Fall 2011 • Issue 41, page 18

Liquor License Sales and Navigating Lien Priorities -- More than ABC

By Singer, Kevin*

A loan is made to the owner of a restaurant or nightclub (“Debtor”), the lender forecloses, obtains a post-judgment enforcement order, and then files a motion for the appointment of a receiver to take possession of the liquor license of the restaurant or nightclub. The receiver can then sell the liquor license as a means of generating proceeds to help satisfy the creditor’s outstanding judgment.

Quite often it is the case that once a receiver is appointed and performs a UCC search to evaluate other secured interests in the assets of the Debtor, the receiver will discover that there are multiple parties which have claims against the Debtor and an interest in its assets (which often includes the liquor license). A sometimes challenging issue faced by the receiver is how to establish the priority in interest amongst the competing claimants to the proceeds of the sale of liquor license when the proceeds are insufficient to satisfy the interest of all claimants.

Receivers Selling A Liquor License
The California Constitution vests the Legislature with the exclusive power to license and regulate the manufacture, sale, purchase, possession and transportation of alcoholic beverages within the State (Cal. Const., art. XX, § 22). The Legislature has exercised this authority by creating the Department of Alcoholic Beverage Control (the ABC). Cal. Bus. Prof. Code § 23000 et seq. (“B&PC”). The statute vests with the ABC the power over the transfer of liquor licenses. Pacific Firestone Escrow Co. v. Food Giant Markets, Inc., 202 Cal. App.2d 155, 158 (1962). The authority of the ABC to control the transfer of liquor licenses is the same as its control over the initial issuance of a license. Richards v. Department of Alcoholic Beverage Control, 139 Cal.App.4th 304, 313 (2006). All transfers are subject to investigation and approval by the ABC. Id. at 314.

California Code of Civil Procedure § 708.630, subdivision (b) provides authority for the appointment of a receiver to sell a liquor license and states as follows:

2. The court may appoint a receiver for the purpose of transferring the judgment debtor's interest in an alcoholic beverage license that is transferable under Article 5 (commencing with Section 24070) of Chapter 6 of Division 9 of the Business and Professions Code, unless the judgment debtor shows in the proceeding to appoint a receiver that the amount of delinquent taxes described in Section 24049 of the Business and Professions Code and claims of creditors with priority over the judgment creditor pursuant to Section 24074 of the Business and Professions Code exceed the probable sale price of the license.

Prior to getting appointed to sell a liquor license, it is important for the receiver to communicate with the appointing party or its attorney to make sure that the court’s appointing order gives the receiver the powers he or she will need to market the liquor license and complete the sale. B&PC §§ 24070 through 24082 provide that not only must an application be filed with the ABC to approve the transfer of the license to a particular party, but if approved, the proceeds from the transfer must be placed in an escrow account from which the receiver makes distribution. Since the transfer of the proceeds of the sale of a liquor license must be accomplished through an escrow, the appointing order should also include language that gives the receiver authority to open an escrow, sign escrow documents, amendments, and sales documents, as well as to hire brokers to market and sell the license.

Determining Priority Amongst Competing Lien Claimants for the Distribution of Proceeds
Once the liquor license transfers and the sale is complete, the receiver must determine how to distribute the sales proceeds. There are often competing interests in the proceeds of the sale since restaurants and night clubs have various vendors and suppliers with lien interests in the assets of the business. The sales proceeds may be insufficient to satisfy all competing interests since the value of most liquor licenses is often less than the security interests against the assets of a restaurant or nightclub. The receiver, therefore, will have to make recommendations to the court as to how the proceeds should be distributed.

B&PC § 24074 provides the priority-based system for distributing the proceeds. “[T]he Legislature has established a mandatory and exclusive system of priorities intended to replace other procedures such as levy and execution in order to protect all parties of the transaction and, at the same time, to prevent the use of liquor licenses or its transfer directly or surreptitiously as a security device.” Grover Escrow Corp. v. Gole 71 Cal.2d 61, 65 (1969).

Under this mandatory scheme, sale proceeds are distributed to creditors in a hierarchy of eight priority statuses as follows:

First, to the United States or state taxing authorities for claims based on income or withholding taxes; and thereafter for claims based on any tax other than specified in B&PC § 24049.

Second, to the payment of claims for wages, salaries, or fringe benefits of employees of the seller or transferor which were earned or accrued prior to the sale, transfer, or opening of an escrow for the sale thereof.

Third, to the payment of claims of secured creditors to the extent of the proceeds which arise from the sale of the security.

Fourth, to the payment of claims on mechanics' liens.

Fifth, to the payment of escrow fees and the payment of claims for prevailing brokerage fees for services rendered and claims for reasonable attorney's fees for services rendered.

Sixth, to the payment of claims for goods sold and delivered to the transferor for resale at his licensed premises and the payment of claims for services rendered, performed, or supplied in connection with the operation of the licensed business, and to the payment of claims of a landlord, to the extent of proceeds on past due rent.

Seventh, to the payment of other claims which have been reduced to court-ordered judgments, including claims for court-ordered support of a minor child.

Eighth, to the payment of all other claims. The payment of these claims if sufficient assets are not available for the payment of the claim in full shall be paid pro rata.

When applying these guidelines to the facts of a case, a receiver might determine that some claimants will get a share of the proceeds, while others get nothing. As straight forward as this mandatory scheme of distribution might seem, claimants that are left without receiving any of the proceeds will often challenge a receiver’s recommendation that follows these guidelines.

Prohibition On Pledge Of Liquor License May Not Apply to Sale Of Liquor License to Satisfy Secured Claim Against Assets of Debtor
In the case of Concorde Equity II, LLC, N. A. v. Q-Black, LLC, et. al., a case the author’s firm recently handled, an issue arose whereby the Plaintiff appointed the receiver to sell a liquor license to satisfy a post-judgment enforcement order on a foreclosed loan that was secured by the assets of the Debtor and his nightclub. One of the assets of the Debtor was the liquor license for the nightclub. The Plaintiff had secured its interest with a UCC filing before any of the other competing claimants. The receiver sold the license to a buyer approved by the ABC, opened an escrow for the transfer, and placed the net proceeds in trust for distribution as directed by the court. The receiver then filed a motion recommending that the Plaintiff be treated as the first priority creditor due to the fact that the Plaintiff was a secured creditor and first to record its security interest in the assets of the nightclub (making it fall under the third priority scheme of B&PC § 24049, which was good enough to make it first in priority for distribution of proceeds in this case).

Due to the fact that Plaintiff’s judgment was larger than the proceeds of the sale, no funds from the sale of the liquor license remained to pay the claims of any other creditors. A creditors’ trade association (“Claimants”), which provided collection services for clients in the food and beverage industry and whose clients had provided goods sold (i.e. such as beer) to the nightclub, fell under the sixth priority under the § 24049 distribution scheme. Due to the fact that Claimants were to receive no proceeds under this scenario, they objected to the proposed distribution. The Claimants contended that the proceeds from the transfer of the liquor license did not “arise from the sale of the security” within the meaning of § 24074, but rather were the result of the liquor license being pledged as security for the loan and, therefore, in violation of section 24076, which prohibits pledging a liquor licenses as security for a loan. B&PC § 24076 provides in full:

No licensee shall enter into any agreement wherein he pledges the transfer of his license as security for a loan or as security for the fulfillment of any agreement. No license shall be transferred if the transfer is to satisfy a loan or to fulfill an agreement entered into more than 90 days preceding the date on which the transfer application is filed, or to gain or establish a preference to or for any creditor of the transferor, except as provided by Section 24074, or to defraud or injure any creditor of the transferor.

In Holt v. Morgan, 128 Cal.App.2d 113, 115 (1954), for example, an agreement was invalidated between a creditor and liquor licensee under which the creditor agreed to dismiss a claim in exchange for a promissory note secured by a power of attorney authorizing transfer of the liquor license in the event of default. In Citrigno v. Williams, 255 F.2d 675 (1958), an agreement was held to be invalid under which the assignee of a lease and liquor license were to retransfer the license to the former owners after the lease expired.

In the Concord Equity case, over Claimants’ objection, the court adopted the receiver’s recommendation and ordered that after the receiver’s fees, the full balance of the proceeds were to be distributed to the Plaintiff. The Claimants appealed the court’s ruling. The appellate court reviewed the trial court’s interpretation of these statutory provisions and found that there was no pledge of the liquor license to the secured lender or to anyone else. The appellate court found that the Plaintiff’s loan was not secured by a pledge of the liquor license but by a security interest in the assets of debtor. Upon the sale of the license to an approved purchaser, the proceeds of the sale became subject to the security agreement, so that the Plaintiff was a “secured creditor” with respect to those funds within the meaning of § 24074. The appellate court took the position that the process conformed both with the letter and the purpose behind the governing statutory provisions. The “‘purpose of section 24076 [is] to prevent a transfer of ownership by any means other than the procedure, compliance with which would limit transfers to those who are qualified to hold licenses.’” Greve v. Leger, 64 Cal.2d 853, 860 (1966). The appellate court held that there was no possibility that the liquor license would become the property of a transferee not approved by the ABC. Therefore, there was no reason why, once the liquor license was transferred with ABC approval, the monetary proceeds of the sale should not have be distributed in accordance with the priority scheme specified in § 24074, and the appellate court affirmed the trial court’s ruling.

Selling a liquor license can be a lengthy process due to the need to determine all outstanding liens, find a buyer, and navigate the ABC approval process. However, the real challenge comes in dealing with the competing lien claimants and their counsel. If a receiver is not familiar with this area, it is advisable to retain counsel that is, or make sure they are well versed in the priority scheme set forth in the B&PC §§ 24070 through 24082, so that your recommended distributions follow the statutory scheme.

*Kevin Singer is a principal at Receivership Specialists with offices in Los Angeles, San Francisco and San Diego. He is a CRF LA/OC Board of Directors member and chapter Education CoChair.