rights, sometimes called “liens” or “security interests,” that enable certain creditors to collect ahead of general creditors in bankruptcy. The inherent purpose of any such lien or encumbrance is to give the holder of the lien a position superior to other creditors in a particular asset
What is essential in determining whether a prior right to proceeds of an asset is valid in bankruptcy is not whether it has been labeled as a “lien” by the state statute, but whether it has any purpose or effect independent of bankruptcy. See
The Ninth Circuit recognized as much a year after Leslie in In re Professional Bar Co., 537 F.2d 339 (9th Cir.1976). There, the court evaluated the contention of general creditors of an estate, one asset of which was a California liquor license, that a California statute requiring payment of California tax claims prior to license transfer was invalid since it overrode the priority federal bankruptcy law gave to wage claimants over tax claimants. 537 F.2d at 340. The court, upholding the priority of the tax claims, responded:
This [notion of the supremacy of the federal distribution scheme] is true as a general principle. In this case, however, the problem is not so much one of priority of claims as one of defining the nature of the bankrupt‘s property to which the claims attach....
California has placed a limitation on the value of a state liquor license by authorizing the Department of Alcoholic Beverage Control to refuse to transfer a state-created liquor license so long as certain state taxes remain delinquent. The bankrupt estate, insofar as it includes liquor licenses, has only the limited value of the licenses encumbered as they may be by the terms of the statutes which create the licenses and provide the conditions of their transfer. It is to that limited value that any claims against the estate attach.
Id. at 340 (citations deleted). By so holding, the court in Professional Bar failed to follow the broad principle for which Leslie could perhaps be read, that simply because a state-related entitlement is not denominated a lien and looks less like a lien than other creditor-protection devices, the entitlement is invalid in bankruptcy.
Section 67c(1)(A) of the Bankruptcy Act,
(c)(1) The following liens shall be invalid against the trustee:
(A) every statutory lien which first becomes effective upon the insolvency of the debtor, or upon distribution or liquidation of his property, or upon execution against his property levied at the instance of one other than the lienor.
The legislative history indicates that “distribution ... of his property” means a “general distribution” of all of the debtor‘s property and not the transfer of a “particular asset.” See S.Rep. No. 1159, 89th Cong., 2d Sess. 2, 7, reprinted in 1966 U.S.Code Cong. & Admin.News 2456, 2457, 2461; 4 J. Moore & L. King, Collier on Bankruptcy p 67.20, at 229 (1978).