Opinion
Bankruptcy No. 14-03742-LT7 Adversary No. 14-90144-LT
12-17-2015
In re: PAUL MOREV, Debtor. LEONARD J. ACKERMAN, Plaintiff, v. ESCROW COMPANY, INC. Defendant. ESCROW COMPANY, INC. a California corporation, Cross-Claimant, v. LEONARD J. ACKERMAN, Trustee; THE WAGE JUSTICE CENTER, a California Non-Profit corporation; ETTA M. KEELER, an individual; SOUTHERN WINE AND SPIRITS OF AMERICA, INC., a Florida corporation; SYSCO SAN DIEGO, INC., a Deleware corporation, Cross-Defendants.
WRITTEN DECISION - NOT FOR PUBLICATION
MEMORANDUM DECISION
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
In 2009, cross-defendant Etta M. Keeler ("Keeler") obtained a judgment against Robert Dale Walker, Jr. ("Walker") pursuant to which, Keeler was entitled to the proceeds of California Liquor License #444033 ("Liquor License") held by Walker. In 2011, Paul Morev ("Debtor") agreed to purchase the Liquor License from Walker. On February 6, 2012, the Department of Alcoholic Beverage Control ("DABC") approved the transfer of the Liquor License from Walker to Debtor. Debtor executed a promissory note in favor of Walker ("Note"). Walker assigned his rights under the Note to Keeler.
In her complaint against Debtor the Liquor License is referred to as #444033. However, in other documents, including the motion for writ of attachment discussed below,
By virtue of the Note and assignment, Debtor was to have paid Keeler $72,000, payable at $3,000 monthly. Debtor apparently made three payments and one partial payment, leaving an unpaid balance of approximately $61,700.
On March 12, 2013, Keeler sued Debtor in the Superior Court of California on the assigned Note. Keeler filed a motion for a writ of attachment, a hearing on which was set for August 2, 2013. Judge Ronald S. Prager issued a tentative ruling indicating that the writ would be issued. However, prior to the hearing, Keeler and Debtor reached a settlement pursuant to which Debtor agreed to assign his interest in the Liquor License to Keeler and Keeler agreed to sell the Liquor License to recoup the amounts owed by the Debtor. Accordingly, Keeler withdrew her motion.
Judge Prager entered a Minute Order dated August 2, 2013 which set forth the terms of the settlement:
[D]efendant agrees to provide assignment of liquor license and equipment back to plaintiff within 1 week. This includes rights to and interest in liquor license, furniture and equipment. Plaintiff will not seek further writ of attachments.
Defendant represents there are no holds or liens on the license.See Exhibit 11.
Plaintiff will make maximum effort to sell license, furniture and equipment to recoup $67,700 plus costs.
Any recovery in excess of that amount will go back to defendant....
Any deficiency, the plaintiff [sic] come ex parte and be entitled to judgment.
On August 2, 2013, either Debtor or Keeler filed with the DABC a "License Action Request," signed by Debtor. The Request provided:
I voluntarily surrender my license for a period of not more than one year. I intend to transfer this license. I understand (a) the license must be renewed at the time renewal fees are due or the license will be automatically canceled; (b) the Department will proceed to cancel the license after one year if not transferred, and (c) I must report any change in my address to the Department.See Exhibit 10.
Surrender effective Immediately.
On August 8, 2013, Debtor executed an "Assignment of Liquor License," which provided:
I, PAUL MOREV, hereby assign all my rights to and interest in CALIFORNIA LIQUOR LICENSE # 513028, to ETTA M. KEELER, effective AUGUST 2, 2013, as so ordered by Judge Ronald S. Prager, San Diego Superior Court.See Exhibit 4. the number is #513028. The discrepancy has no bearing on this Court's decision.
It is hereby agreed that ETTA M. KEELER will make maximum effort to sell the license, to recoup $68,000, which represents the amount I owe her for the purchase of the liquor license, plus legal costs.
I will execute a Power of Attorney appointing ETTA M. KEELER as my Attorney-in-Fact so that the sale of the license can be carried out forthwith.
On the same date Debtor granted Keeler a limited and irrevocable power of attorney with respect to "all matters pertaining to" the Liquor License. See Exhibit 3.
In November 2013, Keeler opened an escrow in Debtor's name with ABC Escrow, Inc., ("Escrow Company"), to accomplish the sale of the Liquor License to Pedigree Provisions, LLC ("Buyer") for $65,000.00. See Exhibit 5.
Two trade creditors of the Debtor, Sysco San Diego and Southern Wines and Spirits (collectively "Trade Creditors"), asserted claims in escrow for goods sold in the amounts of $12,651.88 and $14,912.61 respectively. See Exhibits 6 & 7.
On May 4, 2014, the DABC submitted to Escrow Company, Form 226 approving the transfer of the Liquor License to Buyer.
On May 7, Escrow Company transferred the Liquor License to Buyer. Escrow Company has retained the sale proceeds ("Escrow Funds").
On May 9, 2014, Escrow Company informed Keeler that the Trade Creditors had asserted claims to the proceeds of the sale.
On May 10, 2014, Debtor filed a petition commencing the bankruptcy case. Leonard J. Ackerman was appointed chapter 7 trustee ("Trustee").
On May 14, 2014, Keeler wrote to Escrow Officer Amy Kwak, denying the claims of the Trade Creditors. On May 21, 2014, the Trade Creditors were notified by Escrow Company that their claims had been disapproved by the seller, and that payment would be held. The record before the Court does not indicate that the claims and disapproval thereof has been resolved. At any rate, it was not resolved as of the petition date.
After the petition was filed, Keeler renewed her request for a writ of attachment in the Superior Court. On May 19, 2014, Judge Prager issued a writ of attachment in favor of Keeler nunc pro tunc to August 2, 2013. The Minute Order explained in part:
[T]he Court was unaware of collateral claims that could prejudice plaintiff by other creditors in the event Writ was not issued....See Exhibit 12.
The Court also corrects the record in light of defendant's representations in open Court that there were no holds or liens on the license. See Court minutes of 8/2/13.
On July 22, 2014, the Trustee filed a complaint against Escrow Company seeking turnover of the Escrow Funds under Bankruptcy Code § 542. See Exhibit 15. Escrow Company was the sole named defendant.
On or about September 14, 2014, Escrow Company filed a cross-claim in interpleader naming as defendants the Trustee and all of the claimants to the Escrow Funds. See Exhibit 17.
On August 13, 2015, the Court held a status conference which was attended by counsel for Keeler, the Trustee, Escrow Company, and both Trade Creditors. After extensive discussion with all parties, the Court set the matter for trial. The Court entered a scheduling order which provided that trial briefs were to filed by October 28, 2015, and responsive briefs, if desired, were to be filed by November 4, 2015. Escrow Company, the Trustee, and Keeler each filed trial briefs, the Trade Creditors did not. No responsive briefs were filed.
On November 16, 2015, the Court conducted a trial. The trial revealed that before the Court could reach the factual disputes, of which there are few if any, some legal issues had to be addressed. The Court took the matter under submission to address those issues.
Issues
1. Whether the Trustee is entitled to turnover of the Escrow Funds.
2. Whether and to what extent Escrow Company is entitled to fees and costs associated with this adversary proceeding.
3. Whether and to what extent the Trade Creditors are entitled to the Escrow Funds.
4. Whether and to what extent Keeler is entitled to the Escrow Funds.
5. Whether Keeler's Writ of Attachment has any validity or effect.
Analysis
Turnover
Bankruptcy Code § 542 provides in relevant part:
[A]n entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.11 U.S.C.A. § 542. It is well settled in the Ninth Circuit that where a seller of a liquor license becomes a debtor in a bankruptcy case after the license is sold, but before the proceeds are distributed from escrow, the proceeds become property of the bankruptcy estate and must be distributed in accordance with the bankruptcy priority scheme. In re Leslie, 520 F.2d 761, 762 (9th Cir. 1975). In Leslie, the court explained, "while a state, as the creator of a liquor license, may validly impose conditions on its transferability for the state's own benefit, it may not, consistently with paramount federal law, impose conditions which discriminate in favor of particular classes of creditors." Id. at 736. See also Gough v. Finale, 39 Cal. App. 3d 777 (1974).
Leslie was decided under the Bankruptcy Act, but its holding applies under the Bankruptcy Code. See In re Del Mission Ltd., 116 B.R. 734, 739 (Bankr. S.D. Cal. 1990) aff'd, 130 B.R. 362 (B.A.P. 9th Cir. 1991) aff'd, 998 F.2d 756 (9th Cir. 1993).
Escrow Company attempts to distinguish Leslie on the ground that Debtor had assigned his interest in the Liquor License to Keeler prior to the petition:
By virtue of the Assignment and the Irrevocable Power of Attorney, whatever interest the Debtor had in either the liquor license (which interest is irrelevant at the time of the Chapter filing as the license had already transferred) or the net proceeds, had been transferred to Keeler. The Debtor had no legal power to "transfer" the net proceeds, nor could the proceeds be subject to levy or legal process against the Debtor .... Without such "power", the Trustee could not be vested in such property, which no longer belonged to the Debtor, Paul Morev.Escrow Company Trial Brief 8:2-8.
This is an intriguing argument. Had Debtor assigned his interest in the Liquor License and the proceeds to Keeler outright, and had such assignment been legally valid and binding, this case might be distinguishable from Leslie. However, in the present case Debtor did not effectively assign his interest in the Liquor License. Further, nothing in the record indicates an attempt by Debtor to specifically assign his interest in the proceeds of the Liquor License.
Escrow Company relies on the August 8, 2013, "Assignment of Liquor License," and the power of attorney for its contention that Debtor assigned away his interest in the Liquor License and/or proceeds. As discussed above, in the Assignment Debtor purported to "assign all my rights to and interest in CALIFORNIA LIQUOR LICENSE # 513028, to ETTA M. KEELER..." In the determining the effect of the Assignment, it is helpful to consider what it could not have done.
The Assignment cannot be considered an outright transfer of Debtor's interest in the Liquor License to Keeler, as that would have been ineffective under state law. In California a liquor license cannot be transferred without the prior approval of the DABC. Cal. Bus. & Prof. Code § 24070. In order to obtain such approval, seller and buyer must establish an escrow and follow other procedures not followed by Debtor and Keeler. See Cal. Bus. & Prof. Code § 24074. No party has suggested that the Assignment transferred ownership of the Liquor License to Keeler. Had they, such a position would not, as argued by ABC Escrow, been supported by the power of attorney, but rather belied thereby. That is, had the Assignment effectively transferred ownership, such a power of attorney would have been unnecessary. Consistent with this determination is the fact that Keeler opened escrow in Debtor's name; she acted as his agent not as owner in her own right.
Another possibility is that the parties intended to grant Keeler a security interest in the Liquor License to secure repayment of Debtor's obligation to her. This too though would have run afoul of California law which provides "[n]o licensee shall enter into any agreement wherein he pledges the transfer of his license as security for a loan or as security for the fulfillment of any agreement...." Cal. Bus. & Prof. Code § 24076. Further, there is no indication on the record that Keeler took steps to perfect a security interest in the license or proceeds.
Thus, the Assignment was neither an outright transfer of, nor a grant of security interest in, the Liquor License. Rather, the Court finds that it was at most a grant by Debtor to Keeler of control of the license for the sole purpose of allowing Keeler to sell the license and to control (not own) the proceeds. This control divested Debtor of no ownership interest and gave Keeler no legal rights to the License or to the Escrow Funds except as a creditor of Debtor and a contracting party therewith. Thus, as in Leslie, at the time the petition was filed Debtor had an interest in the sales proceeds sufficient to render them property of the estate subject to turnover.
In support of its position that Debtor had no interest in the Escrow Funds, Escrow Company relies upon the curious case of Business Title Corp. v. U.S., 21 Cal.3d 710 (1978), in which the court held that after a liquor license was transferred, but before the proceeds were disbursed from escrow, there was no property of the transferor to which a federal tax lien could attach. It is possible to distinguish Business Title factually.
The Court says "curious," because in the 37 years since Business Title was decided, not a single case has cited to it.
In Business Title the trial court had found that the seller of the liquor license was completely divested of any interest in the license - it had not only delivered the license to escrow but had made or attempted to make, a partial assignment of its interest in the proceeds to a trustee for the benefit of creditors. Id. at 714. Unlike the case at hand, seller's rights to dispute claims had been extinguished. Id. at 721. Further, all claims to the proceeds had been resolved and escrow company had notified all creditors of what they would be paid. Id. at 715. The funds were not distributed only because the business premises had been destroyed by fire. Id. at 710. The trial court had found:
The Court notes that the Court of Appeals questioned the efficacy of the assignment for the benefit of creditor and held that the assignment "must be left out of account in determining rights to the cash interpleaded by Business Title." Bus. Title Corp. v. United States, 75 Cal. App. 3d 659, 142 Cal. Rptr. 370, 373 (Ct. App. 1977) vacated, 21 Cal. 3d 710, 581 P.2d 627 (1978). --------
[A]t 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.Id. at 717. The California Supreme Court confirmed, finding that as of the time the federal tax lien came into existence, seller lacked any interest in the license or proceeds to which lien could attach:
Whatever 'property' or 'rights to property' the seller may have in the proceeds because of his power to dispute claims of creditors filed prior to transfer, such rights are extinguished when, as here (1) he does not dispute any claim so filed, and (2) the assets remaining in escrow at the time of transfer are insufficient to pay the claims in full. At that point he loses all power to establish a claim to any portion of the proceeds and the matter of distribution becomes wholly one between the creditors and the escrow holder.Id. at 721-22 (citations omitted).
More important than the factual distinctions, though, is the fact that Business Title case dealt with a completely different legal issue - whether a federal tax lien attached to the proceeds of the sale as opposed to whether the bankruptcy estate had an interest. The Court in Business Title considered and did not disagree with the Ninth Circuit's holding in Leslie. Rather, the California court recognized that it was dealing with a distinctive legal issue:
In any event we do not believe that principles applicable in the case of a voluntary filing of bankruptcy by the seller-taxpayer are necessarily applicable in cases involving the attachment of a federal tax lien.Id. at 722.
The Court finds that the Ninth Circuit's holding in Leslie is controlling in this case. Business Title differs in fact, but more importantly in the legal issue addressed. Further, to the extent Leslie and Business Title are irreconcilable, the Court is bound to follow the rulings of the Ninth Circuit.
Escrow Company's Fees and Costs
Escrow Company seeks allowance and payment of the attorneys' fees and costs it incurred in connection with this interpleader action. Escrow Company has submitted as exhibits invoices from its counsel, Steven H. Gardner, PLC, which include fees and costs for the period July 30, 2014 (eight days after the Trustee's Turnover Action was filed) through November 17, 2015, (one day after the trial in this Court.) The invoices reflect fees of $17,362.50 and costs of $1,822.25 for a total of $19,184.75.
Federal Rule of Civil Procedure ("FRCP") 22 authorizes a stakeholder to join "[p]ersons with claims that may expose [the stakeholder] to double or multiple liability" and requires such persons to interplead. Fed.R.Civ.P. 22(a)(1). FRCP 22 is made applicable to bankruptcy cases through Rule 7022 of the bankruptcy rules. Though not stated in Rule 22, courts "hold interpleading stakeholders to a good faith standard." Michelman v. Lincoln Nat. Life Ins. Co., 685 F.3d 887, 893 (9th Cir. 2012). The standard though is not "onerous," but merely requires that the interpleading party "have a good faith belief that there are or may be colorable competing claims to the stake." Id. at 894.
In the present case the Court finds that Escrow Company had a good faith belief that there were competing and colorable claims to the Escrow Funds including by the Debtor, Keeler, the Trade Creditors, the Trustee, and itself. The cross-complaint was filed in good faith. It was necessary because, though Escrow Company had requested that the Trustee name as defendants to the turnover action all claimants to the Funds, he had declined to do so.
Having determined that the interpleader cross complaint was filed in good faith, the Court may award fees and costs associated therewith. Though "there is no explicit statutory authority requiring a federal court to award attorney fees and costs in an interpleader action.... [i]t has since evolved under the common law that a federal court may award a plaintiff who files an interpleader action reasonable costs and attorney fees out of the interplead funds." In re Express Fin. Servs., Inc., No. 07-27374JAD, 2009 WL 8556805, at *3-4 (Bankr. W.D. Pa. Feb. 13, 2009) (citations omitted).
The issue then is what a reasonable award is. The fees and costs requested represent nearly 30% of the total sales price of the Liquor License. Since the Court has determined that the sales proceeds are property of the estate subject to the claims of all creditors of the Debtor, the amount of any award will impact all creditors, not just the parties to this adversary. Accordingly, the Court will require ABC Escrow to make application to the Court for the fees and costs sought with notice to all creditors, giving all an opportunity to review and oppose.
Claims of the Trade Creditors
Despite the opportunity to do so, discussed at the status conference and in the scheduling order, Trade Creditors did not file trial briefs. The trial briefs filed by the other parties, did not address this issue. Based upon its own analysis, however, the Court is prepared to rule that the Trade Creditors have no special claim to the Escrow Funds.
As the court explained in Leslie, "while a state, as the creator of a liquor license, may validly impose conditions on its transferability for the state's own benefit, it may not, consistently with paramount federal law, impose conditions which discriminate in favor of particular classes of creditors." 520 F.2d at 763. The Escrow Funds are property of the bankruptcy estate which the Trustee may use to pay creditors in accordance with the bankruptcy priority scheme. To the extent the Trade Creditors have claims against the Debtor, they must assert those claims in the bankruptcy case.
Claim of Keeler
The same is true of the claim of Keeler. There is no evidence that Debtor executed any documents purporting to grant Keeler a security interest in the Liquor License or the proceeds. Furthermore, to the extent Debtor had done so, such an agreement would have violated California Business & Professional Code § 24076 which provides "[n]o licensee shall enter into any agreement wherein he pledges the transfer of his license as security for a loan or as security for the fulfillment of any agreement." Finally, there is no evidence on the record that Keeler took steps to perfect any security interest.
As discussed below, her postpetition Writ of Attachment is void.
Keeler's Writ of Attachment
The Writ of Attachment, obtained postpetition, is void as a violation of the automatic stay. "[V]iolations of the automatic stay [are] void, not voidable." In re Tippett, 542 F.3d 684, 690-91 (9th Cir. 2008), citing Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 (9th Cir.1992). Here the writ violated the automatic stay as a continuation of a judicial proceeding to recover a prepetition claim against the debtor (§ 362(a)(l)); as an act to obtain possession of property of the estate (§ 362(a)(3)); as an act to create a lien against property of the estate (§ 362(a)(4)); as an act to create a lien that secures a claim that arose prepetition (§ 362(a)(5)); and as an act to collect a claim against the debtor that arose prepetition (§ 362(a)(6)).
It appears from the evidence before the Court that Keeler was unaware that Debtor had filed his petition. She clearly was not scheduled. However, neither her lack of knowledge nor Debtor's failure to schedule her claim are relevant to the question of the validity of the postpetition Writ of Attachment. See In re Weatherford, 413 B.R. 273, 284 (Bankr. D.S.C. 2009).
Conclusion
For the reasons set forth above, the Court orders that Escrow Company must turn the Escrow Funds over to the Trustee. The Escrow Funds are property of the bankruptcy estate, subject to administration under the Bankruptcy Code and any other applicable law. The Escrow Funds, however, must be retained by the Trustee pending a determination after notice and hearing of the fees and costs to be awarded Escrow Company from those Funds.
Otherwise, the Funds are not subject to any specific claims of the Trade Creditors nor / / / / / / / / / Keeler. The Trade Creditors and Keeler are free of course to assert any claims they have against the Debtor in this bankruptcy case, and they will be addressed in due course. IT IS SO ORDERED. DATED: December 17, 2015
/s/_________
LAURA S. TAYLOR, Chief Judge
United States Bankruptcy Court
CERTIFICATE OF MAILING
The undersigned, a regularly appointed and qualified employee in the office of the United States Bankruptcy Court for the Southern District of California, at San Diego, hereby certifies that a true copy of the attached document, to wit:
MEMORANDUM DECISION
was enclosed in a sealed envelope bearing the lawful frank of the bankruptcy judges and mailed via first class mail to the party at their respective address listed below: Philip H. Dyson, Esq.
Law Offices of Philip H. Dyson
8461 La Mesa Boulevard
La Mesa, CA 91942 Mr. Leonard J. Ackerman
6977 Navajo Road, Suite 124
San Diego, CA 92119 Craig E. Dwyer, Esq.
8745 Aero Drive, Suite 301
San Diego, CA 92123 Ray Garwacki, Jr. Esq.
Garwacki & Associates
631 S. Olive St. #120
Los Angeles, CA 90014 James M. McNair, Esq.
Law Office of James M. McNair
734 Ridgemont Circle
Escondido, CA 92027 Steven H. Gardner, Esq.
Steven H. Gardner, P.C.
8730 Wilshire Blvd #400
Beverly Hills, CA 90211 ABC ESCROW
12304 Santa Monica Blvd, Suite 100
Los Angeles, CA 90025 Nick I. lezza, Esq.
Kenneth Moss, Esq.
Spiwak & lezza, LLP
555 Marin Street, Suite 140
Thousand Oaks, CA 91360 Mr. Paul V. Morev
2323 Caringa Way #15
Carlsbad, CA 92009
Said envelope(s) containing such document was deposited by me in the City of San Diego, in said District on December 17, 2015.
/s/_________
Regina A. Fabre, Judicial Assistant