by Michael G. Gatlin
As collateral for a loan to a food service or beverage service operator, a lender often requires that the loan be collateralized with a pledge of the Borrower’s liquor license. While it may be standard operating procedure, in most cases, to file a UCC Financing Statement to protect a Lender’s interest in collateral, such a filing, by itself, is insufficient where the collateral includes a pledge of a liquor license. This point was discussed by the Bankruptcy Court in the recent case JoJo’s 10 Restaurant, LLC v. Devin Properties, LLC et al Lawyer’s WeeklyNo. 04-053-11 June 13, 2011
In that case, a creditor attempted to enforce what the creditor believed was a security interest in the debtor’s liquor license. The security interest had not been noted in the debtor’s application for transfer, filed with the local licensing board at the time the liquor license was obtained, nor was it noted on the documentation considered by the Alcoholic Beverage Control Commission (ABCC) at the time that body approved the transfer. In dismissing the claim by the creditor, the court stated: “…(A) debtor never acquires independent rights in a Massachusetts liquor license for purposes of satisfying UCC § 9-201(b)(ii) unless and until there is a pledge and that pledge has been approved by the required authorities under Mass. Gen. Laws ch. 138, § 23. As the debtor in this case failed to secure the necessary governmental approvals to pledge the liquor license to (Debtor), it did not acquire “rights in the collateral” within the meaning of § 9-203(b)(ii). (Debtor’s) security interest in the liquor license was, therefore, never enforceable against the (D)ebtor…”
Lenders making loans which include a pledge of a debtor’s liquor license should be certain that the lien the Lender seeks to acquire is properly noted both with the local authority and with the ABCC. Typically, such a process will require a public hearing at the local level, with requirements of proper public notice and an opportunity for public comment. While this process may take time the parties hadn’t originally envisioned, a loss of time, from the Lender’s view point, is better than a loss of collateral. As a practical matter, this issue comes up most often when a Lender is providing financing for the acquisition of a restaurant or beverage business, and a transfer of the license from the seller of the business to Lender’s customer is a part of the sale transaction which requires local and ABCC approval in and of itself; the pledge of the collateral can, and probably should, be considered at the same time.
