4 FAQs related to the sale or transfer of liquor permits in Ohio receivership and bankruptcy cases

February 28, 2018

Blog Post

Restaurants, bars, and hotels must overcome a significant number of challenges in order to remain successful – increasing food and labor costs, debt loads, over-saturation of the marketplace, and the growing pressures of e-commerce and food delivery services offering an alternative to eat-in dining. Consequently, many of these businesses are facing liquidity issues and the occurrence of defaults under the terms of their loan documents with their lenders. The ability to sell liquor, beer, and wine (depending on the applicable permits) is essential to the going-concern operations of a restaurant, bar, or hotel business and it is vital to maintaining the business’s value.

Many issues arise in connection with the insolvency and sale of a business selling alcoholic beverages under a state issued liquor permit. Often, assets of financially distressed companies are sold in receivership, bankruptcy, or by secured lenders through secured party sales under the Uniform Commercial Code. This article focuses on issues that arise when attempting to sell, transfer or pledge liquor permits under applicable Ohio law and federal bankruptcy law.

Regulation of Liquor Permits in Ohio

In Ohio, the Ohio Department of Liquor Control (ODLC) has the exclusive authority to regulate the sale and consumption of alcoholic beverages.¹ Ohio law prohibits any entity other than the named permit holder to conduct business under the permit.² In addition, no holder of a liquor permit shall sell, assign, transfer, or pledge the permit without the consent of the ODLC.³

Can a security interest be taken in a liquor permit in Ohio?

The Supreme Court of Ohio held in Abraham v. Fioramonte (1952), 158 Ohio St. 213, that permits issued by the ODLC, pursuant to the Ohio Liquor Control Act, are not property which can be mortgaged or seized under execution or court order for the satisfaction of debt. Instead, rather than property in which the permitee has rights, liquor permits are mere licenses. As such, an Ohio liquor permit may not be subjected to a security interest.⁴ (The transfer of any interest, including a security interest, in an existing permit, requires the approval of the ODLC, and no choice in action, property right, or enforceable obligation is created in the transferee by such unauthorized or unapproved transfer).

Can a receiver be appointed over a liquor permit in Ohio?

Pursuant to Ohio Administrative Code Section 4301:1-1-14, upon written application on forms prescribed and furnished by the division and upon approval by the superintendent of liquor control, the ownership of a permit, location of a permit, ownership and location of a permit, or interests therein may be transferred, unless otherwise prohibited by law or rule:

From the holder thereof to another person when such transfer is in connection with the bona fide sale of the business or personal property assets of such permit holder and the other person and the location meet all other requirements under rule and law.
In the case of a bankrupt permit holder to the trustee in bankruptcy, and thereafter from such trustee to another person when such transfer is in connection with the bona fide sale of the business or personal property assets of such bankrupt permit holder, or pursuant to an order of the commission or a court of competent jurisdiction when the other person and the location meet all other necessary requirements under rule and law.
In the case of a receiver having been appointed for a permit holder, to such receiver and thereafter from such receiver to another person when such transfer is in connection with the bona fide sale of the business or personal property assets of such permit holder, or pursuant to an order of the commission or a court of competent jurisdiction when the other person and the location meet all other necessary requirements under rule and law.
Thus, in Ohio, a liquor permit can be the subject of a receivership as long as the receiver obtains the ODLC’s permission to transfer the permit and the buyer otherwise complies with ODLC’s requirements.

Is a liquor permit property of a debtor’s bankruptcy estate?

A majority of bankruptcy courts have held that a liquor permit is property of a bankruptcy estate under Section 541 of the U.S. Bankruptcy Code, even if the liquor permit is not considered “property” under applicable state law.

Can a liquor permit be sold in bankruptcy?

Yes. In a Chapter 7 bankruptcy (a liquidation of the debtor’s assets), a bankruptcy trustee should place non-operating permits in safekeeping pursuant to O.R.C. § 4303.272 in order to avoid having to file monthly sales tax returns on the debtor’s license related to the permit.

In a Chapter 11 bankruptcy (the debtor remains in possession and control of its business and assets), the debtor must comply with ODLC’s regulations and ensure that the annual renewal for the liquor permit is timely filed and all fees are paid. In addition, the Ohio Department of Taxation will require the filing of all pre-bankruptcy tax returns as well as the filing and payment of all post-bankruptcy tax returns related to the liquor permits. If a liquor permit is being operated during the bankruptcy case the Ohio Department of Taxation requires affidavits from the debtor to ensure that all sales and withholding taxes are being correctly reported, taxes remitted and returns filed. The transfer of the liquor permit to a third party buyer must meet the requirements of Ohio Administrative Code Section 4301:1-1-14(3). The State of Ohio must receive proper notice and be served with any sale motion involving the transfer of a liquor permit.

Often a buyer will apply for a new license with the ODLC and enter into an interim liquor management agreement with the debtor while it is going through the approval process. Interim liquor management agreements, also known as transition agreements, allow the new owner to operate under the previous owner’s liquor license during the transition of ownership (while transferring the existing liquor license or obtaining a new liquor license). Some states do not expressly prohibit and accept such agreements because of the state’s burdensome application process and the time needed to obtain a new liquor license. However, interim beverage management agreements are not allowed in certain states.

Buyer Due Diligence

If you are buying a liquor permit you should take into consideration, among other things, the following:

Confirm the type of liquor permit(s).
Identify the party holding the liquor permit.
Confirm that the liquor permit is in good standing.
Verify that the liquor permit is not on a delinquent list.
Verify that the liquor permit does not have any sales tax issues.
Verify that there are no pending formal complaints against the liquor permit.
Know the applicable law and restrictions on transfer of the liquor permit.

^{1. Westlake v. Mascot Petroleum Co. (1991), 61 Ohio St. 3d 161, 167; Ohio Revised Code § 4301.10(A)(2)}
2. O.R.C. § 4303.27
3. O.R.C. § 4303.29(A)
4. Bank of America Strategic Solutions, Inc. v. Cooker Restaurant Corp., 10th Dist. No. 05AP-1126, 2006-Ohio-4567
5. Kuhlin v. Corner Bar, 2013-Ohio-4163 (Seventh District); Continental Sawmill Limited Partnership v. Italian Oven L.L.C., 00AP-204 (Tenth District); Wilkens v. Boken, 8th District No. 64230 (Dec. 23, 1993); Telecom Acquisition Corp. I, Inc. v. Lucic Ents., Inc., 8th District, 2015-Ohio-2703
6. In re Terwilliger’s Catering Plus, Inc., 911 F.2d 1168, 1171 (6th Cir. 1990)

This decision only adds to to the growing circuit split on the application of the “hypothetical test” or the “actual test” in bankruptcy, and may lead a higher court to consider the issue. For franchisees in the Sixth Circuit who desire to reorganize in bankruptcy, however, this decision provides clarity about which test parties may use to determine if a contract could be assumed.

This ruling reveals the limits to the rejection power of the Bankruptcy Code. While a bankrupt franchisee can use bankruptcy to unburden itself of future monetary liabilities due to a franchisor, such franchisee cannot completely rid itself of those bargained-for equitable remedies that are there to protect the integrity of the brand and the confidential, proprietary information that the franchise arrangement is designed to protect.