Bavely v. United States (In re Terwilliger's Catering Plus, Inc.)

ALAN E. NORRIS, Circuit Judge,

dissenting.

With several of the conclusions drawn by the majority, I agree. First, I agree that we must look to Ohio law in order to determine what legal interests to property the debtor had. Second, I agree that regardless of whether Ohio law has termed it “property” for state law purposes, whatever legal interests state law says the debtor possessed can be considered “property” within the meaning of federal law.

The majority, after giving lip service to the first proposition, but without ever having answered just what property interest the debtor did have in the liquor license, announces that the question on appeal “is not whether the state has reserved an interest in the license or placed a limitation on the debtor’s interest in the license.” Ante, at 1173. Instead, the majority posits the rather interesting proposition that “the question to be answered is whether the state’s debt collection method is a property interest that can be asserted in a bankruptcy proceeding to collect debts owed to the state.” Ante, at 1173. (Emphasis added.)

The term “property” connotes the sum of all the rights and powers incident to the ownership of a thing, including its use, enjoyment, and disposal. This bundle of rights and powers can be divided among a number of persons, each of whom then possesses an interest that is less than absolute ownership.

Rather than characterizing what the state reserved as merely a collection device and then wondering whether that can ever amount to a property interest which the state may assert in bankruptcy, it seems to me we need first to concern ourselves with the nature of the property to which the federal tax lien is said to have attached. For if state law tells us that the nature of the debtor’s property interest in the license was such that the estate received from the debtor an asset which the debtor could not have sold because the state had not conveyed to the debtor the absolute right to sell the license, then we are in no position to characterize the state’s reserved interest as a mere collection device. Instead, the state’s reserved interest is a property interest as a matter of law.

This case does not involve, as the majority seems to imply, a situation where the state is simply regulating the debtor’s absolute ownership of property by limiting its right to dispose of it. Instead, reference to Ohio law establishes that the asset was wholly created by the state, and that in defining the nature and extent of the property interest to be enjoyed by the holder of a liquor license, the state retained an incident of its ownership when it withheld the absolute right to dispose of the license. Accordingly, an incident of ownership which a license holder does not receive is one ordinarily enjoyed by the absolute owner of property — the unfettered power to dispose of it. The debtor’s property interest in the license, then, never was absolute; from the outset it was limited by the interest the state retained. As the debtor took the license without the reserved incident of ownership, so did the estate.

As pointed out by the majority, the Ninth Circuit Court of Appeals has dealt with a line of cases concerning a California statute, which for all practical purposes is identical to the Ohio statute. That court’s logic is compelling. In those cases, it was held that the state’s reservation of the right to insist upon the payment of delinquent taxes as a condition precedent to the holder of a liquor license being able to transfer the license, acted as a limitation on the debtor’s property interest in the license, and the debtor’s estate therefore took the license subject to the restrictions imposed upon the debtor. The logic underlying these holdings is the same as employed by the Supreme Court in Board of Trade of City of Chicago v. Johnson, 264 U.S. 1 , 44 S.Ct. *1179 232 , 68 L.Ed. 533 (1924) and Hyde v. Woods, 94 U.S. 523 , 24 L.Ed. 264 (1877), and points out the reasons we should not characterize Ohio’s position as an effort to compete with other creditors over the proceeds of the sale of the license. In the hands of the estate the asset had no value unless it could be transferred; and it could not be transferred without accommodating the owner of the reserved interest against alienation. If the taxes owed by the debtor exceeded the value of a freely transferable license, then we can assume the estate, standing in the shoes of the debtor, would not deem it prudent to pay the taxes. If the license did have value in excess of the taxes owed, then that would be the value of the asset which the estate could pursue for the benefit of creditors.

As the Ninth Circuit Court of Appeals pointed out:

We look not to the competing claims against the debtor, but to the nature of the debtor’s property rights in the license. In In re Professional Bar, [ 537 F.2d 339, 340 (9th Cir.1976)] we stated:

The bankrupt estate, insofar as it includes liquor licenses, has only the limited value of the licenses encumbered as they may be by the terms of the statutes which create the licenses and provide the conditions of their transfer. It is to that limited value that any claims against the estate attach.

In re Farmers Markets, Inc., 792 F.2d 1400 , 1403 (9th Cir.1986).

The opinion in Farmers Markets built upon earlier opinions in which the court’s rationale was spelled out even more clearly. For example, in United States v. California, 281 F.2d 726 (9th Cir.1960), the court utilized language particularly appropriate to the resolution of this appeal.

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. The federal government has no power to command the state in this area. It has no power to direct that property be created by the state for purposes of federal seizure.

281 F.2d at 728 (emphasis added).

It seems to me that the majority is doing precisely what it may not do — creating property by conferring upon the estate the unfettered right to transfer the license, an incident of ownership not enjoyed by the debtor. Because the estate may take no greater an interest than that held by the debtor, the judgment of the district court should be reversed.