Source: https://scocal.stanford.edu/opinion/business-title-corp-v-division-labor-law-enforcement-27984
Timestamp: 2020-08-07 21:54:38
Document Index: 195631235

Matched Legal Cases: ['§ 6322', '§ 6323', '§ 6321', '§ 24074', '§ 6321', '§ 38']

Business Title Corp. v. Division of Labor Law Enforcement - 17 Cal.3d 878 - Thu, 09/02/1976 | California Supreme Court Resources
Home > Opinions > Business Title Corp. v. Division of Labor Law Enforcement
Citation 17 Cal.3d 878
Business Title Corp. v. Division of Labor Law Enforcement , 17 Cal.3d 878
(Opinion by Sullivan, J., with Wright, C. J., McComb, Tobriner, Clark and Richardson, JJ., concurring. Separate dissenting opinion by Mosk, J.) [17 Cal.3d 879]
Lipsig, Rosenfield, Temkin & Leff, Robert G. Leff, Denison & Kightlinger, John P. Kightlinger, Evelle J. Younger, Attorney General, Thomas Scheerer and Martin Milas, Deputy Attorneys General, and Lazar, Friedman, Stahl & Jabin for Defendants and Appellants. [17 Cal.3d 880]
During the course of the escrow various creditors of Mating Game, Inc. notified plaintiff escrow holder of unpaid claims. On October 21, 1971, the Internal Revenue Service filed with the Recorder of Los Angeles County notice of its lien for the assessed taxes and on January 5, 1972, served on the escrow holder notice of levy pursuant to this perfected lien for $3,170.88 in previously assessed taxes, penalties and interest. Defendant Division of Labor Law Enforcement, State of California, presented a wage claim in the sum of $1,418.85; defendant Los Angeles Hotel-Restaurant Employer Union Welfare Fund presented [17 Cal.3d 881] a wage claim for $1,650; and defendants William H. Temkin, Jr., Sanford Orling and Peter Rooney presented similar claims for $3,952.19, $575, and $575 respectively.
On July 25, 1972, Business Title brought the instant action in interpleader asking the court to require the claimant defendants to litigate among themselves their respective rights to the funds in escrow [17 Cal.3d 882] since the total of the claims filed exceeded the sum held in escrow. Each of the defendants answered. Plaintiff escrow holder was ordered to deposit with the court the sum of $7,699.04, the amount remaining in its hands after payment of the above-mentioned state taxes and of the attorney's fees and costs incurred by it and allowed by the court. Upon making such deposit Business Title was discharged from the action. Defendant Mating Game was also dismissed from the action pursuant to a default entered on May 16, 1973. Defendant United States of America (United States), which pursuant to stipulation had been substituted as defendant in place of the originally named United States Department of the Treasury -- Internal Revenue Service, moved for partial summary judgment and defendants Temkin, Orling and Rooney also moved for summary judgment.
The trial court filed findings of fact and conclusions of law fn. 3 in which it found the facts to be substantially as we have set them forth. From these findings it concluded that the title to the interpleaded sum of $7,699.04 was in the defaulting defendant Mating Game, that the supremacy clause of the United States Constitution (art. VI, cl. 2) fn. 4 made the priorities accorded defendant United States under sections 6321 and 6323 (a) of title 26, United States Code, control over any priority scheme contained in section 24074 of the Business and Professions Code and that the claim of defendant United States constituted a priority lien claim for unpaid taxes, interest and penalties upon the sum interpleaded and deposited in court and was entitled to be paid from the fund before the claims of the other defendants. Judgment was entered accordingly. fn. 5 [17 Cal.3d 883] These appeals by the several defendants (except defendant United States) followed.
Section 24074 fn. 6 prescribes certain procedures and requirements in connection with the transfer of a liquor license: The establishment of an escrow, the deposit of the purchase price therein, and the payment from the purchase price of all bona fide creditors who file claims with the escrow holder. If the purchase price or consideration is not sufficient to pay the claims in full, then the escrow holder is to distribute the consideration, so far as is here material, as follows: First to the payment [17 Cal.3d 884] of claims for wages, salary, or fringe benefits of employees of the seller; second to the payment of claims of secured creditors; and "Third, to the United States for claims based on income or withholding taxes." Thus, the statutory language would appear to give priority to defendants' wage and salary claims over defendant United States' claim for unpaid taxes.
However, this conferral of priority is illusory and dissolves before the paramount commands of federal law. [1] It is now well settled and indeed beyond argument that federal law rather than state law determines the priority of competing liens where one of them is a tax lien asserted by the United States. fn. 7 (Aquilino v. United States (1960) 363 U.S. 509, 513-514 [4 L.Ed.2d 1365, 1368-1369, 80 S.Ct. 1277]; United States v. Acri (1955) 348 U.S. 211, 213 [99 L.Ed. 264, 267, 75 S.Ct. 239]; U.S. v. Security Tr. & Sav. Bk. (1940) 340 U.S. 47, 49-50 [95 L.Ed. 53, 56-57, 71 S.Ct. 111]; United States v. Trigg (8th Cir. 1972) 465 F.2d 1264, 1269.) In Acri the high court observed that the "relative priority of the lien of the United States for unpaid taxes is ... always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this Court." (348 U.S. at p. 213 [99 L.Ed. at p. 267].) In the case at bench, as the trial court properly determined, defendant United States acquired pursuant to 26 United States Code section 6321, fn. 8 a lien "in favor of the United States upon all property and rights to property, whether real or personal, belonging to ..." Mating Game. This lien arose on September 24, 1971, the date of the assessment (26 U.S.C. § 6322) and was perfected [17 Cal.3d 885] by filing notice of lien with the Recorder of Los Angeles County. (26 U.S.C. § 6323 (f).) Under 26 United States Code section 6323 fn. 9 the lien was superior to all unperfected claims and all later perfected claims, such as those of defendants.
On the other hand, state law, not federal law, determines whether the taxpayer has "property and rights to property" (26 U.S.C. § 6321; see fn. 8, ante) to which the federal lien can attach. (Aquilino v. United States, supra, 363 U.S. 509, 513 [4 L.Ed.2d 1365, 1368].) Therefore, "[t]he threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property ... sought to be reached by the statute.' ... However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.'" (Aquilino, supra, at pp. 512-514 [4 L.Ed.2d at pp. 1368-1369]; United States v. Bess (1958) 357 U.S. 51, 55 [2 L.Ed.2d 1135, 1140-1141, 78 S.Ct. 1054]; Avco Delta Corporation Canada Ltd. v. United States (7th Cir. 1973) 484 F.2d 692, 697.)
Defendants rely heavily on the case of United States v. State of California (9th Cir. 1960) 281 F.2d 726, which arose out of bankruptcy [17 Cal.3d 886] proceedings. There, a California liquor licensee was delinquent in payment of federal taxes. The United States, pursuant to a warrant of distraint, seized his business property, including the license certificate. The licensee was adjudicated bankrupt and the United States surrendered the certificate to the receiver in bankruptcy. The license which had meanwhile been renewed was sold at auction by the receiver to certain purchasers, subject to the approval of the Department of Alcoholic Beverage Control. The Department withheld its approval of the transfer of the license until delinquent state sales and use taxes and unemployment contributions were paid from the purchase price pursuant to section 24049. (See fn. 1, ante.) Upon payment thereof, the transfer was approved and a certificate was issued to the purchasers. As a result, the United States received a substantially lesser amount from the proceeds of the sale.
The United States argues that the case at bench is distinguishable because section 24049 (see fn. 1, ante) -- the section applicable in the last cited case -- confers upon the Department the power to refuse absolutely [17 Cal.3d 887] the transfer of a liquor license if the licensee is delinquent in paying state taxes whereas section 24074 (see fn. 6, ante) -- the section applicable in the instant action -- merely directs the priority in which the proceeds derived from the transfer (after approval by the Department) shall be distributed. To put the argument another way: Section 24049 gives the Department the power to refuse to transfer any liquor license, and thereby to make available to creditors the proceeds of its sale, until the delinquent state taxes specified in the section have been paid. Section 24074 on the other hand confers no power to defeat the transfer of the license as is shown by section 24074.1 (see fn. 2, ante) which provides that within 10 days after the license has been transferred with the approval of the department, the escrow holder shall notify the creditors of the distribution of the assets held by the escrow holder. If such assets are insufficient to pay all creditors in full the escrow holder shall advise each creditor who filed a claim of the following: (a) The total assets placed in escrow with him and the nature of each asset; (b) the name of each creditor who filed a claim against the escrow and the amount of said claim; (c) the amount he proposes to pay each creditor; and (d) the day of payment. (§ 24074.1; see fn. 2, ante.)
[2] It is thus clear that the priorities set forth in section 24074 are not conditions to the approval of the transfer by the Department, that section 24074 does not confer upon the Department the power to refuse the transfer unless the priorities are complied with, but that instead it sets forth the priorities for disbursement of the funds belonging to the seller after the transfer has been approved by the Department in accordance with the prescribed escrow. fn. 10 (See Doyle v. Coughlin (1974) 37 Cal.App.3d 911, 917-918 [112 Cal.Rptr. 701].) Once the transfer has been approved, as occurred in this case on May 24, 1972, prior to the close of escrow, title to the proceeds passed to Mating Game subject to the lien priorities and Mating Game held property in the escrow to which the federal tax lien could attach.
This conclusion is entirely consistent with prior California law on the subject. (Gough v. Finale (1974) 39 Cal.App.3d 777 [114 Cal.Rptr. 562]; [17 Cal.3d 888] Doyle v. Coughlin, supra, 37 Cal.App.3d 911, 917-918; Golden v. State (1955) 133 Cal.App.2d 640 [285 P.2d 49].) In Golden the court held that the liquor license and the proceeds derived from its transfer while reposing in escrow were "property" and "rights to property" within the meaning of 26 United States Code section 3670 (now 26 U.S.C. § 6321), that the federal tax lien attached to such property and acquired priority under federal law, section 24074 notwithstanding. Defendant wage claimants urge that since section 24074 as it read at that time fn. 11 merely directed the escrow holder to distribute the sale proceeds pro rata to timely filing creditors, the court recognized that the statute was not intended to give the creditors priority over the prior government tax lien (id., at p. 646). They further argue that since section 24074 now specifically asserts priorities for state wage claims over and above federal tax liens, Golden no longer has vitality. However, the court in Golden did not limit itself to a question of statutory interpretation, but specifically indicated that the state was incompetent to set up such priorities in derogation of federal claims (see fn. 10, ante) because the liquor license and proceeds of sale thereof were property to which the lien attached and under settled law once the lien attaches federal law governs the priority of tax liens.
Moreover, the court in Gough v. Finale, supra, 39 Cal.App.3d 777, interpreted the effect of section 24074 as it presently reads with the asserted order of priorities and held that where the scheme for payment of creditors of a bankrupt vendor of a liquor license under section 24074 conflicts with the priorities specified in the Federal Bankruptcy Act, the [17 Cal.3d 889] Federal Bankruptcy Act controls. The court distinguished the case of United States v. State of California, supra, 281 F.2d 726, on the ground that section 24049 affected rights reserved by the creator of the property right whereas section 24074 attempts to grant priority rights to a certain class of private creditors of a license holder. As pointed out earlier in this opinion, we distinguish this case on a different basis in the tax lien context as opposed to the bankruptcy context: section 24074 does not confer upon the Department the power to refuse to transfer the license, thereby conditioning the very creation of the proceeds from a transfer, but merely attempts to establish priorities among creditors following transfer. Nonetheless the result in Gough as in Golden is entirely consistent with our conclusion that the proceeds in escrow following approval of the transfer by the Department belong to the vendor licensee subject to the lien claims priority as established by federal law, when one of the claims is a federal tax lien. The court in Doyle v. Coughlin, supra, 37 Cal.App.3d 911, 917-918, specifically held that title to the escrow fund is transferred upon the transfer of the liquor license by the Department and that upon such transfer the seller owns the proceeds of the sale subject to the claims of the seller's creditors who filed their claims with the escrow holder before the latter was notified by the Department of its approval of the transfer of the license.
The problem here is not the conferral of a priority, or the effect of competing liens on property. If it were, unquestionably federal claims would be paramount. The fundamental issue is whether, when the property would not exist except for its creation by the state, the federal government can prevent the state from determining the nature and value of the property which it creates. [17 Cal.3d 890]
"The United States contends that the state has no right to impose such a condition against the claims of the United States; that a state's control over the issuance of liquor licenses is derived from its police power; that [17 Cal.3d 891] the conditions here imposed by the state relate to revenue and not to police control.
The statutes thus contemplate that transfer is totally dependent upon payment of funds or other consideration to the escrow holder, and the duties of the escrow holder require compliance with section 24074.1 [17 Cal.3d 892] before a transfer may be consummated and property or a property right created. If the escrow holder fails to complete his statutory duty the attempted transfer fails.
In the final analysis, as the Attorney General points out in his amicus curiae brief, a matter of important public policy is involved here. The Legislature in section 24074 recognized the preferred position of wage earners who have not been paid for their labor, and thus imposed payment to them as a condition precedent to the creation of a property interest in the escrow funds. It is clear that state law determines whether there exists a property interest to which a federal lien can attach. (Aquilino v. United States (1960) 363 U.S. 509, 512-513 [4 L.Ed.2d 1365, 1368-1369, 80 S.Ct. 1277]; United States v. Bess (1958) 357 U.S. 51, 55 [2 L.Ed.2d 1135, 1140-1141, 78 S.Ct. 1054]; Avco Delta Corporation Canada Ltd. v. United States (7th Cir. 1973) 484 F.2d 692, 697, cert. den. 415 U.S. 931 [39 L.Ed.2d 490, 94 S.Ct. 1444].) Under the circumstances in this case the relevant funds in escrow belong to the wage claimants. They are not property, belonging to persons indebted to the government, to which a federal tax lien may attach.
­FN 1. Section 24049 provides: "The department may refuse to transfer any license when the applicant is delinquent in the payment of any taxes due under the Alcoholic Beverage Tax Law, the Sales and Use Tax Law, the Personal Income Tax Law, or the Bank and Corporation Tax Law, or on unsecured property as defined in Section 134 of the Revenue and Taxation Code, when such tax liability arises in full or in part out of the exercise of the privilege of an alcoholic beverage license, or any amount due under the Unemployment Insurance Code when such liability arises out of the conduct of a business licensed by the Department of Alcoholic Beverage Control."
­FN 2. Section 24074.1 provides: "Any person desiring to act as an escrow holder under Section 24074 shall:
­FN 3. Findings of fact "have no place in summary judgment procedure which seeks to discover whether there is anything to try and is concerned with 'issue finding' not 'issue determination.'" (de Echeguren v. de Echeguren (1962) 210 Cal.App.2d 141, 148 [26 Cal.Rptr. 562].) However, in the case at bench, after the summary judgment motion was filed, the interpleaded defendants filed a stipulation of facts, and thereby, at least implicitly agreed to a trial on the facts stipulated rather than by summary judgment. (See 4 Witkin, Cal. Procedure (2d ed.) § 38, p. 2704.) Although findings of fact are normally unnecessary where a cause is tried on stipulated facts, it is proper for the court to make findings of fact where the stipulated facts contain evidentiary material. (Hugo Neu Corp. v. County of Los Angeles (1966) 241 Cal.App.2d 703, 706 [50 Cal.Rptr. 916].) Moreover, the parties do not dispute the facts, limiting their appeal to issues of law.
­FN 4. Article VI, clause 2, of the United States Constitution provides:
­FN 5. The judgment directed the clerk of the court to pay out of the fund deposited in court by plaintiff the following: To defendant United States, the sum of $3,520.54 with interest as specified; to defendant Division of Labor Law Enforcement, 17.36 percent, to defendants Temkin, Orling and Rooney collectively, 62.45 percent, and to defendant Los Angeles Hotel-Restaurant Employer Union Welfare Fund, 20.19 percent, of the fund remaining after payment of the claim of defendant United States.
­FN 6. Section 24074 provides: "Before the filing of such a transfer application with the department, if the intended transfer of the business or license involves a purchase price or consideration, the licensee and the intended transferee shall establish an escrow with some person, corporation, or association not a party to the transfer acting as escrow holder, and the intended transferee shall deposit with the escrow holder the full amount of the purchase price or consideration. The transfer application shall be accompanied by a description of the entire consideration. Such description shall include a designation of cash, checks, promissory notes, and tangible and intangible property, and the amount of each thereof. The licensee and intended transferee shall also enter into an agreement, which agreement shall be deposited with the escrow holder, directing the escrow holder, after the requirements for transfer as provided in Section 24049 are satisfied, to pay out of the purchase price or consideration, the claims of the bona fide creditors of the licensee who file their claims with the escrow holder before the escrow holder is notified by the department of its approval of the transfer of the license or if the purchase price or consideration is not sufficient to pay the claims in full, to distribute the consideration as follows:
­FN 7. Defendants contest the applicability of this rule to the sale of alcoholic beverage licenses on the ground that section 24074 was enacted pursuant to the Twenty-first Amendment to the United States Constitution and therefore is not subject to the supremacy clause. However, the Twenty-first Amendment does not supersede all other provisions of the Constitution with respect to liquor regulation (California v. LaRue (1972) 409 U.S. 109, 115 [34 L.Ed.2d 342, 350, 93 S.Ct. 390]) and is aimed specifically at exempting the states from "traditional Commerce Clause limitations when it restricts the importation of intoxicants destined for use, distribution, or consumption within its borders." (Hostetter v. Idlewild Liquor Corp. (1964) 377 U.S. 324, 330 [12 L.Ed.2d 350, 355, 84 S.Ct. 1293].) Whenever the Twenty-first Amendment and other portions of the United States Constitution are in potential conflict, the conflict is resolved as follows: "Like other provisions of the Constitution, each must be considered in the light of the other, and in the context of the issues and interests at stake in any concrete case." (Id., at p. 332.) Section 24074 merely provides a scheme of priorities among private creditors of liquor licensees that in no way relates to the state's interest in regulating the consumption and distribution of alcohol.
­FN 8. Section 6321 provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."
­FN 9. Section 6323 (a) provides: "The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate."
­FN 10. Moreover, even if section 24074 purported to condition the property rights, it is doubtful that a state is empowered to modify property rights and concepts in order to effect a state-desired scheme of lien priorities in derogation of federal law. "The language alone of our statute is not dispositive of the issue, for a state legislative pronouncement in and of itself is insufficient to determine the existence or nonexistence of a property interest within the meaning of section 6321 [26 U.S.C.] .... [¶] Thus, as far as the federal government is concerned, N.J.S.A. 33:1-26 cannot immunize liquor licenses from the attachment of federal liens. ..." (The Boss Co., Inc. v. Bd. of Com'rs of Atlantic City (1963) 40 N.J. 379, 383, 387 [192 A.2d 584].)
­FN 11. Former section 7.2 of the Alcoholic Beverage Control Act (Deering's General Laws, Act 3796), predecessor statute to section 24074, provided: "At least seven days before the filing of a transfer application with the board the licensee and the intended transferee shall establish an escrow with some person, corporation or association, not a party to the transfer, acting as escrow holder, and said intended transferee shall deposit with said escrow holder the full amount of the purchase price or consideration, if any there be, to be paid in connection with said transfer, and said licensee and intended transferee shall also enter into an agreement, which agreement shall be deposited with said escrow holder, directing said escrow holder, out of said purchase price or consideration, to pay the claims of such of the bona fide creditors of the licensee as shall file their said claims with said escrow holder within said period of seven days after the recording of the notice provided for in Subdivision 1 of this section or if such purchase price or consideration shall not be sufficient to pay said claims in full, to distribute said consideration pro rata to said creditors of said licensee; said agreement shall also provide that said escrow holder shall make such payment or distribution within a reasonable time after the completion of the transfer of said license. A certified copy of the recorded notice of intended transfer and a copy of said escrow agreement certified by the escrow holder to be a true and correct copy thereof shall be filed with the board together with any transfer application." (Stats. 1941, ch. 1189, p. 2960.)
Thu, 09/02/1976 17 Cal.3d 878 Review - Civil Appeal Opinion issued
1 BUSINESS TITLE CORPORATION, Plaintiff, v. DIVISION OF LABOR LAW ENFORCEMENT et al., Defendants and Appellants; UNITED STATES OF AMERICA (Defendant and Respondent)
2 DIVISION OF LABOR LAW ENFORCEMENT et al., Defendants and Appellants; UNITED STATES OF AMERICA (Defendant and Respondent)
Sep 2 1976 Opinion: Affirmed
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