Best Practices: Liquor Licenses as Collateral

There are a number of occasions where a SBA lender may wish to lien a liquor license as part of its collateral. Not only may a liquor license be a valuable asset of the borrower, but also SBA SOP 50 10(5)(I) p. 156 requires Lenders to take a first security interest on all assets financed with 7(a) loan proceeds. Some examples of loans that may involve a lien on a liquor license include the financing of a hotel with a restaurant that serves alcohol, or the acquisition of a liquor, convenience, or “package” store. In these scenarios, it’s important to understand that many states prohibit the holder of a liquor license from pledging it as collateral for a loan. In addition, many states do not allow liquor licenses to be transferred or assigned from the original licensee to another person or entity.

Determining whether a liquor license may be subject to a lien and whether it can be transferred or assigned requires a state-specific analysis, which may entail a close review of the applicable state statutes, local county regulations and case law. For this reason, lenders should investigate as early as possible in the loan process whether a particular state allows a liquor license to be liened and/or transferred.

Assume, for example, a lender is extending credit in Arkansas to a borrower that will have a liquor permit. The Arkansas statutes governing alcoholic beverages clearly state that liquor permits “shall not” be pledged as collateral for a loan, nor may they be transferred or assigned. Ark. Code Ann. § 3-4-217(a)(b). Accordingly, the lender in this instance would likely remove the lien on the liquor license from the collateral section of its Credit and Authorization, as the license cannot be pledged or sold.

By contrast, in Massachusetts, “a [liquor license] may be pledged by the licensee for a loan, provided approval of such loan and pledge is given by the local licensing authority and the commission.” Massachusetts law also allows the transfer of a liquor license with approval from the local licensing authorities. 20 Mass. Gen. Law ch.138 § 23. Consequently, a lender working with a Massachusetts borrower/licensee is likely to include a security interest in the liquor license in its collateral section of its Credit and Authorization, and then seek the required local approvals and proceed to perfect the lien.

If a lender finds that a borrower cannot pledge its liquor license as collateral, there “may” be a workaround if licenses are transferrable in that state. In New Jersey, for example, a liquor license cannot be pledged to a creditor, but it may be transferred if approved by the issuing authority, depending upon the circumstances. N.J.S.A. § 33:1-26. Balancing the risks of state vs. SBA compliance, some lenders attempt to indirectly secure access to a borrower’s liquor license by taking a pledge of the ownership interest in the entity that holds the license. For example, if the borrower is a limited liability company (“LLC”), the lender could take a pledge of the borrower’s membership interest in the LLC. (Lender would file the appropriate UCC’s to secure the membership interest.) In a default situation, a lender “may” be able to exercise its secured rights under the pledge and take ownership and control of the entity that holds the liquor license. Presumably, then, the lender could seek approval to sell the license and collect the proceeds of that sale. However, other lenders in New Jersey take a more conservative approach. These lenders believe that a sale of the ownerships interest under the pledge constitutes a violation of the states; Alcohol Beverage Act, and the transfer of the lender interest to a third party without the borrowers consent would be rejected as an improper transfer.

Again, the laws governing the pledge and transfer of liquor licenses are very state specific and require careful research and analysis. Lenders should evaluate their options as early as possible, and modify the collateral sections of their Credits and Authorizations to reflect the interests available in a borrower’s liquor license under a particular state’s laws. For more information regarding liens on liquor licenses, contact us at (215) 542-7070 or at info@starfieldsmith.com.