Question: Most of our loan documents for hotels, restaurants, convenience stores, etc. include security interests in not only business income and inventories, but also in any liquor license, which we understand is often crucial to the business. If we foreclose, what is the process for gaining ownership of that license?
Answer: Many lenders and servicers are surprised to learn that security interests in liquor licenses are virtually unenforceable. Even if the court orders the borrower to turn over the license, only the licensing authority in each state can grant the use of a license, and they are not subject to the court in a foreclosure action. Obviously that can be a near-fatal problem for a business that needs to serve or sell alcohol to survive.
Similarly, the court appointing a receiver has no legal authority over a state licensing agency (or other entities that are not a part of that legal action). To complicate matters further, even if the lender was able to gain control of the license, it would still need to go through the application process.
In many states, this process can go so far as to require personal affidavits for every director of the acquiring entity, including their spouses. Then, often a person registered to vote in that state is required to be the actual licensee.
A lender or related entity has further hurdles, one of which is a “tied house” rule, precluding any party with a business connection with another business involving liquor (producer, wholesaler, distributor) from being a retail seller.
Question: If we are precluded from owning or using a liquor license, how do we keep the business operating?
Answer: Despite the legal hurdles cited above, a skilled receiver can often manage to work out an “agreement” with the licensing agency. This may simply involve an allowance to use the debtor’s license, but can sometimes lead to an actual transfer of the license into the receiver’s name.
That feat is not accomplished through any statutory provision, but depends on the receiver’s experience and powers of persuasion in dealing with the agency. This issue of eTips does not allow for the lengthy explanation of how this is accomplished, but when the receiver is able to actually gain control of the license, it can then be transferred to a subsequent owner upon sale (subject to the buyer’s qualification with the agency).
When trying to sell hotels or restaurants or other “liquor dependent” assets, the license can be critical to maximize recovery. The lender with a defaulted loan on such property needs to address the issue with legal counsel prior to foreclosure, as well as with any proposed receiver.
“Tied House” Rules: "Tied house" refers to laws, adopted both on the federal level and by every state, which regulates how alcoholic beverages are marketed and how the various tiers of our industry interact.
The name comes from a practice in England where a bar may be tied, by ownership links or contractual obligations, to a specific manufacturer. Prior to Prohibition, this practice was allowed in America, and it resulted in marketing practices that encouraged intemperance.
Receiver: A disinterested person appointed by a court, or by a corporation or other person, for the protection or collection of property that is the subject of diverse claims.