BUSINESS TITLE CORPORATION, Plaintiff and Respondent, v. UNITED STATES of America, Defendant and Appellant, Los Angeles Hotel-Restaurant Employer-Union Welfare Fund, Defendant and Respondent.
This appeal arises in an action in interpleader brought by Business Title Corporation (Business Title), escrow holder in a transaction involving sale of a liquor license and licensed establishment and therefore governed by Business and Professions Code section 24070 et seq. Appellant United States seeks satisfaction of its tax liens against seller-taxpayer Hall-Thomas, Inc. (Hall-Thomas) from the cash portion of the interpleaded purchase price which it characterizes as property or rights to property of Hall-Thomas. The Los Angeles Hotel-Restaurant Employer-Union Welfare Fund (Welfare Fund) presses general wage-related claims to the same fund. Business Title professes indifference as to the claims of these parties, although if the position of the United States is sustained the question of Business Title's entitlement, as interpleader, to attorney's fees and costs of suit is thereby reopened. Analysis of the statutory scheme created for such a transaction involving transfer of a liquor license and relevant case law leads us to conclude that following approval by the Department of Alcoholic Beverage Control (Department) of transfer of the liquor license, the seller-taxpayer has in the escrow fund property or rights to property which it retains until the fund is actually distributed to timely filing bona fide creditors of the seller. Accordingly, we reverse the judgment and remand with instructions.
There is no real dispute as to the facts of the matter. Hall-Thomas entered into an agreement to sell to Frank and Genevieve Muscia a cocktail lounge business including the on-sale general liquor license. As provided by Business and Professions Code section 240741 an escrow was established on December 10, 1971, with Business Title as escrow holder. The total purchase price for the business, including inventory and the liquor license (but not including a real estate broker's fee)2 was $63,000, the price to be paid $10,000 in cash, buyers to assume an unpaid obligation of seller in the approximate amount of $14,000, and the remainder to be in the form of a note secured by deed of trust. The cash and documents were deposited with Business Title whose instructions included compliance with the statutory provisions of section 24074. Escrow was to close upon the Department's approval of transfer of the liquor license.
On January 31, 1972, the escrow instructions were amended to reflect that Hall-Thomas had executed an assignment of note and assignment of security agreement documents in favor of Credit Managers of Southern California (Credit Managers) as trustee for Hall-Thomas' unsecured creditors and to provide that at the close of escrow Business Title was to remit these documents “together with residue of cash proceeds, accruing to selling corporation, of (sic') any . . . to Credit Managers.”
Notice of the sale of the business and intention to transfer the liquor license had been previously published. Various creditors' claims were timely received, including that of the Welfare Fund for almost $10,000 in employer's contributions for employee benefits as called for by contract. None of the claims was disputed by Hall-Thomas. On February 7, 1972, Business Title received notice that transfer of the liquor license had been approved. Apparently on February 17 Business Title notified the claimants that the cash in escrow was insufficient to satisfy all claims and described the proposed distribution of the fund; but no distribution was made. On April 3 and 27 federal tax assessments were made against Hall-Thomas for nonpayment of federal withholding and payroll taxes in an amount over.$19,000.3 Notice of these liens was served on Business Title on April 21 and 27, about the same time they were filed with the Los Angeles County Recorder and Secretary of State.4
Business Title brought its action in interpleader in June 1975,5 naming the United States, Welfare Fund, Credit Managers, and a number of other parties as defendants. It seems that all named defendants except for the United States and the Welfare Fund filed disclaimers of interest in the interpleaded fund. Following certain disbursements for the administration of escrow, the amount of money interpleaded was.$8,651.25. The judgment, so far as it concerns us,6 discharged Business Title, awarding it attorney's fees and costs, and awarded the remainder of the interpleaded fund to the Welfare Fund. The judgment was premised on findings “That at the time of the United States of America's assessment and later filing of notice of tax lien, there was no property or rights to property belonging to the delinquent taxpayer herein to which the United States of America's lien could attach then being held by the plaintiff interpleader escrow company” and “The interpleaded property was properly assigned pursuant to an assignment for the benefit of creditors upon the claim of escrow herein prior to any assessment or filing of any notice of claim or lien of the United States of America.”
Before passing to the true issues on appeal, we note the effect of the trial court's finding with respect to Hall-Thomas' assignment to Credit Managers for the benefit of creditors. It seems clear, notwithstanding some disagreement among the parties, that the assignment can have no impact on the determination of rights to the interpleaded fund. First, the amendment to escrow instructions referring to the assignment states that, aside from certain documents, only the “residue” of cash proceeds, if any, were assigned. Further, Credit Managers' disclaimer of interest filed with the court removed any arguable claim on its part. Consequently, the assignment for the benefit of creditors must be left out of account in determining rights to the cash interpleaded by Business Title.
There is no difference of opinion as to the appropriate framework for legal analysis in this case. The assessment of unpaid federal taxes constitutes a lien in favor of the United States “upon all property and rights to property, whether real or personal . . . of the taxpayer.” (26 U.S.C., s 6321.) Whether or not the taxpayer has property or rights to property in any given instance is determined by state law; once it is determined that property or rights to property exist, federal law, by virtue of the supremacy clause of the Constitution (art. VI, cl. 2), governs the priority of claims against it. To use the words of the United States Supreme Court: “The threshold question 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 . . . . 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.’ ” (Fn. omitted.) (Aquilino v. United States (1960) 363 U.S. 509, 512-514, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365.) Neither the Welfare Fund nor Business Title contests the assertion of the United States that its tax liens, perfected or unperfected, will take priority over the unperfected general wage-related claims of the Welfare Fund, and Business Title's claim as interpleader for attorneys' fees and costs, if it is determined that the interpleaded fund represents property or rights to property of Hall-Thomas. (See 26 U.S.C., s 6323(a); United States v. Trigg (8th Cir. 1972) 465 F.2d 1264, 1268-1269, cert. den. 410 U.S. 909, 93 S.Ct. 963, 35 L.Ed.2d 270, and generally, Annot. Federal Tax Lien Competing Liens (1964) 94 A.L.R.2d 748.)
Where the parties differ is on the threshold question whether under California law Hall-Thomas has property or rights to property in the interpleaded escrow fund. The escrow was required by Business and Professions Code section 24074. (See Fn. 1, ante.) Before the filing of an application for transfer of a liquor license the parties are obliged by section 24074 to establish an escrow and to deposit with the escrow holder the full amount of the purchase price or consideration for sale. The escrow instructions must direct the escrow holder, after satisfaction of the transfer requirements of section 24049,7 to pay out of the purchase price or consideration the timely filed bona fide creditors' claims, and if the fund is insufficient to satisfy all such claims to distribute according to the described priorities. Section 24049 permits the Department to refuse to transfer any liquor license when the licensee is delinquent in the payment of certain state taxes. Described as the escrow fund-creditor protection plan (Doyle v. Coughlin, 37 Cal.App.3d 911, 917, 112 Cal.Rptr. 701), the provisions of section 24074 are mandatory and exclusive and must be read into every transaction within the section's scope. (Grover Escrow Corp. v. Gole, 71 Cal.2d 61, 63-64, 77 Cal.Rptr. 21, 453 P.2d 461.) Failure to file a claim does not result in a loss thereof, it simply results in a loss of the protection afforded by the statutory scheme. (Pacific Firestone Escrow Co. v. Food Giant Markets, Inc., 202 Cal.App.2d 155, 157-158, 20 Cal.Rptr. 570.)
Prior to the Department's approval of transfer of the liquor license the seller has no property or rights to property in the consideration held in escrow because section 24049 conditions the very creation of the proceeds from a transfer. This was nicely explained in United States v. State of California (9th Cir. 1960) 281 F.2d 726 wherein the Department refused to approve transfer of a liquor license sold at auction by the licensee's receiver in bankruptcy until delinquent state sales and use taxes and unemployment contributions were paid from the purchase price pursuant to section 24049. As a result of payment of these amounts, the United States received in satisfaction of its tax lien against the bankrupt a substantially reduced amount from the proceeds of sale. The court held that there was no property to which the lien could attach until the Department approved the transfer, that such approval was conditioned upon the prior payment of state taxes, and therefore there was no property to which the lien could attach until after such taxes had been paid: “The question . . . is not as to the supremacy of the tax lien of the United States. The question is as to the nature of the ‘property and rights to property’ (26 U.S.C. s 6321) to which that lien attached. Ordinarily, in determining this question, we look to state law. . . . (P) Here the license existed because the state had issued it. If the licensee acquired something of value, it was because the state had bestowed it upon him. Whatever value the license, as property, may have had to a purchaser depended upon its transferability. If it was transferable, it was because the state had made it so. If the state had seen fit to impose conditions upon issuance or upon transfer of property it has wholly created, that is the state's prerogative so long as its demands are not arbitrary or discriminatory.” (Pp. 727-728.)
If it was clear that, because of section 24049, prior to the Department's approval of transfer of the license the seller had no property or rights to property in the escrow fund, it was somewhat less clear at what point, if at all, the seller did have property or rights to property in the fund where creditors' claims equalled or exceeded the amount of the fund. The Supreme Court decided the matter in Business Title Corp. v. Division of Labor Law Enforcement, 17 Cal.3d 878, 132 Cal.Rptr. 454, 553 P.2d 614, a case very much like that at bar. There wage claimants, in fact the Welfare Fund, argued that the seller-taxpayer was not entitled to the proceeds of sale until the liquor license was transferred, that the license could not be transferred until all the bona fide creditors were paid in accordance with section 24074 and therefore that seller-taxpayer had no “property” or “rights to property” until the prior claims specified by section 24074 were paid. The court rejected this argument, distinguishing section 24049 which conditions the creation of the fund from which creditors are paid, from section 24074 which merely sets forth the priorities for disbursement of the funds belonging to the seller after the transfer has been approved. “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 (seller-taxpayer) subject to the lien priorities and (seller-taxpayer) held property in the escrow to which the federal tax lien could attach.” (17 Cal.3d at p. 887, 132 Cal.Rptr. at p. 460, 553 P.2d at p. 620.)
It is apparent that in the absence of principled grounds for distinction, Business Title Corp. mandates reversal of the judgment in this case. Welfare Fund asserts as factual grounds to distinguish, that in Business Title Corp. the federal tax lien arose prior to the opening of escrow while in the instant case the tax liens arose subsequent to the approval of transfer of the liquor license at a time when, it is maintained, escrow had already closed.
These facts assume special significance only in light of the Welfare Fund's construction of the statutory scheme, which is as follows. The parties to the required escrow must include escrow instructions to the effect that the proceeds of sale are to be paid to timely filing bona fide creditors of the seller. In case a claim is disputed the escrow holder must so notify the claimant and withhold the amount or pro rata amount of the claim for a period of 25 days and, if not attached, then pay it to the seller. The agreement must provide for distribution of the escrow fund within a reasonable time after transfer of the liquor license. Under section 24074.1, subdivision (3)8 the escrow holder, within 10 days of transfer of the license and prior to distribution of the fund must give notice to claimants whether the fund is sufficient to satisfy all claims in full and when distribution will be made. If the fund is insufficient, notice must advise of the amount and nature of the fund assets, the name and amount claimed by each creditor, the amount the escrow holder proposes to pay each creditor and when payment will be made. No notice to the seller is required under this section. The effect of these provisions is to assure that within 10 days after approval of transfer of the liquor license there be a list of undisputed creditors' claims from which the escrow holder may compile the required notice. The Welfare Fund's conclusions are that: (1) section 24074 gives the seller-taxpayer property or right to property only to the extent of having the right to protest creditors' claims, that if this right is unexercised title to the escrow fund vests in the creditors when the escrow holder makes its determination of the manner of distributing the fund and gives notice thereof under section 24074.1 subdivision (3); and, (2) once the escrow requirements of sections 24074 and 24074.1 have been complied with, escrow has closed and the seller-taxpayer no longer has property or rights to property in the fund (assuming creditors' claims to equal or exceed the amount in the fund).
The Welfare Fund's most fundamental error lies in the fact that it would make of section 24074 a property creating statute. In this case the property or rights to property would be created in the seller's creditors, whose claims were undisputed by the seller, once the escrow holder's notice is sent or when escrow closed (but before distribution). Business Title Corp., however, makes it clear that section 24074 “merely attempts to establish priorities among creditors . . . .” (17 Cal.3d at p. 889, 132 Cal.Rptr. at p. 461, 553 P.2d at p. 621); the section creates statutory priorities not statutory liens (Gough v. Finale, 39 Cal.App.3d 777, 781, 114 Cal.Rptr. 562, In re Leslie (9th Cir. 1975) 520 F.2d 761, 762). “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.” (17 Cal.3d at p. 887, fn. 10, 132 Cal.Rptr. at p. 460, 553 P.2d at p. 620.)
Further, under the Welfare Fund's theory title to the escrow funds would vest in creditors according to the escrow holder's proposed plan of distribution. Yet one purpose of the notice provision of section 24074.1 subdivision (3) is to allow creditors time to legally challenge the proposed distribution prior to its implementation. (Cohn v. Gramercy Escrow Co., 65 Cal.App.3d 884, 894, 135 Cal.Rptr. 688.) Who has title to what part of the fund when there is such a challenge becomes problematical according to the Welfare Fund's view.
Much of the Welfare Fund's argumentation is wide of the mark because of its insistence upon making of the section 24074 escrow something other than a true escrow. It may be that not all principles applicable to an ordinary escrow are applicable to the section 24074 escrow. (See Doyle v. Coughlin, 37 Cal.App.3d 911, 918, 112 Cal.Rptr. 701.) But the Legislature did not create whole cloth a unique procedure for the case of transfers of liquor licenses (see s 24074.1, subd. (1); fn. 8 ante.) During the existence of escrow the escrow holder acts as agent for both parties to the transaction and upon satisfaction of the terms of escrow the escrow holder acts as agent of each party with respect to the money, etc. to which that party is entitled. (Shreeves v. Pearson, 194 Cal. 699, 707, 230 P. 448) Where it is provided in an escrow agreement that the escrow holder will pay out of the proceeds of sale the claims of seller's creditors, the creditors are third party beneficiaries of the agreement. (Orloff v. Metropolitan Trust Co., 17 Cal.2d 484, 487, 110 P.2d 396.) They acquire thereby enforceable contract rights, not property rights (see 4 Corbin on Contracts (1951) s 860, pp. 418, 420); the same is true in the section 24074 escrow (see Cohn v. Gramercy Escrow Co., 65 Cal.App.3d 884, 893, 135 Cal.Rptr. 688). In the ordinary escrow upon the close thereof the escrow holder, as agent for the seller, pays seller's debts to the filing creditors. It is no different in this case.9 Upon approval of transfer of the liquor license the seller-taxpayer holds title to the proceeds of sale in possession of the escrow holder subject to the claims of timely filing creditors. (Business Title Corp., 17 Cal.3d at p. 889, 132 Cal.Rptr. 454, 553 P.2d 614, Doyle v. Coughlin, 37 Cal.App.3d 911, 917-918, 112 Cal.Rptr. 701.) When the fund is disbursed it is the seller's money being applied to the seller's debts. The Welfare Fund would impute significance to the fact that section 24074.1 does not require notice to the seller of the proposed distribution of the fund, as though this were anomalous if the fund is still his property though he has disputed no claims. It is not anomalous. Section 24074 requires that the escrow instructions empower the escrow holder to make payment of timely filed bona fide claims of creditors, and section 24074.1 gives notice to all the world as to how the escrow holder is to perform this function. The seller has the right to protest claims but no latitude on how undisputed claims shall be paid; if it were otherwise the priorities of section 24074 would be subject to manipulation by the seller. It is true that if no claims were disputed “ . . . every creditor had the right to assume his claim would be honored.” (Cohn v. Gramercy Escrow Co., 65 Cal.App.3d 884, 894, 135 Cal.Rptr. 688, 694) but no creditor could acquire title to the fund, and Hall-Thomas could not be divested thereof, simply by virtue of such a claim.
We are led to the conclusion that until the escrow fund was actually distributed Hall-Thomas retained property or rights to property to which the federal tax liens could and did attach. Undoubtedly, the fact that the United States may step into the proceedings at a late date may cause inconveniences and disappointments to other claimants and perhaps the escrow holder itself. However, the United States is not obliged to comply with the claim filing requirements applicable to ordinary claimants (Golden v. State of California, 133 Cal.App.2d 640, 648, 285 P.2d 49), and there is no injustice in allowing the United States to reach the taxpayer's property or rights to property at any point before the taxpayer parts with title.
Judgment is reversed with instructions that priorities to the interpleader fund be determined in accordance with federal law. Necessarily this reopens the question as to the interpleader's claim to attorney's fees and costs.
1. “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:“First, to the payment of claims for wages, salaries, or fringe benefits or employees of the seller or transferor earned or accruing prior to the sale, transfer, or opening of an escrow for the sale thereof;“Second, to the payment of claims of secured creditors to the extent of the proceeds which arise from the sale of the security;“Third, to the United States for claims based on income or withholding taxes; and thereafter for claims based on any tax other than taxes specified in Section 24049;“Fourth, to the payment of claims on mechanics' liens;“Fifth, to the payment of escrow fees and the payment of claims for prevailing brokerage fees of services rendered and claims for reasonable attorney's fees for services rendered;“Sixth, to the payment of claims for goods sold and delivered to the transferor for resale at his licensed premises and the payment of claims for services rendered, performed, or supplied in connection with the operation of the licensed business;“Seventh, to the payment of all other claims. The payment of these claims if sufficient assets are not available for the payment of the claim in full shall be paid pro rata.“If the transferor licensee disputes any claim, the escrow holder shall notify the claimant and the amount or pro rata amount thereof shall be retained by the escrow holder for a period of 25 days, and if not attached shall be paid to the transferor licensee. The agreement shall also provide that the escrow holder shall make the payment or distribution within a reasonable time after the completion of the transfer of the license.”
2. The broker's commission of $10,000 was paid by the buyers through escrow.
3. In the United States' opening brief on appeal it is stated that as of April 22, 1977, the amount of tax still outstanding was $4,618.09 plus interest and penalties.
4. Upon recordation the lien was superior to all unperfected claims and all later perfected claims. (26 U.S.C. s 6323(a).)
5. It appears that sometime during escrow the cocktail lounge was destroyed by fire. Litigation over the rights of various parties ensued. Apparently at the request of some of Hall-Thomas' creditors, Business Title delayed bringing its interpleader action until this litigation had terminated.
6. None of the parties challenges the judgment other than as it determines distribution of cash. In addition, the judgment ordered cancellation of certain instruments.
7. “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 (Rev. & Tax. C. §§ 32001 et seq.), the Sales and Use Tax Law (Rev. & Tax. C. §§ 6001 et seq.), the Personal Income Tax Law (Rev. & Tax. C. §§ 17001 et seq.), or the Bank and Corporation Tax Law (Rev & Tax C §§ 23001 et seq.), 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.”
8. Section 24074.1 reads in full: “Any person desiring to act as an escrow holder under Section 24074 shall:“1. Comply with all the applicable provisions of chapter 1 (commencing with Section 17000) of Division 6 of the Financial Code.“2. Not more than 10 days after receiving a claim from a creditor, said escrow holder shall acknowledge receipt of each claim; and“3. Not more than 10 days after the license has been transferred and prior to the distribution of the assets held by said escrow holder he shall advise each creditor who filed a claim against the escrow whether or not there are sufficient assets in the escrow to pay all creditors in full. If the assets in the escrow are sufficient to pay all creditors in full, said escrow holder shall also advise each creditor of the date on or before which payment will be made. If there are not sufficient assets to pay all creditors in full, he shall then 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 date on or before which said amount will be paid to the creditors.”
9. As a matter of fact, it appears that escrow in this case had not closed by the time the tax liens arose. In its complaint in interpleader Business Title listed certain disbursements made “During the course of said escrow, . . . ” which included one item paid in July 1975, long after the time escrow is asserted to have closed.
LILLIE, Acting Presiding Justice.
THOMPSON, and HANSON, JJ., concur.