Insight When a Personal Privilege… Isn’t (Liquor License Security Interests and Liens in Idaho)
By Amy M. J. Knight,
Our previous blogs have discussed recent legislation involving State of Idaho Retail Alcohol Beverage Licenses used in operation of restaurants and bars, commonly referred to as “liquor licenses”. Such legislation has substantially changed the landscape of the use, purchase, sale and leasing of liquor licenses since 2023. One area not (yet) touched in such legislation is the routine financing of restaurant and bar operations by so-called seller carrybacks, banks and private lenders (which will be referred to in this blog as “lenders”).
Operating a restaurant or bar is no easy and cheap undertaking, and is fraught with risk. Food and beverage costs, which eat up most of the profit margin, are just an appetizer to the whole meal deal of operating costs which also include real estate rents, employment costs, FF&E, taxes, etcetera. The expense associated with the build-out of a commercial kitchen alone can run into six and seven figures. Few Idahoans with a great recipe and the will to work hard as a restauranteur also have the necessary start-up and operational funding for such an undertaking. They commonly turn to private and institutional lenders to find the necessary funding. Or, common particularly in the smaller towns of our state, the operator seeks to buy out a retiring restauranteur and pay the seller over time.
Of course, the main incentive for lenders in making purchase, start-up, and operational loans to restaurant and bar owners is the interest earned under promissory notes and loan agreements. But, just as important to a lender is the security it holds and remedies it can enforce in the event the operation fails or the operator/debtor does not make its payments. The lender’s enforceable security interest and liens against whatever the debtor owns become vital to the lender’s decision to make the loan. As a secured party, the lender can move against the assets if necessary, and use their proceeds to make itself whole after the operator defaults.
Where the operator owns and uses a liquor license, enabling the operator to serve alcoholic beverages as a part of its menu offerings, the liquor license is an important asset, both on its own and as a part of the entire operations. For some patrons, what is fine dining without a cocktail, or a celebratory dinner without a champagne toast? Is a bar really a bar without liquor? These issues drive the economic viability of a restaurant or bar and, collectively with others, of Idaho’s economy, especially in scenic tourist areas.
Idaho Code expressly protects liens in liquor licenses when the secured party is the State of Idaho. Through the power held by the Idaho State Tax Commission (“ISTC”), when an operator has tax liens filed against it for failure to make tax payments, the State may seize the liquor license and offer it to the public in a tax sale, using the proceeds to satisfy the tax liens under its power of levy and distraint. (See Idaho Code §§ 23-950 and 72-1360A.) Following the sale, the ISTC’s buyer goes through the regulatory process to become a license holder of the liquor license by full vetting with the State of Idaho Alcohol Beverage Control Division (“ABC”). When this occurs, which is routine, we know that the ISTC lien was actually attached to the liquor license and enforceable by the ISTC with the result that, as a transferable property right, it was conveyed to a new, third party.
What about an enforceable lien or security interest held in a liquor license by a lender? Under Idaho law, a security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, and is enforceable against third parties when value has been given, the debtor has rights in the collateral, and the debtor has authenticated a security agreement that provides a description of the collateral. The attachment of a security interest in collateral also gives the secured party the rights to proceeds of the sale of the collateral. (See Idaho Code § 28-9-203.) In the common instance of a loan given for a restaurant or bar purchase or operation, a security interest (or lien) becomes enforceable against the debtor when the debtor obtains the liquor license, signs a security agreement, and the lender funds the related loan to the debtor. The lien becomes enforceable against all third parties upon the lender’s filing of a UCC. As a secured party, the lender then has rights in the liquor license and the proceeds therefrom.
Some take the position that a security interest and lien is unenforceable against an interest in a state of Idaho retail alcohol beverage license, except for a lien held by the ISTC. While this is a commonly-heard statement, we respectfully submit that it is unsupported in Idaho law. There is, in fact, no Idaho statute holding that a security interest or lien in a retail alcohol beverage license is unenforceable, and the language supporting the ISTC’s seizure of liquor licenses in Section 23-950, Idaho Code, demonstrates that it is possible for a lien arising under other Idaho law to be construed to encumber the interest in a retail alcohol beverage license held by a debtor. In fact, the ISTC has recently conceded, in practice, that a bank lien on all personal property assets does attach to a retail alcohol beverage license, and when perfected by a proper UCC filing, that bank lien is perfected in the license.
Additionally, the 2024 changes to Idaho Code § 23-903(18) allow for a license holder who also holds an estate in land to effectively treat the license like a fixture, in that the license is permanently changed to be of use only on that land, and the rights thereunder may be transferred to any third-party purchaser of the land as the licensed premises. ABC calls these liquor licenses “tied” licenses because of their express attachment to real property. Like a built-in freezer or wine cooler, or an antique bar affixed to and made a part of the building on the land, a “tied” license also should, by logical extension, be subject to Idaho law related to mortgage liens and security interests granted under deeds of trust.
The above errant statement (“only ISTC gets an enforceable liquor license lien”) is obviously unfair under the arguments brought against the King’s Law and absolutist monarchies, and contrary to the democratic system enshrined in Idaho’s legal system. But, it is often based on the correct assertion (which is supported under Idaho law) that a retail alcohol beverage license is a privilege conferred by the State upon the license holder, and not a property right held by the license holder which the license holder can enforce against the State. A number of Idaho Supreme Court cases have held that rule in disputes between a license holder and the State.
However, the Idaho Supreme Court has also recognized that property rights in a retail alcohol beverage license exist when a dispute arises with or between third parties. See Weller v. Hopper, 85 Idaho 386, 379 P.2d 792 (1963), which plainly states: “a liquor license as between the licensee and third persons constitutes a right to which value as property and assignability is attributed”. Id., at 394, 797. From and after the Weller case, courts in Idaho have consistently recognized that retail alcohol beverage licenses have sufficient attributes of personal property such that rights in such licenses may be transferred from a license holder to third parties and among third parties after the license holder’s right to use the license ends. ABC’s historic cooperation in purchase, sale and lease transactions (including tax sales by the ISTC) involving retail alcohol beverage licenses further supports that analysis. Idaho law treats a retail alcohol beverage license as a personal privilege as between the license holder and the State, but as personal property with all attendant rights, including lien rights, when third parties become involved.
Thus, in a typical lending scenario, the lender’s security agreement accomplishes the creation of a security interest and lien in the liquor license (and the proceeds therefrom), and its UCC perfects that interest against all third parties, including the ISTC. While no Idaho statute or case has expressly held such (yet), the rationale holds true and is apparently persuasive to the ISTC. Because the F&B industry has an important rippling economic effect in Idaho, perhaps this is the next area of needed legislative change for Chapter 9, Title 23, Idaho Code; namely, to document and confirm the right of a lender to attach its security interest to a retail alcohol beverage license, perfect that security interest against third parties, and retain its priority position according to the Idaho Uniform Commercial Code. Idaho Code should also explicitly protect the security interests created by mortgages and deeds of trust in the newly-created “tied” liquor licenses. In doing so, Idaho can protect the economic value of liquor licenses and the economic engine that hospitality businesses rely upon throughout the Gem State.
This blog is provided by Hawley Troxell Ennis & Hawley LLP for educational and information purposes only. It is intended to notify our clients and friends of certain events or issues. It is not intended to be, nor should it be, used as a substitute for legal advice regarding specific factual circumstances. © Hawley Troxell Ennis & Hawley LLP all rights reserved.
