“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.”
How later courts described this case
- “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.”
Written by the judges who cited it.
The opinion
MOSK, J.
I dissent.
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.
*890 The United States relies upon 26 United States Code section 6321 , which provides, in relevant part, for a tax lien “upon all property and rights to property, whether real or personal, belonging to such person.” (Italics added.) Thus in determining the validity of the government’s lien we must initially ascertain whether there was any property and rights to property belonging to the persons indebted to the government, and if so, the nature and value thereof. In so doing we look exclusively to state law; it has been held that the federal code section creates no property rights but merely attaches federally defined consequences to property rights which are defined by state law. (Ideco Division of Dresser Indus, v. Chance Drilling Co. (5th Cir. 1970) 422 F.2d 165 ; United States v. Gurley (5th Cir. 1969) 415 F.2d 144 .)
Superficially a liquor license is merely a tangible sheet of paper, worth a farthing. Whatever additional value there may be inherent in its possession or transfer is artificially created by the State of California. Its worth is determined not by intrinsic merit, not by supply and demand, not by the tests of market value, not by any other principles of economics, but exclusively by the monetary and possessory limits prescribed by the regulating authority, the state. If the state were to prohibit the transfer of liquor licenses, which it could do under its police power, there would be no property or rights to property in the instant case and thus the government could impose no lien. By parity of reasoning, when the state permits a transfer only upon satisfaction of precise statutory conditions, which are admittedly not unreasonable, the property and rights to property exist subject to those conditions.
The rule was well-stated in United States v. State of California (9th Cir. 1960) 281 F.2d 726 , 728: “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.
“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 *891 the conditions here imposed by the state relate to revenue and not to police control.
“Assuming, arguendo, that conditional demands of a state, unrelated to the privilege sought to be transferred, would be regarded as arbitrary, we cannot say that such is the case here. If (as here) the conditions be lawful in the sense that they are proper and reasonable demands to make of an applicant, they constitute a limitation upon the right of the applicant and upon the property which that right constitutes and upon the values which attach to that property. Those values and no greater values became a part of the bankrupt estate and fell within the reach of the United States.”
I turn, then, to determine the nature and extent of the property interest created by the State of California. It seems evident that as to the escrow funds to which the wage earners have a valid claim, there is no property or rights to property “belonging to such person” indebted to the government, as required by 26 United States Code section 6321 . The wage earners are not indebted to the government and property belonging to them is not subject to a tax lien.
But, the majority argue, the state statutory conditions apply to the disbursement of funds in escrow as distinguished from the transfer of the license. There are, they hold, two distinct processes. However, such attempted fragmentation of what is essentially a unitary transfer scheme is utterly unrealistic.
The Legislature has made it abundantly clear that the escrow is an integral part of the transfer process. Entering into escrow is not a voluntaiy act; the statute directs that it shall be established (§ 24074). Sections in the Business and Professions Code relating to the entire subject (transferability, § 24070; transfer fees, § 24072; notice of intended transfer of licenses, § 24073; escrow, § 24074; duties of escrow holder, § 24074.1) are all included in the same article of the code (ch. 6, art. 5). That they are interrelated and inseverable is indicated by section 24074.3, which requires the prospective transferee to file with the department a statement that the consideration has been deposited—not with the proposed transferor—but with the escrow holder.
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 *892 before a transfer may be consummated and property or a property right created. If the escrow holder fails to complete his statutoiy duty the attempted transfer fails.
A reading of section 24074.4 confirms this interpretation. In lieu of opening an escrow a corporate licensee may file with the department a guarantee that all creditors of the licensee shall be faithfully paid, and the “department shall not transfer the license until the guarantor has paid all the creditors’ claims in full.” The section, while not apposite to the instant case, is illustrative of the legislative intent to make inseverable the. relationship between transfer of the license and satisfaction of creditors’ claims, in this instance through an escrow.
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.
I would reverse the judgment.