Rushmore State Bank v. Kurylas, Inc.

BANK, STATE RUSHMORE Appellee,

Plaintiff and INC., KURYLAS, Defendant Appellant, Service, Internal Revenue Appellee, Defendant and Inc., George Neil Lewis and Ceasar’s D. Twitero, A. Defendants.

No. 15764. Supreme Court of South Dakota.

Argued Jan. May Decided Hodge Wayne R.

Randall Gilbert Johnson, Banks, Monserud, Johnson Col- Huffman, Rapid plaintiff City, for bath & appellee. Butler, Joseph Hurley, M. James P. Ter- (on Duffy ry L. Hofer and Patrick Butler, brief) McCullen, Bangs, Foye & Simmons, Rapid City, for defendant and appellant. Lichtenberg Dept,

Michael G. Justice, D.C., Washington, for defendant appellee. of, Stephen J. Helmers and Haven Stuck Jackson, LeBrun, Rapid Lynn, Shultz & City, for defendants.

GILBERTSON, Judge. Circuit PRELIMINARY STATEMENT by (Kury- appeal Kurylas, is an Inc. las) concerning litigation arising from its mo- attempts unsuccessful to sell a various Upon Kurylas’ complex. tel review purportedly claims of error committed court, we find that court to be the trial therefore correct and affirm. ISSUES brief, Kurylas eight In its raises issues committed it states trial court against ruling combine error it. We these into three issues as follows: 1. Under South Dakota’s Uniform Com- Code, mercial is a license “property” to which a valid

interest can attach? col-

2. Did convert the Bank’s lateral? priori- Is the United States entitled to

ty of 26 of escrow funds virtue U.S.C. 6321?

FACTS motel, Prior to owned lounge Rapid complex restaurant it City, Dakota. of 1983 South June ownership an to Dar- transferred (Kiser) agree- exchange Kiser rell Thereafter, ment and contract deed. property was to Motel transferred Inc. and to Cea- Company, subsequently counts, sar’s, (Ceasar’s). equipment general intangi- After a default Inc. Ceasar’s, ultimately Ku- was returned bles.

rylas. 13, 1984 financing December Bank files a identifying statement essential Ceasar’s as its of this case are many facts involved debtor. proper analysis of the issues to a clarity, these appeal. For sake January purchases 1985 Ceasar’s Mo- following chrono- facts are set out Company tel stock. logical order: 11, April Ceasar’s, 1985 and Lewis Motel 11, Kurylas transfers inter-

June 1983 provide Company Kurylas a deed in lieu fixtures, equip- inventory, realty, est in of foreclosure for per- the motel and its liquor licenses ex- ment and to Kiser property. They sonal further execute a change agreement and deed. contract for to by Kurylas. consent foreclosure Ku- in Kurylas reserves rylas leases motel to back Lewis and personal property. Ceasar’s. 23, Company incorpo- June 1983 Motel 15, April Kurylas 1985 financing files a rated. identifying statement as Lewis debtor. 1,1983 July in Kiser transfers his interest 4, provides June 1985 Kiser Kurylas a fixtures, realty, inventory, equipment deed lieu of in foreclosure for the real by assignment and the ex- licenses personal property constituting and change agreement and contract for deed motel. Company. Kurylas expressly to Motel 18, June 1985 Escrow account established exchange consents to transfer of this whereby to Lewis is make rent contract for and deed. motel; for payments payments are to be August 1,1983 Rapid City Common Coun- 1, Kurylas 1985, released December approves cil transfer of the and on-sale default, and thereafter or which- liquor off-sale licenses from ever first. occurs Company. Motel 1, July 1985 Ceasar’s makes first rent- 4,1984 February Compa- Kiser and Motel payment into al escrow account. ny exchange agreement execute an contract transferring for deed their inter- July 21, 1985 Ceasar’s makes its second fixtures, realty, est inventory, payment rental into account. escrow equipment and licenses to Neil Lewis D. 19, August 1985 IRS attaches escrow ac- (Lewis) and others as trustees for Cea- pay for failure of vari- count Ceasar’s sar’s, corporation Kury- to be formed. ous taxes. transfer, las refuses consent to this 9, September 1985 Ceasar’s makes its Lewis, Ceasar’s, pos- but d/b/a obtains payment third rental into escrow ac- premises session of motel notwith- count. standing. 7, 1985 Ceasar’s makes its fourth October 9, February Kurylas, 1984 Mo- Kiser and account. payment rental into escrow tel Company execute a trans- consent to 15, claims October fer to Ceasar’s. Lewis Ceasar’s are default for 21, February incorporat- 1984 Ceasar’s is nonpayment rent under lease. ed. (cid:127) 1, 1985 Ceasar’s defaults on a November 5, Rapid City March Common Coun- 21, 1985, $20,000 January note dated approves cil liquor transfer of licenses Bank. favor of Company from Motel to Ceasar’s. 4, 1985 Ceasar’s defaults on November 13,1984 Kurylas November financ- files a $50,000 $25,000 Septem- dated ISSUE privilege, property rather than a it must be general intangible clearly as it does not a SOUTH DAKOTA’S UNIFORM UNDER any categories personal proper- of fit other CODE, LIQUOR IS A COMMERCIAL ty described in the code. Under SDCL WHICH LICENSE “PROPERTY” TO 57A-9-106, intangibles general defined are INTEREST A VALID SECURITY things “any personal property (including as CAN ATTACH? action) accounts, goods, chat- in other than liquor that the licens- The trial court held documents, instruments, paper, tel es, presently Kurylas, name of were UCC, however, money.” fails to de- previous- subject to a valid “personal property.” fine what constitutes given license ly Bank former such are contained Where definitions not holder, Ceasar’s, Kurylas challenges Inc. UCC, other stat- within confines of holding grounds this on the utory control. 57A-1- definitions law, liquor is not Dakota a license South 103. First Federal v. Union Bank & does fall within “property,” and thus not Trust, 282, (S.D.1980).1 291 N.W.2d 285 (Uniform scope of our state’s UCC Code). “Property interests are general Commercial of definition South Dakota has Constitution, ‘they are not created personal property found 2-14- in SDCL created their dimensions are defined 2(17): personal property “money, includes existing understandings rules or that stem chattels, action, goods, things in evi- independent from an source such as state of dences definition does debt.” Bd. v. law....’” Cleveland Education Therefore, def- include licenses.2 were this 532, Loudermill, 538, 470 U.S. 105 S.Ct. exclusive, held settle inition it would be 494, 84 L.Ed.2d However, Kurylas.3 the issue favor of rule, general held that as a this court has Many jurisdictions other have faced this liberally, be rath- interests should issue with various results and rationales. strictly, er than v. these construed. Carlson While decisions are some value Hudson, (S.D.1979). UCC, analysis the context of it is N.W.2d recognized apparent proper the issue This court other review of has various greatly depends unique clearly on South Dakota’s interests which fall outside Eighth 1-26-1(3) Appeals, 1.The Circuit Court of In re 2. SDCL defines a license as "the certificate, part agency permit, (8th Village, whole Cir. O'Neill'sShannon 750 F.2d 679 charter, approval, registration, 1984), or similar form relied on the official comments of UCC permission required by law.” supply 9-106 to this definition. As the official ¿he adopted comments to code were never personal property re- 3. This definition of Legislature, they South are not bind- Dakota 2469(3) unchanged mained since See § ing statutory authority. County Sanborn of that code. ing this existed dur- Since definition Magness Exchange, v. Livestock 410 N.W.2d experiment prohibition South Dakota’s with J., result). (S.D.1987) (Miller, concurring 1934, obviously from 1917to not include does liquor licenses. Thus, in order amination of liquor our statutory supports definition.4 statutes this liquor majority position. license is a whether determine privilege, we must or a mere liquor A license is for period and the UCC. compare our statutes only year one grant wide discretion is give ef- Statutes are to be construed governing ed the body local and the state so as to have them to each statute and fect determining it is whether issued or de Woods, harmony. State Randall’s-Yankton, exist nied. Inc. v. Ranney, (S.D.1985); Matter Ex- N.W.2d 81 S.D. 134 N.W.2d 297 More Renewal, 323 N.W.2d ploration Permit significantly, the license can be voted out (S.D.1982). is a It fundamental by municipal of existence election before that the in- statutory construction rule expiration and its holder is entitled to no primarily ascer- of the law is to tention compensation loss pro- for its other than a language expressed in from the tained rata refund of the license fee. SDCL 35-3- Brands, Famous Inc. statute. Petition 35-3-15, 35-3-16 35-3-27.5 We (S.D.1984). In addi- granted note that the license holder fun tion, mandated to inter- statutorily we are process rights damental due such as a as the laws such UCC “to pret uniform hearing, notice and a thereof to be general purpose to make uni- effectuate its proceedings heard at such when considera states which enact the law of those given form grant, tion is renew revoke a A- SDCL 2-14-13. also SDCL 57 However, it.” See process rights license. due such guaranteed are 1-102. by the Constitution to li cense holders as well owners. generally It is the held rule in other Burson, 535, 1586, Bell v. 402 91 S.Ct. that the state and jurisdictions as between (1971); 29 L.Ed.2d 90 Distillers Affiliated licensee, property right in a there exists no Gillis, 44, Corp. Brands 81 S.D. v. 130 privilege merely the license but a to con Thus, (1964). clearly N.W.2d 597 there is regulated that state business. duct Gibson general no in the license Beverage Bd., v. Alaska Alcoholic Control South Dakota as between state and the (D.Alaska 1974); F.Supp. 311 151 Roehm v. licensee. 280, Orange County, 32 Cal.2d 196 P.2d however, (1948); remains, Hopper, legal There a 550 Weller v. 85 Idaho second 386, (1963); recognized jurisdic- 379 most of Saugen, P.2d 792 State v. doctrine 402, (1969); Minn. 169 37 tions cited there are 283 N.W.2d Har above that ding 232, rights in Equalization, v. Bd. 90 the license as between the licensee Neb. of (1911); parties 133 N.W. 191 Nelson v. and third creditors. These Naranjo, such (1964); position N.M. 228 with this 74 395 P.2d In re courts find no conflict Lic., general property right no Liquor Revocation 72 Pa.Commw. rule that (1983). 456 state and A.2d 709 While this court exists as between the the licen- Gibson, Roehm, directly issue, supra; never supra; has addressed this it see. Wel- ler, Nelson, supra; referred supra; Saugen, has to.sell alcoholic su- beverages privilege. pra. Kurylas majority as a admits Dis Affiliated Gillis, Corp. property right, tillers Brands 81 finds a often based on an v. S.D. (1964); Collins, UCC, analysis 130 N.W.2d 597 Burke but counters that in v. (1904). position prohibited S.D. 18 99 1112 An South is N.W. ex- Dakota such a Health, Dept. qualified. 4. In Lee v. Collins South Dakota which he or she is v. Wakon Dist., (S.D.1977). N.W.2d (S.D.1987), da Ind. School N.W.2d 108 this court determined public employee’s that the existence of a interest cry 5. This is a from value these far job regulations. his state created In state-granted marketplace. licenses in Schramm, Appeal (S.D.1987), 414 N.W.2d 31 bar, gave appraiser the case at uncontradict- professional this court further a found that has testimony ed and on-sale licens- that the off-sale property right practice a in his license to his $75,000 $90,000 es had a commercial value qualified profession. See also SDCL 13-43-9.1 Village, Rapid City In Shannon on the market. concerning property right a teacher’s to contin supra, value of on-sale li- commercial employment teaching position ued in a for $90,000 the Sioux Falls market. cense was beverage similar to those found in the South are our alcoholic terms of by the code: 35) Dakota maintains (SDCL Title code. security interest a granting specifically The license was related 1. 35-2-7,6 SDCL license forbidden particular ato location. See SDCL are not any which prohibits transfers

which 75. 35-4-74 and transfers” where state-approved “bulk of licenses can be 2. number However, the party. is to transfer another issued is limited law. SDCL See clearly security interest granting through 35-4-10 35-4-11.1. exclusively controlled not a bulk transfer death, Upon personal the licensee’s specifi 57A-9-111 by that section. may li- representative operate the “a cally mandates that cense; automatically does not ex- Shannon See also not a bulk transfer.” pire. See SDCL 35-2-8. Such bulk supra at 681-682. Village, 4. The license is to another transferable 35- completed under SDCL are transfers appropri- person consent of the with a new obtains 2-7 when the transferee governmental ate authorities. See govern appropriate local from the license SDCL 35-2-7. Dakota.7 ing body State South and the only The license could be revoked hearing. cause and after notice and person states no SDCL 35-1-4 Application 35-2-13 and See SDCL “produce, transport, store or sell shall Sons, Phillips Ed 86 S.D. un beverage except as authorized alcoholic This stat provisions of this title.” der Weller, Jung regulate supra; also Horn Moon attempt or forbid See ute does Soo, (1946); v. Ariz. P.2d 929 granting Brewing, 41 Wash. Deggender Seattle Further, it has been held that license. P. Thus im- the clear legislature made licens “wherever the recog- port beverage of our alcoholic code transferable, assignable and the es nizes the existence of valuable can effected with the consent transfer right in licensee the license as between the anyone qualifying un of the authorities to Therefore, party creditors. un- and third statute, der the element clearly gener- der the UCC it can become a recognized sufficiently to warrant license intangible subject security to a interest al exposure by creditors of its to seizure Minn, of a creditor. favor the licensee.” Saugen, Saugen by Kurylas The court in at 40. Those cases cited which have found the of such a existence existence refused find the of a based Minnesota which have so on the that the statutes done basis upon original provides: application. 6. SDCL 35-2-7 acted as if an In any any Any may case of transfer of license affected granted license under this title be title, fifty transferred to a new location or to another person. this a fee of one dollars hundred person, If required portion the transfer is to another unexpected to continue the oath, writing, the licensee must show in under of the license. that he a bulk business has made sale of the operated under the license. The bulk sale complaint. Bank asked for a court-or- In may upon granting be conditioned of a solely license on its dered transfer of the based transfer of must the license. transferee security interest in the license. The learned exactly original application make applicant, am as if refusing clearly court trial correct application and the shall take grant judicially-mandated such Such a relief. origi- same course and be acted as if an legislature transfer is not authorized un- application. any nal No transfer of license 35-2-7, as to der SDCL which is sole method person may granted another be until all mu- acquire liquor license how in this situation. nicipal taxes and state sales incurred security A holder of interest has foreclos- who operation transferor of the as a result quali- ed his interest in court must still meet the premises paid. licensed have been If the fications of Title 35 and the discre- secure location, transfer is to a new the licensee approval body tionary governing of the local application showing must make all the rele- Department Revenue South Dakota location, vant facts new as to such he new before becomes the licensee. application shall take the and be same course possession re- liquor specifically code SDCL 57A-9-301 and applicable state 57A-9-312(5)(a). re Revocation a result. In quires such License, Eagles supra; Matter Liquor Kurylas’ Security A. Was Interest Ex- Inc., (Bkrtcy.N.D.Ind. Nest, B.R. 337 tinguished by Disposi- an Authorized Inc., 1986); 23 B.R. Rudy’s, re tion? may be an (Bkrtcy.E.D.Mich.1981). issue, of the but trial court found that the secur appropriate treatment ity Kurylas interest political to the retained when it dealt determination is left such a extinguished with Kiser was thereafter arena, legislature has chosen the and our disposition, giving an authorized thus recogni- alternative, being other superior security interest the invento liquor reality” that a tion of “commercial accounts, liquor ry, licenses as of De as- frequently the most valuable license Any Kurylas cember interest type that this of .business can own.8 set April obtained 1985 transaction was majority juris join Thus we with the prior perfected security inferior to Bank’s decided this issue and dictions that have pursuant 57A-9-312(5)(a). interest to SDCL to take hold that our laws allow creditor There is no doubt that consented in a licensee’s disposition of the collateral in his as it is between those two license exchange agreement with Kiser: parties. Bogus v. American National agrees assign The Purchaser not to this (10th Cir.1968); Bank, 401 F.2d 458 Para Agreement dispose or sell or otherwise States, Finance mount Co. United any real de- (6th Cir.1967); Shop, F.2d 543 In re Coed herein, part, either in whole or in scribed Inc., (N.D.Fla.1977), F.Supp. aff'd person, corporation, firm or other (5th Cir.1978); 567 F.2d 1367 In re Came receiving permis- without first Seller’s Court, Inc., (Bkrtcy.D.R.I. lot B.R. 596 sion, permission and said cannot be un- 1982); already and those cases cited herein. reasonably withheld. may assigned nor This contract ISSUE II underlying property may the be sold consent of the Sell- without written DID BANK’S KURYLAS CONVERT ers. written consent shall not be Such COLLATERAL? unreasonably withheld. It is the intent adequately protect The trial court held that convert- paragraph to ed Bank’s collateral on November and not to restrict the Seller’s prop- possession when motel alienation took the sale other complex erty, by the Purchaser hereunder. Sell- personal property related may assign that Purchaser agrees er thereafter obtained the on-sale transfer of corporation to a to be Agreement this liquor and off-sale A determina- licenses. assignment Such Kurylas tion of whether the col- converted hereafter shall not formed. however, relieve Purchaser of question in comparison lateral involves a hereunder, obligations assumed Bank’s interest in that collateral with the added) (emphasis Kurylas, interest of party since each as- security serts a in proper- by Kurylas, assignment interest the same As authorized ty. by Kiser party priori- agreement We must decide which was executed of this Company, ty to in of Motel the collateral and thus one week later favor lawful Village, supra, only reported cannot take 8. Shannon is the of items in which creditor addressing security 57A-9-104. See decision in interest. See SDCL this issue the context of Roberts, (Bkrtcy.E.D.Mich. Boufsko, the South In re 44 B.R. 98 Dakota UCC. In re 358 also (footnote 5). legis- (D.S.D.1973), 1984) past, F.Supp. by Kurylas, when the 392 cited In the interpreta- agreed judicial with a not a case which deals with the UCC. legislature disagreed lature has not If our statute, Village overturn that it has acted to with the Shannon tion of a interpretation code, interpretation concerning both alcoholic bever- of our commercial had 35-11-2, years legislatively holding. ages, the UCC. four and overturn the SDCL 35-11-1 ch. 410. Yet a license remains absent from the list 1986 S.D. Session Laws 656 Kurylas’ security We must thus determine what consti- Bank claims that

Inc. tutes an “authorization” In the for sale. by assignment this was terminated interest case, by context of this is an authorization by failing 1, 1983, July party an all nothing proposi- a secured or obtaining by a new securi- itself protect which, given, if tion waives the creditor’s financing statement agreement and ty rights secured may to its interest? Or Co., Inc., Kurylas assignee, Motel from the give party authorization to which condi- creditor. SDCL an unsecured became attached, may tions such as the continu- (2). 57A-9-105(l) and Comment security ation the collat- given pur- consent argues that written eral after sale? exchange agreement is contin- suant to remaining security interest at- gent on its a line of hold cites cases which to the collateral. tached security agreement expressly when a “Except states: as oth- 57A-9-201 SDCL prohibits disposition of collateral security title a provided by this erwise without the written of the se- consent according to its is effective in order to find party, cured for a court against parties, pur- between the

terms permitting disposition an authorization against credi- chasers of collateral security free interest within provided” referred tors.” “otherwise 9-306, (2), meaning of section subdivision pertinent to this that section which prior there or must either be actual sub- 57A-9-306(2) found case is SDCL sequent writing se- consent 57A-9-402(7). 57A-9-306(2) reads SDCL purpose manifesting cured creditor “Except chapter oth- as follows: where disposition authorize the the se- free provides, security erwise interest contin- curity interest. notwithstanding sale, ues in collateral ex- Equipment v. Dolk Central change disposition or other thereof unless California Tractor, Cal.App.3d 144 Cal. 78 disposition authorized the se- wcls added) Rptr. (emphasis 371 See party security agreement cured otherwise_” Inc., 46 Systems, also Matter Franchise added) (emphasis 1985); (Bkrtcy.N.D.Georgia B.R. In re recognized court has that an “authorized Inc., 44 Properties, B.R. Southern disposition” or sale” “consent to has the Matto’s, (Bkrtcy.E.D.Va.1984); Matter extinguishing effect of Inc., (Bkrtcy.E.D.Mich.1981); B.R. thus the transferee takes free of the Co., Long Baker PCA v. Creek Meat security interest. Aberdeen Production Or. 513 P.2d Livestock, Credit v. Redfield (S.D.1985). authority also key See James- the line of factor Swift Bank, (8th town Nat. 426 F.2d 1099 Cir. cited is that all of the secured 1970). 57A-9-306(2), Under inter- perfected SDCL the bur- creditors had their 57A-9-402(7) den is on Bank that the authoriza- est. the effect of to show Thus given (1) financing by Kurylas play: tion to sell was came “A state- into filed security agreement (2) otherwise, respect ment to col- if it is remains effective with prevail. even E. lateral transferred the debtor Savage United v. W. States Son, Inc., though party of or con- (D.S.D. the secured knows F.Supp. & 1972); per- sents PCA, to the transfer.” The benefit supra Aberdeen Un- specifically fection PCA, to the creditor more like Aberdeen this case concerns a addressed Official Comment 8 to UCC to sale agree- consent in security clause the ment, 9-402:9 therefore, question of other (7) outside consent par- to sale the secured also Subsection deals with a different ty filing does not problem, namely arise. is whether a new 57A-l-102(2)(c), 9. As noted at footnote the Official which call Comments 2-14-13 and SDCL statutorily binding They are not on this court. construction acts such as the uniform helpful guidance, are nevertheless Sanborn UCC. Bank, County supra, especially light of SDCL market, clearly party supe- the third has has been the collateral necessary where goods. rior one debtor to another. from transferred much debated has been question This Idaho Production Credit v. Sim Western This under the Code. preCode law Feed, plot 106 Idaho 678 P.2d question answers article now This rationale is also accord with searching Thus, any person negative. long-standing principal statutory our debt- ownership of the of a legislature the condition construction that the said what inquiry as to the debtor’s make and meant it said. or must meant what Crescent title, Nerison, and must search Electric v. 89 S.D. 232 N.W. source if circumstances former owner 2d 76 name of a require it.

seem holding harmony Such a also with goal preventing the UCC’s secret liens. Kurylas’ reliance problem with Industries, Inc., Hodge re Forest In does not authority cited above is that it 1986); (Bkrtcy.D.Idaho In re B.R. Vi of this case. When the facts fit eths, (Callahan) (Wis. Rep.Serv. UCC of the to the transfer consented 1971). by Kurylas cited are also cases Co., Inc., Kiser to Motel on June from exclusively disputes original between the perfected holder of a it was not a subsequent party secured transferees. not filed a security interest since it had dispute Here the a seller and between 57A-9-302(l). financing statement. SDCL Bank, expand party. innocent third To an protection af- Kurylas thus was denied the assignments in of conditional the doctrine party under perfected a secured forded case in effect make this would 57A-9-402(7). SDCL obligations originally as of the insurer of an was a holder nevertheless by Kiser and Motel Co. and there sumed security interest on that date. unperfected transferee, subsequent Ceasar’s. after 57A-9-203(l). 57A-1-201(37) and SDCL money to which was Bank loaned Ceasar’s by the contract for deed That is made clear ulti paid as rent and which would to be himself exchange agreement between de mately go Kurylas. When Ceasar’s Thus, question arises and Kiser. obligation, Bank should faulted on unper- as an whether had the now its collateral rather than entitled to interest to condi- fected holder to it Kurylas is entitled finding out that approval of the tion the of the transfer conditional sale prior unknown Co., from to Motel Inc. collateral Kiser lien. secret requirement unperfected securi- that its is similar to those type of situation ty interest continue on in the collateral. has the secured creditor cases in which dispo- his consent to attempted to condition 57A-9-306(2) only of a speaks proceeds that the upon requirement 57A-9-402(7), sition “disposition.” Unlike SDCL to him. As sale be remitted any type is no mention of of condi- there party has no control over third innocent disposition. This led the Su- tional origi- his creditor and dealings between preme Court of Idaho to conclude: debtor, down have struck nal the courts states: three of UCC [Comment § 9-306] party third attempts to make the such “The transferee will take free whenever PCA, supra Aberdeen insurer of debt. disposition was authorized ...” J., dissenting (Henderson, and cases at 834 Therein, no distinction made between therein); Equip- v. Haar’s cited Vacura other conditional authorization (Minn.1985).10 Inc., ment, As kind of authorization. between agreed summary, only those conditional party purchaser who to no third disposi party to the by a secured and the holder which consents condition recognized are collateral which placed tion of his permitted goods to be on the por- "or otherwise" the alternative Kurylas’ authority mined from is further diluted noted, 57A-9-306(2). situations As has been fact that those cases deal with fact tion of disposition where the is not authorized before us. type situation is not of a fact security agreement but is rather to be deter- PCA, preserve to his all the facts in effective Aberdeen found that are by the UCC property.11 no there was “otherwise” authorization for in the interest thus, cattle, security the of the sale and Security Lose Interest Bank Its B. Did interest continued. The same result arises Disposition? to by a Consent Kurylas from the facts this case. that Bank knew there shown was some During pos had the time Ceasar’s change relationship Kurylas between collateral, Bank made vari session Ceasar’s, he failed to that but establish and secured such loans with loans to it ous an Bank knew there had been actual trans- inventory, accounts receivable and Ceasar’s knowledge fer of the Absent collateral. intangibles, licenses. general transfer, certainly a there can no con- be perfected on De security This interest Further, disposition by sent to the Bank. April Kurylas In of 1985 1984. cember court Aberdeen PCA this held that even complex. motel regained possession knowledge, if not there is it will elevated financing statement exe Kurylas filed legal to status April of an “authorization” to by as its debtor cuted Lewis extinguish security from interest. 379 N.W.2d as the leaseback a condition contrary Kurylas To hold also Kurylas Lewis Ceasar’s. would that Lewis Ceasar’s be inconsistent with the terms of the secur- now contends Kurylas ity agreement required con- transfer of the collateral back which written disposition Therefore, authorized extin security constitutes an sent. Bank’s interest pursuant security interest guishing Bank’s to Ku- survived unauthorized transfer 57A-9-306(2). The trial Similarly, court rylas. to SDCL the November Bank did not consent to found that since liquor licenses Cea- transfer of the from transfer, security interest contin repossession such Kurylas following sar’s ued the collateral. by the motel had effect on no security Bank’s as Bank had also interest between Bank not consented this transfer. give prior required Bank to Ceasar’s disposition collat- written consent Superior Right to C. Did Bank Have a eral, inventory, except could be sold which Possession on No- of the Collateral buyers ordinary course. in the It vember 1985? undisputed not execute a did authorizing written consent such transfer perfected security Bank had inter Kurylas. Kurylas argues that Bank’s inventory, est in Ceasar’s accounts receiva knowledge regarding the leaseback consti- 13, 1984, as ble licenses on December disposition tutes an authorization of the unperfected interest in well as an Ceasar’s exception under the “or otherwise” se equipment January Any of 1985.12 57A-9-306(2). disagree. We had initial curity in the extinguished transactions with Kiser was This the same issue in court addressed and, disposition July 1983 there PCA, supra. Aberdeen case we fore, perfect did not his refused consent in to find the written doc- April until collateral security agreement. uments other than the However, filing 1985, transaction. present case, PCA, In the unlike Aberdeen equipment Ku- was ineffective as to since purport no documents exist that to evi- rylas equipment failed to describe the dence a consent to transfers written court, financing Bank. a full statement. Yet this review collateral against party. type holding conditional does mean that a This is a secured 57A-9-306(2) party protect disposition clearly cannot him- UCC. allowed type self in this ous of a obvi- situation. most Nitrogen Corp., 173 Inv. Co. v. Mann Columbia protection financing is to file a statement (1984); Hodge Ga.App. In re 325 S.E.2d 612 signed by original purchaser, bringing thus Vieths, Industries, Inc., supra. supra; In re Forest play protection into 402(7). offered 57A-9- alternative, party As secured can financing statement 12. Bank failed to file a disposition withhold his assent unless the equip- as to accordance with SDCL 57A-9-402 subsequent purchaser signs financing state- ment. establishing perfection ment in the collateral Kurylas’ conflicting security se- perfected Because interest Priority was between of time by Bank's, is determined curity interests the subordinate trial court was 57A-9-312(5). perfection. SDCL filing or holding Kurylas in correct that converted Kurylas priority Thus, Bank achieved over property belonging to Bank. financing state- file its being the first to by Kurylas argues upon receipt that of a security inter- unperfected Bank’s ment. personal delivery property, demand for of January prior- has equipment of est holding property one hás of another Kury- of unperfected interest ity over investigate a reasonable time to to deter- did not same collateral which in the las right possession. mine who has the Therefore, any April until 1985. arise Rapid Sewing Sanders, Center v. 79 S.D. through Kurylas the Lew- obtained interest (1961). 112 N.W.2d 233 This conten- 1985is April is and Ceasar’s transaction merit, Kurylas is without as much tion did the inven- to Bank’s subordinate merely investigate than ownership. more receivable, liquor licenses tory, accounts Kurylas transferred licenses to its , equipment. name, prop- own made beneficial use of the Ceasar’s was On November erty property leased the back Cea- nonpayment Bank reason of default to sar’s and Lewis. These actions illustrate imme- Bank was entitled to three notes. converted, that such was as de- pursuant the collateral possession of diate Myers, 258 fined N.W.2d Scherfv. security agreements and the terms of its (S.D.1977): “Conversion is the act Not- provisions of SDCL 57A-9-503.13 exercising person- or dominion over control withstanding had the the fact Bank repudiates in manner that al possession collat- right to immediate of the right man- in the or in a owner’s on took eral November right.” with ner that inconsistent such This ac- possession Bank’s collateral. constituted conversion. tion took possession Because loan, securing Bank the collateral Bank’s recognized a conver- This court has disposing collat prevented from of the appropriate where a sion action an action pursuant to SDCL 57A-9-503. eral party party’s interferes with secured of the the value conversion entitles to take possession reason conversion, plus time of County Bank debtor’s default. Sanborn 21-3-3(1). court The trial Magness 410 N.W. interest. SDCL Exchange, Livestock (S.D.1987). damages equal ad- to the 2d UCC also assessed these 9-306, unpaid obligations dresses this Official situation amount of Ceasar’s § 3: interest, Comment Bank, Bank is not enti with since an from the In most a debtor makes more than loss cases when tled collateral, disposition unauthorized 57A-9- disposition of its collateral. SDCL interest, security prior law and 504(1) damages under hold that the We Article, origi- in the continues proper.14 trial court were assessed purchas- nal collateral hands of the say, er or other is to transferee. That III ISSUE subject since the takes transferee THE STATES ENTITLED IS UNITED interest, may party the secured ESCROW FUNDS TO PRIORITY OF repossess collateral from him 6321? BY OF U.S.C. VIRTUE appropriate maintain case an action the Internal Revenue 6321 of conversion. Section signed by financing Kiser in No- provides: his statement 13. 57A-9-503 "Unless otherwise time, agreed party a secured motel and default At that vember Ceasar’s, possession take See to also Farmers State Bank v. collateral ...” possession not were contents Often, S.D. underlying As have held Kiser. we N.W.2d the transfer did not survive 1983, we Co. in June from Kiser to Motel assigns finding of also as error the issue. this additional need address perfect the trial court that he failed to his secur- ity finally filed interest of June of 1983 when he and, notice, therefore, federal tax lien without imposes entitled of 195415 Code rights to property, prevail 6323(b). under section upon property and We dis- “all belonging a agree. or to personal,” real whether 26 U.S.C. taxpayer. 6321 delinquent § Our initial concerns determination automatically arise liens (1964). tax Such question of ownership of the escrow and of assessment continue the time parties stipulated funds. The that the mo liability is underlying tax satisfied

until the deposited nies in the escrow accounts were expires. limitations This of statute or the account, checking drawn from Ceasar’s and property property to all or lien attaches through the source of such funds was taxpayer then holds or subse rights the Bank loans made to Ceasar’s. The escrow City acquires. Bank v. quently Glass primary importance is of in set States, 265, 108, 66 326 U.S. S.Ct. United ting parties’ to Court, forth the intent as owner (1945); 56 v. L.Ed. J.D. Inc. 90 ship of the funds: States, (7th Cir.1983); 258 712 F.2d United Trust & Ass’n. Bank America Nat. Sav. (9th Mamakos, Cir.1975). 1217 509 F.2d v. OF MANNER PAYMENT scope of 6321 “broad and The section deposit $22,500 agrees Tenant on the Congress on its meant to reveals face that June, July, August, September, 15th of every in that a tax reach November, the es- October and 1985 and might Na payer have.” United States v. $22,500 Commerce, 713, pay crow on shall Landlord 472 tional Bank 2924, 1st of Janu- 719-20, December 105 86 L.Ed.2d S.Ct. March, ary, February, April May, (1985). priority federal tax over liens $22,500 agrees deposit on the Tenant essentially liens is based “first other prepay 15th months in of such right.” is first in in time United States v. payments required the lease for Decem- Britain, City New 347 U.S. ber, through May, January 1986 and L.Ed. S.Ct. 1987 ... general government pre- This lien of the against unperfected accruing all or inchoate escrow vails on such covering taxpayer’s property liens Tenant a account to credited to the be rights exceptions quarterly providing with out- Tenant is not in 26 lined U.S.C. 6323 That sec- under the terms of this Lease. default provides default, in- principal tion that federal tax liens are the event respect valid with to the claims of account interest accrued such escrow security interest, “purchaser, holder of the sole after the date of default shall be lienor, judgment mechanic’s lien creditor of the Landlord. proper

until notice has been filed.” J.D. Kurylas argues prepaid the law Court, Inc., supra. controlling ascertaining the own- rent argues Generally, Kurylas ership its claim assets. to the es- of the escrow proceeds superior prepaid property of the landlord and crow to that of the rent is (1) upon payment United States because Ceasar’s had no such transfer of title occurs is not interest in escrow to the landlord and account for tenant government contingent upon later Zaconick Kurylas lien to default. attach — (5th Cir.1962); rightful owner; (2) McKee, Mary- even if v. 310 F.2d Ceasar’s had funds, States, an interest in the escrow land National Bank United Thus, F.Supp. (D.Md.1964). under this purchaser was nonetheless a without notice lien, rationale, ownership of priority entitled first would have 6323(a); (3) prior payments funds of rent monies escrow under section first two purchaser was a to the IRS assessment. “securities” therefore, and, 15. We note that change change, the In- major the Internal antedate this controlling. Revenue Code All Code of 1954 is occurred in 1986. facts here- ternal Revenue case, however, equity. “equitable is not a di The so-called title” or funds Ceasar’s to from does not become pur- transfer vested rect brings play into an escrow payment it also Kurylas; purchase chaser until full it, body account, with of law price-or other fulfillment of condi- is defined as a to escrow. Escrow pertains tions of the contract-until time deed, prop writing, money, stock or other purchaser has no interest which can grantor, promisor or delivered erty subject virtue this contract become person, into the of a third obligor hands as of mortgage, although part a lien happening of by the latter until the held payment may given eq- have him an performance of a condi contingency or interest in property, uitable the which a tion, by then him delivered to the equity protect. court of will obligee. Black’s Law grantee, promisee or 114, 166 (emphasis 40 S.D. at N.W. at 424. 1979); (5th Dictionary King 489 ed. v. First added) Fairbanks, 647 P.2d 596 National of Wyatt This court in made it clear that Triska, 1982); (Alaska Pike v. 165 Neb. potential recipient property the of the un- 104, Money may be 84 N.W.2d 311 agreement der the escrow did not have agreement. subject of an Ed escrow prior per- interest to sufficient 41 Mich. Shafer, v. ward Rose Sales Co. Therefore, to formance for a lien attach. 105, 199 655 When App. N.W.2d party legal the other who still held under placed has been escrow equitable title to the must be sub- go agreement property is to to an that the ject to attachment on the entire value of meeting particular person upon the of a property. potential recipient’s The condition, person title vests in that when equitable relief from a state court Rose, supra; the condition is met. Edward would be useless here because after Vandercook, 642, 136 Mich. Alexander v. attached, lien the United States was enti- (1904); Develop 858 Mar 99 N.W. Win priority section 6321 to its which tled under Wilson, (N.D. 369 ment v. Congress defeated or has not allowed to be 1960). obligor grantor or of an instru subsequent equitable by diluted state court held in control over it ment escrow loses “ determined actions. ‘Once it has been although legal he and its con retains title interests in that law creates sufficient state performance condi comitants until of the satisfy requirements [taxpayer] grantee tions of the contract escrow statute], inoperative,’ state law is Win, obligee. Pike, supra; supra; or Mar [the consequences are thenceforth and the tax 30A C.J.S. Escrows 9.§ v. dictated federal law.” United States important Such to this state law Commerce, 472 U.S. National Bank of party issue it determines whether a 722, 2926, 86 L.Ed.2d at 575. 105 S.Ct. at “property rights property” or which lost control over the may Ceasar’s have government Aquili lien can attach. accounts, deposited in the escrow 509, funds it States, no v. United 363 U.S. 80 S.Ct. equitable title legal it retained 1277, (1960); but 4 L.Ed.2d Avco Delta until the condi- States, (7th Cir.1973). the law of escrow United F.2d 692 per- the escrow were much tions of While South Dakota does not have formed; i.e., the date concerning escrow, the earliest of either case the case of law 111, transfer, Bank, or default Wyatt S.D. December County v. Meade 15, 1985). (1918) great (which Before 166 N.W. 423 is of assistance occurred October event, August resolving question. happening of either on 1985, 19, attached all the United States Payment part purchase price of that in the escrow account as funds however, agent], does not escrow [to Therefore, legal equitable date. legal equitable pur- vest a title in the eligible to may have been chaser, title that equitable only but 15, not occur before October receive did property. “equitable A ti- so-called time, had be- legal the funds nothing tle” more than a title, assessment. encumbered the IRS may presently be enforced come purchaser on that it the date claims was a had no default there been As assessment, pay- on the prepaid two rents the escrow account in date also remained occupancy made before ments return for Ceasar’s continued subject and thus Ceasar's disagree. purchaser A the motel. We the lien. meaning usually within of the statute acquires means who title for a one valuable payments were made two The second of vendor consideration manner assessment, on date subsequent Scovil, vendee. United States v. 1985. These U.S. 9 and October September (1955) (inter- account in the escrow were 75 S.Ct. L.Ed. 271 placed funds deposit; there- at the time of preting predecessor encumbered § fore, yield claim must to the IRS Kurylas' 6323(h)(6)). protection purchas- of a accruing The interest statutory authority. lessee, er has so that been extended he would also encumbered funds these option his or his cannot lose leasehold States, Phelps v. United encumbered. renew or extend it on of a account federal 95 S.Ct. L.Ed.2d yet duly time tax lien not filed at the he agreement provides inter- (1975). The executory the lease or the entered contract default, belongs upon to but est option Plumb, or the to lease. Federal Tax the IRS assessment which cannot override Liens, (3d 1972). Chap. ed. The § prior We hold that had occurred thereto. include statute has been broadened to a payments by Ceasar’s into four made all purchaser, lessee not as a but we will ex- the accrued inter- escrow account and the scope tend of that to include statute a subject property of Ceasar’s est were purchaser lessor as a without further stat- lien under government’s tax section utory supporting guidance or case law. To purchaser to allow a landlord become a “pur that it was a claims premises, rent when he receives for leased without notice under 26 U.S.C. chaser” future, presently or in is either not 6323(a) and, therefore, priority entitled to § 6323(h)(6). scope If within the of section exception this to of the escrow funds under case, avoid the such was the lessors could 6323(h)(6) general rule. defines Section tax on a priority of all federal liens debtor’s purchaser as a follows: property by establishing accounts similar “purchaser” person means The term An to in- those of and Ceasar’s. who, adequate for and full consideration terpretation “purchaser” in such a broad worth, money money’s acquires or an purpose offend sec- manner would (other lien or than a “superpriority” tion statute. interest) is which valid under purchasers against subsequent local law Kurylas is also not a bona fide applying without actual notice. purchaser of “securities” under section purposes preceding for of sub- sentence 6323(b) protection as to be so afforded (a) section, pur- section this Congress from tax lien. has limited poses of section 6324— money “security” the definition of a to or (A) a lease of property, negotiable as various documents described (B) executory pur- a written contract to First instruments. United States v. Nat property, chase or lease Bank, Cir.1972). (6th As 458 F.2d (C) option purchase prop- an or lease parties appeal maintain none of the erty therein, or or negotiable is a that the escrow instrument,16 remaining question sole (D) option an renew or lease extend a definition of whether it falls within the property, not lien or “[MJoney means "money.” in the section interest shall be treated bite, feel property. money; an interest kind one or could (S.D.1986) Negotiable as to whether instruments are defined for discussion negotiable following purported condi- 57A-3-104 sections thereafter. instrument be Const., See Western Bank v. RaDec tional or unconditional. if ‘money premises they or six months later define it as avoided If one should pinch. default. money,’ the door would receive beyond any width reasonable open majority opinion page states at 659- in mind.” could have had Congress 60: States, United Worleyv. 340 F.2d Section 6321 of the Internal Revenue assessment, Cir.1965). On the date of (9th imposes of 1954 Code federal tax lien receive Kurylas had at most rights proper “all fu- on a money ty, personal,” belonging from the escrow account whether real delinquent taxpayer. to a date, money is 26 U.S.C. right to receive and the ture Such tax liens auto arise security. included in the definition of not matically at the time of assessment Bank, supra. supra; Worley, First Nat. underlying liability continue until the tax does is clear that the escrow account It or the is satisfied statute limitations “money.” security as it is not constitute a expires. proper lien attaches to all Therefore, Kurylas is not entitled to ty rights the taxpayer then lien tax exception from the effects of the acquires. Glass subsequently holds or purchaser of grounds that it was a on the States, City Bank v. United 326 U.S. 6323(b).17 section securities (1945); J.D. 66 S.Ct. 90 L.Ed. 56 is af- of the trial court The decision Court, States, Inc. v. United F.2d firmed. (7th Cir.1983); America Mamakos, Nat. Trust Ass’n. v. & Sav. WUEST, C.J., Cir.1975). (9th scope and MORGAN and 509 F.2d 1217 MILLER, JJ., of Section 6321 is “broad reveals concur. Congress face that meant reach J.,

SABERS, dissents. taxpay every interest in that a have.” United States v. Na GILBERTSON, sitting might for Judge, er Circuit Commerce, 713, tional HENDERSON, J., U.S. disqualified. of 2924, 2919, 719-20, 105 86 L.Ed.2d S.Ct. SABERS, (dissenting). Justice law, application is dispute The of the III the United I dissent on Issue because point majori- The the not in the law itself. escrow priority entitled to States not the opinion obviously overlooks is that ty The funds virtue of U.S.C. § lien the only tax reaches federal pre- argument of the that the core IRS’ has, the taxpayer and not rents in escrow at all times paid held were taxpayer’s of the credi- Ceasar’s, Inc., and thus the payments be- prepaid These lease tor. out subject pointed to IRS lien. As the agree- longed to under the escrow brief, IRS cite three Kurylas’ the failed to nor succes- and neither Ceasar’s ment paragraphs from the escrow IRS, ex- sor, any interest therein the had into payments that the which make clear position interest. This cept for the accrued pay- lease prepaid the escrow account were opin- by the indirectly majority conceded pay- had no to those ments. Ceasar’s page it states: ion on 662 where ments; paid to ac- they the escrow were payments made The second two were belonged Kurylas for and count assessment, on subsequent the date escrow expressed terms of the 7,1985. These September and October agreement, contrary to IRS’ asser- and placed in escrow account were funds tions, contingency no to occur needed deposit; time encumbered proper- payments Kurylas’ therefore, yield those to become Kurylas’ claim must authority. inter- fact, only contingency statutory was The ty. the IRS accruing funds on these encumbered of the est would be entitled to the use Ceasar’s of 26 States on the basis to the United in favor of funds 17. The trial court also found against Kurylas unnecessary review under 31 United States and U.S.C. we deem holding. for its holding. §C. 3713 as an additional basis this alternative trial award of Since we affirm the court’s Phelps v. which was properly placed in an would escrow encumbered]. [also States, prior United 421 U.S. 95 S.Ct. account and outside reach of creditor, 44 L.Ed.2d 201 Ceasar’s or its the IRS. in- as to correct opinion is majority as- date of payments after terest and payments sessment, correct as not but The feder- of assessment. date before August occurred tax lien assessment

al lien tax did the federal 1985 and into escrow paid funds attach to Therefore, the to that date. prior account MARTINSON, Mayme Nelson, Peter $22,500 payments lease prepaid first two Fenno, Bogstad, Bog Irene Earl James July made on were each which stad, Bogstad, Bogstad, Ronald Duane 21,1985, were the July Larsen, Blogg, Elva Darlene Darlene and there- property of Ceasar’s and not the Bogstad, Larsen as for Earl Trustee IRS’ by the IRS. fore not attachable Evans, Dinwiddie, Marjean Junella proper- only attach lien could federal tax Dick, Anderson Melva and A.G. Plain point Ceasar’s, which at ty of Appellants, tiffs and to use the than the nothing more month each periods of one property for HOLSO, Mayme individually and as Ex January 1986 and ac- December Spar ecutrix Estate of Orville M. crued interest. by, Deceased, Overby, Albin the un operates under This escrow account Martinson, Jenny De known heirs pledge Dakota law same South Deceased, ceased, Sparby, Bennie M. to be effective as does not need be filed Deceased, Sparby, B. Clifford Milton S. payments long prepaid lease as the two Deceased, Sparby, and the South Dako paid prior to the IRS’ assessment date were Revenue, Department ta Defendants above, indicated August 1985. As Appellees. rights of only the IRS lien attaches No. 15829. (taxpayer) rights not the debtor money creditor. debtor’s Supreme Court of South Dakota. majority opinion As indicated Argued Jan. liens page priority of federal tax May Decided essentially based over other liens right.” first time “[FJirst Britain, New City United States S.Ct. general lien L.Ed. government against prevails all

unperfected covering or inchoate liens

taxpayer’s property rights exceptions in 26

with the outlined U.S.C. provides That section tax are that federal liens invalid with respect any “purchaser, claims of interest, of a

holder mechanic’s lienor, judgment lien creditor until J.D.

proper notice has filed.” been Inc., Court, supra. This federal tax lien invalid re- with

spect Kurylas’ property the claims notes ing identifying statement Kiser as debt- 1985, Bank. ber favor of or. posses- December takes Ceasar’s executes a November security agreement personal in favor of sion the motel and related Rushmore (Bank) inventory, State Bank all ac- from Lewis and Ceasar’s. liquor and our state’s definition of Rapid City Common statues November Twenty-first liquor “personal property.” li- “The approves transfer of Council Kurylas. virtually grants Amendment the States from censes Ceasar’s complete control over ... how structure Bank commences December liquor system.” Cal. Re distribution motel claims over various action settle Liquor Dealers Assn. v. Midcal itself tail as between assets and debts 110, 100 Alum., also and Lewis are S.Ct. Kurylas. Ceasar’s collection 63 L.Ed.2d named defendants addition, the guarantee. notes and a UCC, our state’s version of the Under priority as to determine court was asked may security interest parties create a account be- ownership of the escrow general personal property includes Kurylas. tween IRS 57A-9-102(l)(a). intangibles. See personal found If a license is to be I

Case Details

Case Name: Rushmore State Bank v. Kurylas, Inc.

Court Name: South Dakota Supreme Court

Date Published: May 11, 1988

Citation: 424 N.W.2d 649

Docket Number: 15764

Court Abbreviation: S.D.