The Perils of Buying a Liquor License at Auction

By John P. Connell & Robin Sosnow

A judgment creditor of a restaurant or liquor store business can attach and then levy against the retail liquor license of that business, as a valuable and transferable asset, in order to satisfy a judgment the creditor may have obtained in court. Fallon v. Shelbourne Hospitality Group, Inc., ABCC (Sept. 4, 1991) citing Springsteen v. Meadows, Inc., 534 F. Sup.504, (D. Mass. 1982) (holding a liquor license subject to levy pursuant to Mass. Gen. Laws ch. 138, §23), Arrowhead Estates Inc. v. Boston Licensing Board, 15 Mass. App. Ct. 629, 677 (1983) (holding liquor licenses attachable by the IRS pursuant to I.R.C. §6331). In order to levy against the liquor license, a judgment creditor customarily employs the local Sheriff’s office to conduct an auction for the license. At a liquor license auction, similar to other auctions, the Sheriff, as auctioneer, will seek the highest bid. Upon the determination of the highest bidder, the Sheriff will take certified funds to secure the “purchase” of that license. In return for payment of the bid, the Sheriff may provide the “buyer” of the license with a piece of paper entitled “bill of sale” – a document that may state very little other than the purchase price.

The “purchase” of a liquor license at auction, however, does not constitute a “transfer” of that license to the successful bidder. Rather, the “buyer” must have a suitable location for the relocation of the license and satisfy all other prerequisites to transfer as prescribed by its local municipal licensing authority and the Alcoholic Beverages Control Commission, and then successfully obtain approval of the “transfer’ from both the local licensing authority and the ABCC. See Mass. Gen. Laws ch. 138, §15A. Assuming the successful “buyer” can satisfy all the conditions required of it to successfully petition for the “transfer” of the license, several issues remain: What has the buyer actually “purchased” at this auction and what is the true cost of what the buyer will actually have to pay for that license in order to secure the “transfer” of that license? In short, what are the perils of buying a liquor license at auction?

Even though the “buyer” may believe he or she may have received a “deal” at a Sheriff’s auction, paying perhaps far less than what a license may fetch on the open market, Sheriff’s auctions are not a desirable mechanism for the average seeker of a liquor license. Most importantly, prospective buyers cannot be certain at the time of auction whether the current license holder is in good standing with the Department of Revenue (DOR) and/or the Department of Unemployment Assistance (DUA) for all taxes owed and returns due, as required by Mass. Gen. Laws ch.62C, §§ 51, 52 in order for the license to ultimately transfer.

Insuring payment of all taxes and returns due to the DOR and/or DUA can add time and cost to the license purchase and transfer process. The taxpayer seller of a liquor license, selling voluntarily or involuntarily in the case of an auction, is required to pay-off any and all taxes owed and file any returns due the DOR or DUA before either of these two agencies will release its lien-holds on the license “transfer.” Mass. Gen. Laws, ch. 62C, §§ 51, 52. In the case of an auction, where the taxpayer holder of the liquor license has just had its license involuntarily seized and sold by the Sheriff – for usually less than what it’s worth on the open market – that holder may not be financially able to pay off the taxes it may still owe to DOR or DUA. Moreover, the licensee may feel no need to even cooperate with the buyer with respect to providing the buyer with its status before the DOR or DUA, causing the buyer difficultly in even learning how much may be owed in un-paid taxes.

Accordingly, any unpaid taxes the holder of the license may have had at the time of the auction may suddenly add to the cost of the auction price, as the buyer may now have to either pay the license holder’s taxes; negotiate with the DOR and/or DUA for a reduction in the lien-hold amount; or abandon the transaction altogether if the amount of taxes owed makes the cost of the license prohibitive. All these scenarios will add time to the proposed transaction, which may cause the buyer the additional problem that the license holder must renew it by December of each year; a process that cannot generally be completed by the “buyer” without some cooperation from the licensee. An auction held in October, for example, will require the holder of the license – the business that just lost the license and is perhaps now out of business – to affirmatively renew the license and pay perhaps a few thousand dollars for its renewal just weeks after it lost the right to use it; something the holder may not want to pay for even if it could afford the cost.

Negotiating a subrogation of the DOR or DUA’s lien-hold on the license transfer, while possible, can be extenuated and very time consuming. In the ordinary sale of a liquor license where there arises the issue of un-paid taxes, it is customarily the seller’s financial responsibility to pay-off any and all taxes owed, separately from the sale price, and this is usually an issue between only the seller and the buyer. If the seller fails or refuses to pay its taxes, the customary language used in such transactions ordinarily allows the buyer to terminate the transaction and have its deposit returned. When attempting to negotiate the subrogation of DOR or DUA’s lien hold on the license transfer after an auction, however, multiple parties with competing interests are involved in this process with no formal agreement between any of them as to who will payoff the un-paid taxes or what will happen to the auction price paid the Sheriff if the “transfer” process is never completed.

The parties who are sitting at the bargaining table when one successfully bids for a retail liquor license at auction include: (a) the holder of the license, who wants its judgment amount and/or its tax delinquency reduced as much as possible with the buyer’s money but who may be unable or unwilling to pay anything towards its own unpaid taxes; (b) the judgment creditor, who seeks to keep as much as the auction price as possible but who may have to sacrifice a portion of that auction price towards un-paid taxes in order for the deal to go through; (c) the Sheriff, who wants to keep its portion of the auction price, or its “poundage,” for conducting the auction and who may also hesitate in returning the auction amount to the buyer depending upon the terms of the auction; (d) the DOR and DUA, who want to collect as much money as possible towards the un-paid taxes, regardless of the auction amount, before they release their lien-hold on the license transfer; (e) the buyer at auction, who wants to spend as little as possible in acquiring the license over and above the auction price already paid; potentially (f) the landlord of the premises where the license is still physically located, pending “transfer,” who may not be able to re-let the space to another liquor licensed tenant, and who will therefore be losing rent until the current license is transferred out of that location to a new location; and (g) potentially other creditors or employees of the holder of the license who may have pursued a court action after the auction and obtained a court order preventingthe “transfer” of any assets belonging to the defendant pending their lawsuit(s).

If the potential for un-paid taxes may give one pause before making a bid at auction, also consider that alcoholic beverage wholesalers— the companies that sell liquor stores and restaurants their alcoholic beverage inventory – may also be silently sitting at the bargaining table when a buyer bids for a license at auction. In Massachusetts, a retail liquor license holder that is sixty days delinquent in payment of an alcoholic beverage shipment from a wholesaler is required to be “posted” or “listed” with the M&S Service Information Bureau (“M&S Service”) that compiles or lists all so-called “delinquent” licensees. Mass. Gen. Laws ch. 138, §25.

Being “listed” with M&S Service by one or more wholesalers prohibits any wholesaler in Massachusetts from making any further deliveries of alcoholic beverages to that delinquent licensee on credit, and that licensee must pay for all such future deliveries in cash until the unpaid delinquency is paid and the wholesaler clears the licensee from the M&S Service list. While the buyer of a retail liquor license does not inherit the “liability” of the seller’s debt to wholesalers prior to the “transfer,” and while being “posted” with the M&S Service will not, itself, prevent the “transfer” of a liquor license, any buyer of a liquor license – whether they be a buyer pursuant to a voluntary sale or a buyer at auction pursuant to an involuntary sale – inherits the “posting” of the previous licensee at the time of the “transfer,” and will not be able to receive shipments of alcoholic beverages from wholesalers on credit for so-long as the prior licensee’s debt to the wholesaler(s) remains unpaid. Mass. Gen. Laws, ch. 138, §25.

Inheriting a posting on the M&S Service may not cause the price of license to automatically increase, because the buyer has no legal obligation to pay it. Nevertheless, such a posting can not only hamper the proposed business of the buyer by it having to pay cash-on-delivery for all of its alcoholic beverage shipments, it can also depress the value of the license when the buyer ultimately seeks to sell that license sometime in the future, as the next buyer of the license would inherit the same delinquency list posting and so on to every subsequent buyer. Accordingly, knowing at auction whether the holder is “listed” with the M&S Service – and for how much and to how many wholesalers – is a fact that any auction bidder would want to know and should be easily enough learned from the M&S Service at the time of auction, provided the licensee has already been posted.

The fast moving mechanics of an auction, however, are at odds with the sixty-day delay between the time a licensee receives a shipment of alcoholic beverages, or several of them from different wholesalers, and their being listed as delinquent for failure to pay for that delivery. The licensee can order and receive shipments of alcoholic beverages right up until the day its license is auctioned. The M&S Service, for its part, only receives and enters delinquency listings between the sixty-first and the sixty-fourth day after a delivery; no earlier and no later.

Accordingly, a financially distressed licensee may receive several expensive shipments of alcoholic beverages on credit shortly before its license is seized and auctioned by the Sheriff. As the auctioning of a liquor license has the natural effect of closing down a restaurant or liquor store, the licensee may thereafter have no ability nor any desire to pay for the alcoholic beverage shipments it received prior to the auction. It may not be until after the auction and after the bidder has paid the Sheriff for the purchase of the license before the licensee’s delinquency is “posted” with the M&S Service, therefore adding another potential expense to the auction purchase price that was not advertised at sale.

In summary, when attending an auction for the sale of a liquor license – a very valuable asset in some Massachusetts towns and cities – one should be aware that while he or she may be “paying” the Sheriff for a license and actually receive a “bill of sale,” the actual “transfer” of a license does not properly occur until both the local licensing authority for the municipality where the license is located and the Massachusetts Alcoholic beverages Control Commission approve the “transfer.” This process can sometimes take months when only two parties are working together to achieve the “transfer.” In the case of an auction, where the holder of a license has involuntarily lost a significant asset for its business and therefore may not cooperate at all in the “transfer” process, a host of other potential parties to the transaction may delay a “transfer” process for so long that the perceived “bargain” achieved at auction may, in fact, have been no “bargain” at all.