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Kenai Peninsula Borough v. Associated Grocers (2/10/95), 889 P 2d 604
NOTICE: This is subject to formal correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, (907)264-0607.
THE SUPREME COURT OF THE STATE OF ALASKA
KENAI PENINSULA BOROUGH, )
) Supreme Court No. S-5981
) Superior Court No.
v. ) 3KN-92-422 CI
ASSOCIATED GROCERS, )
INCORPORATED; MARKET FINANCE )
COMPANY; and COUNTRY FOOD, )
INC., ) O P I N I O N
Appellees. ) [No. 4166 - February 10, 1995]
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Kenai, Jonathan H. Link, Judge.
Appearances: Clifford J. Groh, Sr.,
Michael W. Price and Susan E. Swann, Groh,
Eggers & Price, Anchorage, for Appellant. C.
R. Baldwin, Law Office of C. R. Baldwin,
Kenai, for Appellees.
Before: Moore, Chief Justice,
Rabinowitz, Matthews, Compton and Eastaugh,
A municipal corporation adopted an ordinance which
purported to impose personal liability on a successor business
owner for the former business owner's delinquent sales taxes. In
this case the successor owner is a secured party who foreclosed
on the former owner. The municipal corporation sued to collect
the delinquent sales taxes from the secured party. The superior
court dismissed the claim of the municipal corporation. We
I. FACTUAL AND PROCEDURAL BACKGROUND
The parties stipulated to the following facts. Kenai
Peninsula Borough (KPB) is an Alaska municipal corporation.
Roseco, Inc. (Roseco) owned and operated B&B Foodland (B&B), a
grocery business located in Soldotna.
By security agreements executed in October 1987 and
February 1989, Roseco, the debtor, granted to Associated Grocers,
Inc. and its wholly-owned subsidiary, Market Finance Co. (AGI), a
security interest in inventory, stock in trade, equipment,
fixtures and proceeds therefrom. AGI perfected these security
interests by filing the appropriate financing statements.1
As permitted by AS 29.45.650 et seq., KPB levied a
consumer sales tax on all retail sales, rents, and services
rendered by B&B. KPB Code 5.18.100. Roseco failed to remit
sales taxes collected at B&B between November 1989 and March
1991. At no time did KPB file or record a sales tax lien for the
In May 1990 Roseco filed for Chapter 11 bankruptcy. It
listed the delinquent KPB sales taxes on the schedule of
creditors. In March 1991 AGI obtained relief from the automatic
stay of 11 U.S.C. 362(a). Pursuant to a Foreclosure Agreement,
AGI (1) took possession of all or substantially all of the assets
relating to B&B, and (2) operated and managed the store for its
own account until October,2 when it sold the equipment and
inventory to Country Food, Inc. Roseco then liquidated its
remaining assets; KPB received a small pro rata distribution.
KPB demanded payment of the balance of the delinquent
sales taxes from AGI and Country Food as successor owners
pursuant to the following ordinance:
Any person acquiring an ownership
interest in an ongoing business . . . whether
by purchase, foreclosure, or otherwise, shall
be liable for the payment of taxes, penalties
and interest accruing and unpaid to the
borough on account of operation of the
business by the former owner . . . provided,
however, that the borough shall first make
all reasonable efforts to collect the tax
from the person who owned the business at the
time the liability was incurred.
KPB 5.18.130(B). AGI and Country Food refused to pay the
taxes.3 As of March 1, 1993, the delinquent tax bill was
$150,244.85, including interest and penalties to date.
In April 1992 KPB sued AGI and Country Food under KPB
5.18.130(B). On cross-motions for summary judgment, the superior
court granted AGI's motion.4 KPB appeals.
Both parties seem to acknowledge that the dispositive
issue in this case is one of law, not of fact. We agree.
Alaska Statute 29.45.650(e) provides:
A borough may provide for the creation,
recording, and notice of a lien on real or
personal property to secure the payment of a
sales and use tax, and the interest,
penalties, and administration costs in the
event of delinquency. When recorded, the
sales tax lien has priority over all other
liens except (1) liens for property taxes and
special assessments; (2) liens that were
perfected before the recording of the sales
tax lien for amounts actually advanced before
the recording of the sales tax lien; (3)
mechanics' and materialmen's liens . . .
recorded before the recording of the sales
The statute provides the exclusive procedure for a
municipality to collect delinquent sales taxes pursuant to a tax
lien. Indeed, KPB has adopted an ordinance under this authority.5
AS 29.45.650(e) does not provide for successor liability, unless
done through the vehicle of a lien on the real and personal
property of the "seller,"i.e. the business. Nevertheless, KPB
has attempted by ordinance to hold successor owners personally
liable for delinquent sales taxes, KPB 5.18.130(B), supra at 3.
Application of the ordinance in this case would effectively
eliminate AGI's AS 29.45.650(e)(2) lien priority.
A municipality's authority to pass ordinances is to be
liberally construed. AS 29.35.400. However, a municipality's
powers are not unbounded. A municipality may only exercise those
powers which are specifically enumerated in Title 29 of the
Alaska Statutes, or those "necessarily or fairly implied in or
incident to the purpose of all powers and functions conferred in
this title." AS 29.35.410. In Fairbanks North Star Borough v.
Howard, 608 P.2d 32 (Alaska 1980), we reaffirmed "the general
rule against nonstatutory tax liens."6 Id. at 34 (citing Libby,
McNeill & Libby v. City of Yakutat, 206 F.2d 612, 613 (9th Cir.
1953)).7 We based that decision on a determination that the
creation of a tax lien "is beyond the scope of what may be
'necessarily or fairly implied in or incident to' the authority
to collect a sales tax." Howard, 608 P.2d at 33-34.
Although, strictly speaking, KPB 5.18.130(B) does not
impose a lien, we agree with AGI's assertion that "its impact on
the property rights of an innocent lienholder is even more
drastic than a lien." Not only would the ordinance, if enforced,
effectively reduce the value of the security of the foreclosing
lienholder, it would impose personal liability on the foreclosing
lienholder which could be greater than the value of the
lienholder's collateral. Insofar as KPB 5.18.130(B) attempts
to impose personal liability on a successor owner which is
exercising its rights pursuant to a prior perfected security
interest, the ordinance is invalid.8
1 Financing statements were filed on various dates from
October 1987 to March 1989.
2 According to the foreclosure agreement, the amount owed
to AGI exceeded $2,000,000. The purpose of the foreclosure
agreement was stated as follows: "[T]o reduce the total
indebtedness owing to the Secured Parties through the
repossession and retention of the Collateral by Secured Parties
in satisfaction of the obligations pursuant to A.S. 45.09.505
of the Uniform Commercial Code . . . and/or the liquidation of
Collateral pursuant to A.S. 45.09.504 of the Code."
3 Incidental to the sale, AGI had indemnified Country
Food for any sales tax obligation.
4 The superior court granted summary judgment for AGI
based on stipulated facts. It did not make additional findings
of fact or conclusions of law. The court appears to have based
its decision on the Uniform Commercial Code, AS 45.09.010 et.
seq.: "I think that if I were to adopt the arguments of the
borough I would be, at least to a certain extent, changing the
existing playing field, if you will, of people who enter into
security agreements in Alaska." It concluded generally that the
arguments presented by AGI were more persuasive.
5 K.P.B. 5.18.660 Enforcement - Sales tax liens.
A. The mayor may cause a sales
tax lien to be filed and recorded against all
real and personal property of a registered
seller where the seller has:
1. Failed to file sales tax
returns for 2 consecutive filing periods as
required by the chapter; or
2. Failed within 60 days of the
end of the filing period from which taxes
were due to either (a) remit all amounts due
or (b) to enter into a secured payment
agreement as provided in this chapter.
6 AGI made this argument below, as well as on appeal. In
Howard, Windrum failed to pay sales taxes collected at her gas
station. The Fairbanks North Star Borough attempted to foreclose
on land that was once owned by Windrum, but had been conveyed to
Howard. Because the statute providing for sales tax collection
was silent as to how such power could be exercised, we affirmed
summary judgment for Howard. 608 P.2d at 33.
7 KPB seeks to distinguish Howard and Libby insofar as
they are limited to liens on real property. However, no such
limitation is suggested in the cases.
8 We do not address the question of whether a
municipality has the power to adopt successor liability ordinance
which does not interfere with a successor's perfected lien