Gough v. Finale

Citations: 39 Cal. App. 3d 777; 114 Cal. Rptr. 562; 1974 Cal. App. LEXIS 1010Docket: Civ. 32615

Court: California Court of Appeal; June 12, 1974; California; State Appellate Court

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The case involves an appeal against a summary judgment favoring all defendants regarding three counts in plaintiff-appellant Kerry M. Gough's complaint, which was filed as the trustee in bankruptcy. The first count challenges the validity of California Business and Professions Code section 24074 concerning the transfer of liquor licenses and the distribution of escrow funds to creditors. The second count addresses a claimed security interest by defendant Hoffman, while the third count involves Hoffman’s second deed of trust on the bankrupts' real properties, asserting that he should pursue collection remedies related to that deed.

The appellant argues that certain escrow funds, representing partial payment from the sale of the bankrupts' liquor business and license, should be considered property of the bankrupt estate and distributed according to Bankruptcy Act priorities, not section 24074's stipulations. The background includes the bankrupts, Finale and Morley, purchasing a liquor store and license from Hoffman in 1967, secured by a promissory note and second deeds of trust on their homes. After selling their liquor license and assets in 1969, an escrow was established per section 24074, mandating that sale proceeds be disbursed to creditors in a specific order. The appellant contends that these procedures should not apply following the bankruptcy adjudication on October 27, 1970. The relevant California statutes outline the order of claims to be satisfied from the sale proceeds, prioritizing employee wage claims and secured creditors, among others.

This case represents a novel issue in California regarding the application of section 24073, which governs the protection of creditors of liquor licensees through a mandatory program for debt collection from license sale proceeds. The California Supreme Court's decision in Grover Escrow Corp. v. Gole established that section 24074 creates a mandatory priority system intended to supersede other collection methods, although that case did not involve bankruptcy.

The appellant argues that section 24074 should not apply if the seller is declared bankrupt before the sale proceeds are distributed, claiming it conflicts with the Bankruptcy Act (11 U.S.C. § 104) and the supremacy and bankruptcy clauses of the U.S. Constitution. Citing In re Crosstown Motors, Inc., the appellant points out that the Illinois Trust Receipts Act's provision for creditor priority was invalidated as it conflicted with federal bankruptcy law, which prevails over state statutes. The Crosstown Motors case involved a dispute over whether an entrustor had a lien on a bankrupt's general assets or merely a priority for payment from proceeds, ultimately affirming the supremacy of the Bankruptcy Act.

The court in Crosstown Motors found that state-created priorities, such as those in the Illinois statute, were eliminated by the Chandler Act of 1938, which aimed to prevent state priorities from depleting bankruptcy estates. The respondent attempts to differentiate the current case based on the nature of the asset involved and the timing of its receipt, but the court finds these distinctions unconvincing.

The promissory note is identified as a general asset of the bankrupt, except for the specific statute in question. Should the statute be deemed inapplicable to bankruptcy, the court would address the general asset. Section 24074 establishes priorities rather than liens, raising the issue of its compatibility with section 64 of the Bankruptcy Act. In Elliott v. Bumb, the Court of Appeal determined that a California statute regulating licensed sellers of checks and money orders conflicted with the federal Bankruptcy Act and must defer to it. This decision highlighted that when a trust fund is indistinguishable by the beneficiary, they are treated as a general creditor of the bankrupt's estate.

Respondents reference United States v. State of California and Middleton v. Fidelity-Philadelphia Trust Co. to counter the appellant's claims. In United States v. State of California, the Ninth Circuit upheld the state's right to withhold a liquor license transfer due to unpaid state taxes, asserting that the federal government could not dictate state property rights or the conditions under which state-issued licenses could be transferred. The value of the liquor license was contingent upon state recognition and transferability, and the federal government lacks authority over state-created property.

The court also cited Hyde v. Woods, which supported the notion that state-imposed conditions on the sale of property, like stock exchange memberships, do not unlawfully preferentially benefit state creditors over general creditors. Respondents argue that these precedents align with their position that section 24074 does not conflict with federal law. However, they distinguish the applicability of these cases, emphasizing that they concern only the prioritization of proceeds from specific sales rather than broader asset classifications.

United States v. State of California and Hyde v. Woods establish that conditions on the issuance or transfer of property rights, such as liquor licenses, are primarily for the protection of the property right's creator, notably the State of California regarding tax collection and Exchanges for the collection of debts from members. California's enactment of section 24074 attempts to extend priority rights to specific private creditors of license holders, which diverges from its traditional role. Middleton v. Fidelity-Philadelphia Trust Co. supports this interpretation by affirming that proceeds from a bankrupt stock broker's securities should be paid to the trustee, reinforcing that exchanges can regulate and discipline members only for transactions occurring within their jurisdiction, without extending their control over transactions conducted elsewhere. Section 24074’s priority provisions lack significant public or state interest beyond protecting suppliers or service creditors of licensees and are inconsistent with federal bankruptcy law, as outlined in Elliott v. Bumb. Furthermore, the Bankruptcy Act grants bankruptcy courts jurisdiction to require the delivery of property held by receivers or trustees, ensuring that such entities account for the property’s disposition, although this requirement is limited in certain circumstances.

Respondent contends that section 2(a)(21) limits the trustee's powers in this case, as the respondent was appointed as the escrow holder prior to the sellers' bankruptcy filing. However, the provision of the Bankruptcy Act cited by the respondent does not apply to this case since the respondent does not qualify as a receiver, trustee in a different proceeding, or an agent authorized to manage or liquidate property. The appellant has appealed the order granting summary judgment for the defendant, but since the order itself is nonappealable, the appeal must be made from the judgment. The judgment has been reversed with concurrence from Justices Rattigan and Christian. Additionally, it is noted that proceeds from a note have been used to settle Hoffman's secured claim, and a similar case in the United States District Court for the Northern District of California established that a trustee in bankruptcy was entitled to judgment under comparable circumstances. The document clarifies that a general assignment for the benefit of creditors involves transferring a debtor's property to a trustee for liquidation and equitable distribution, which does not apply in this situation.