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The Revised UCC Does Not Give Secured Lenders a Lien on Liquor Licenses
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Earlier this year, lenders which had duly filed UCC financing statements covering “general intangibles” found themselves with the ability to realize on the proceeds of a sale of a liquor license by a trustee the borrower’s trustee in bankruptcy. The prior law had been that if the lender did not properly structure its security arrangements with a liquor license owner, the trustee in bankruptcy for that owner could sell that license and distribute the proceeds to general unsecured creditors.
In In Re Chris-Don, 308 B.R. 214 (Bankr. D.N.J. 2004), The United States Bankruptcy Court considered the question of whether the revised Uniform Commercial Code, overrode the longstanding statutory and case law which characterized a liquor license as a “privilege” and not “property” that could be the subject of a lenders lien via the UCC. The secured lender in the Bankruptcy Court had lent the debtor $300,000 and had duly perfected a security interest in the debtor’s assets, including general intangibles. The trustee sold the debtor’s liquor license free and clear of all liens, with valid liens to attach to the proceeds. The State of New Jersey had several judgments against the debtor, including a judgment for unpaid taxes. The secured lender sought to obtain the proceeds in the hands of the trustee, relying on the revised Uniform Commercial Code.
The Bankruptcy Court agreed with the lender’s position that the revised Uniform Commercial Code repealed the anti-alienation provisions of the New Jersey Alcoholic Beverage Control statute which specifically states that the liquor license is not property subject to a lien. The Bankruptcy Court found that N.J.S.A. 12A:9-408(c) specifically repealed the anti-alienation provisions of the Alcohol Beverage Control statute and that a liquor license constituted a “general intangible” against which a security interest could attach. The Court addressed the State’s concern that the result reached by it would not interfere with the State’s control over liquor licenses by noting that the secured lender acknowledged that only the trustee could sell the license and that the secured lender could not do so.
The State of New Jersey appealed from the Bankruptcy Court’s ruling. The United States District Court (Cooper, J.) reversed. In re Chris-Don, Inc. Civil Action No. 04-2660(MLC) (D.N.J. March 31, 2005). The District Court determined that for a liquor license to be a general intangible, it must first be found to be personal property. The Court noted that the revised Code provides that “other law” determines whether a debtor has a property interest (‘rights in collateral’) and the nature of that interest. The District Court found that the Alcohol Beverage Control statute was controlling and because that statute defined liquor licenses as “not property”, the Uniform Commercial Code does not include a liquor licenses as a general intangible.
Thus, as the law now stands, a lender can not rely on a UCC filing to perfect a security interest in a liquor license and must resort to the somewhat cumbersome stock pledge type arrangements to attempt to utilize a liquor license as collateral.
Samuel Feldman
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