Financing New Jersey Liquor Licenses by John Newman, Esq.
The following was written by a New Jersey Liquor License attorney.
I receive many calls about how to finance a liquor license in New Jersey.
This article is specifically on point.
Should you have questions about New Jersey liquor license financing, I encourage you to contact Mr. Newman for specifics to your situation.
LIENS ON New Jersey LIQUOR LICENSES
By John Newman,
Newman and Simpson
32 Mercer Street
Hackensack, NJ 07601
Phone – 201-487-0200
Email at firstname.lastname@example.org
For over seventy years New Jersey law has prohibited a borrower from granting a security interest in a liquor license. New Jersey’s Alcoholic Beverage Control statute specifically precludes a licensee from utilizing a liquor license as collateral for a loan. Courts have recognized that a liquor license is a privilege, not a right, and is analogous to a temporary permit. The rationale behind these decisions was to defer to the State’s regulatory authority in issuing and monitoring liquor licenses.
Of course lenders do give financing to bars and restaurants. In giving such financing it has been the practice to effectively obtain a lien on the license by taking a pledge of the stock in the licensee. This is done by obtaining a stock pledge agreement from all shareholders in the corporation. If there is a default, the lender can take control of the stock and the Board of Directors, and elect new officers who can then sell the license (and pay down the secured debt). Usually this procedure is sufficient to protect the lender, but not always.
If there is a federal or state tax lien, the holders of the lien can levy on the license and “prime” the lender. In addition, if there is a bankruptcy, the proceeds of a sale of the license by the bankruptcy trustee may be used by the trustee for administration expenses, and for the benefit of creditors generally, including unsecured creditors. Thus, it has always been incumbent upon a lender who is relying on its “lien” on a liquor license to be sure that its borrower is paying its taxes and is solvent.
A recent case has turned the long-settled principles set forth above on their head. This past summer the New Jersey Bankruptcy Court held that the 2001 amendments to the New Jersey Uniform Commercial Code overrode the seventy-year-old provisions of the Alcoholic Beverage Control Act, declaring that a lender with a lien on “general intangibles and the proceeds thereof” held a valid, perfected security interest in a liquor license. This is revolutionary development in the world of lending to bars and restaurants.
The case dealt with a bankruptcy where the trustee sold the liquor license. The court held that 100% of the proceeds went to the secured creditor due to its perfected security interest, priming a subsequent judgment by the State of New Jersey and, of course, unsecured creditors and administration expenses.
The court held that because of the Alcoholic Beverage Control Act and the State’s paramount interest in controlling liquor licenses, although the lender did have a valid perfected security interest in the liquor license, it could not foreclose on the license nor compel its sale. The lender’s only remedy was to wait for a sale by the borrower, a receiver or trustee, and then assert a lien on the proceeds of the sale.
For a lender, this position is far better than only having a lien derived through a stock pledge. The lender cannot be primed by a subsequent tax lien or by creditors in a bankruptcy. In addition, a lender is usually in a position to force appointment of a receiver or to force a bankruptcy once there is default.
There is one large caveat: the case is on appeal to the United States District Court and potentially from there to the Third Circuit Court of Appeals. We will keep you advised. In the interim, lenders to bars and restaurants are well advised to obtain their liens both ways: through the old stock pledge and through a security interest in general intangibles including, specifically, the liquor license.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.