Liquidating Liquor Licenses in Bankruptcy

It is no secret that restaurants and bars have high mortality rates. When these businesses fail, liquor licenses are frequently the only remaining valuable asset. Liquor licenses are crucial to restaurants and other hospitality venues’ ongoing operations and can be worth a lot of money.

Unlike with other assets, antiquated state laws dating back to the repeal of prohibition regulate alcohol beverages in ways that seem to defy logic, and they can make selling a liquor license next to impossible. Depending on the state of issuance and the class, liquor licenses may be transferrable. Private-party security interests in liquor licenses and governmental liens can impact transferability, and navigating these encumbrances in bankruptcy can be tricky. The following is a set of crucial questions for a debtor-in-possession or bankruptcy trustee to ask when dealing with a liquor license:

Is the Liquor License Property of the Estate?

The threshold question in a bankruptcy proceeding is whether the liquor license constitutes “property of the estate” pursuant to 11 U.S.C. § 541. Unlike many other assets, liquor licenses require governmental approval and can be revoked upon proof of misconduct in most states. The majority of courts have held that a liquor license is “property” under the Bankruptcy Code, even if the license is not considered “property” under applicable state law.[1]

Does the Liquor License Have Monetary Value?

The monetary value of a liquor license depends of the state of issuance and the type of license. Liquor licenses are categorized by the beverages allowed to be sold under the license (e.g., beer, wine or spirits) and the type of establishment (e.g., restaurant, bar, nightclub, golf course, etc.). Alcoholic beverage regulations in the U.S. follow a three-tiered system whereby manufacturers must sell to wholesale distributors, who in turn must sell to retailers. Retailers are broken up into two categories: (1) on-premise retailers, like bars, restaurants and nightclubs, which sell alcohol for patrons to consume on the licensed premises; and (2) off-premise retailers, like supermarkets, liquor stores, gas stations and convenience stores, which sell alcohol to be consumed off of the retailer’s premises. Separate types of liquor licenses apply to each of these categories.

“Beer and wine” retail licenses are typically of lower value than full liquor licenses. In Florida, for example, a new restaurant can obtain a beer and wine license directly through the Florida Division of Alcoholic Beverages and Tobacco for a license fee of less than $400. By contrast, a bar wanting to sell hard liquor (spirits) must purchase a COP license on the open market from an existing licensee. These full-liquor licenses are limited by population in each county, with only one license issued per 7,500 residents. In Miami-Dade County, these licenses cost nearly $200,000 on the open market. New Jersey liquor licenses are some of the most valuable in the country, as they must be purchased from an existing licensee on the open market and can cost nearly $1 million.

Is the Liquor License Transferrable?

The bankruptcy trustee, stepping into the shoes of the debtor, must decide whether the liquor license is a saleable or transferable asset. Again, the transferability of a liquor license depends on the state of issuance and the type of license. Some state laws prohibit transferring certain type of licenses to a new entity or individual. Even if a liquor license can be purchased and sold on the open market, regulating state and/or local agencies generally must approve the sale or transfer of the license to a new entity or individual. Sellers can be responsible for transfer fees charged by state or local agencies, which can be several thousand dollars. In some jurisdictions, local agencies waive transfer fees for licenses transferred in a bankruptcy proceeding.[2]

Are There Security Interests in the Liquor License?

Liquor licenses can be great collateral for lenders, but the law is all over the map on whether a security interest can be created in a liquor license. As a starting point, the Uniform Commercial Code (UCC) does not prohibit the creation of a security interest in a liquor license. Several cases have held that, absent inconsistent state law, a liquor license is a “general intangible” within the meaning of Article 9 of the UCC.[3]

Each state treats security interests in liquor licenses differently, and some states expressly prohibit a lender from creating a security interest in a liquor license. For example, the New Jersey Alcohol Beverage Act prohibits any pledge or security interest in a liquor license. In 2014, the U.S. Bankruptcy Court for the District of New Jersey concluded that New Jersey statutes do not allow a private creditor to obtain a security interest in a liquor license, and can therefore not assert a secured claim for the proceeds of the sale the liquor license in bankruptcy proceedings.[4]

By contrast, Florida law expressly permits lenders to place a lien on the license, but the lien must be filed directly with the Florida Division of Alcoholic Beverages and Tobacco.[5] This lien is treated by the agency as the only properly perfected lien on the license and is superior to any UCC filings involving the liquor license not recorded with the agency.

Tax liens on liquor licenses have been the subject of many bankruptcy decisions. Some state agencies require payment of state taxes before approving a liquor license transfer.[6] In California, this restriction is not tantamount to a statutory lien and is therefore not avoidable under § 545(2) of the Bankruptcy Code. Rather, the bankruptcy estate takes the license subject to state tax obligations.[7]

What Else Do I Need to Know?

There are several other important things for a debtor in possession or bankruptcy trustee to keep in mind. Either may be responsible for submitting license renewal applications and correspondent fees during the pendency of the bankruptcy proceeding. Failure to do so could result in license revocation. Also, agency administration actions, including revocation of the license, do not violate the automatic stay provisions contained in § 362(a) of the Bankruptcy Code.[8]

While most liquor licenses are held by corporate entities, several individual debtors have been unsuccessful in claiming “tools of the trade” exemptions available to them under applicable state law. For example, the U.S. Bankruptcy Court for the Western District of Pennsylvania held that a liquor license did not constitute a tool of the trade under § 522(d)(6) of the Bankruptcy Code.[9] The court held that the liquor license was “a right or a privilege to transact a type of business, and is not a professional book or a tool or an implement by means of which acts involved in the conduct of a trade or business are performed.”[10]

The Bottom Line

As with most other things in bankruptcy, there is no one-size-fits-all way to deal with liquor licenses. The parties in a bankruptcy proceeding must carefully analyze complicated state liquor licensing laws and related agency policies, making it advisable for trustees to consult with qualified alcohol beverage counsel to assist with valuing the liquor license and determining the feasibility of and process for transferring the license.