Bar and Nightclub MCA Debt: 6 Questions About Licensing, Sale, and Settlement

If you run a bar or restaurant and you got behind on a merchant cash advance, you may be wondering whether the lender can take away your liquor license. The answer varies from state to state. Some states consider a liquor license to be a type of property, like a building; other states see it as a privilege that the state grants at its own discretion. States that treat a liquor license like property may allow its seizure, but even then, the funder cannot simply swoop in and start seizing liquor licenses without going through strict steps. In New York, the sale of a bar generally requires that the buyer have his or her own valid liquor license, which does not happen overnight. And if you settle the debt for less, the forgiven part may be taxable as ordinary income.

In Pennsylvania, a liquor license is a type of property, although not an actual physical piece of property. To the liquor board, though, the license is a privilege granted by the state. New Jersey, by contrast, like some other states, considers a liquor license to be a privilege, not a property. Its law flatly says that the court cannot take, sell, or use a liquor license to pay off debts. Liens are allowed in Pennsylvania, Florida, Massachusetts, Michigan, Montana, New Mexico and South Dakota.

What a license is worth depends on whether your state caps the number of available liquor licenses in the state (or city, county, or some other jurisdiction). In a state that does not have a limit, you can often apply for a new one. Because licenses are plentiful there, a license has little value. But in an area where the government limits the number of available licenses, having one can be quite valuable. There is far more demand than supply. That is why licenses are often treated as property - when there are more buyers than sellers, the sellers command a higher price.

Under Article 9 of the Uniform Commercial Code, a creditor may obtain a security interest over property, which provides security that the debt will be paid. Security interests must be “perfected,” however, to give the creditor priority over other creditors and lienholders. To “perfect” a security interest, the creditor must typically file what is called a UCC-1 Financing Statement. This financing statement must include accurate information about the debtor, the creditor, and the type of collateral. With liquor licenses, many courts have found that it is not sufficient to simply list “Liquor License” on the form without the license identification number. In Pennsylvania, a creditor may obtain a security interest in a liquor license if the lender complies with state liquor codes, not to mention the UCC. In Massachusetts, a creditor can perfect a security interest by filing a UCC-1, but it also needs approval from the local licensing authority and the Alcoholic Beverage Control Commission. In Florida, to perfect a security interest in a liquor license, the funder must file the lien with Florida’s Division of Alcoholic Beverages and Tobacco, on its own form, within 90 days. If the financing statement is not filed correctly or the documentation is missing, the courts may rule that the security interest was never perfected, and the creditor who wants to seize the license may have to get in line behind other creditors. A financing statement also expires when a certain amount of time has passed without renewal, commonly five years, which varies from state to state. By the time a funder seeks to enforce a security interest, the filing may have lapsed, and a lapsed filing cannot be revived.

In Pennsylvania, if a licensed bar shuts down, whether temporarily or permanently, its liquor license can be moved into “safekeeping,” held by the liquor board while you are closed. Left there long enough, it is reinstated if you apply, sold to another party, or extinguished if the local quota is over its cap. There is a fee to take it out of safekeeping. If the license expires or goes to someone else at auction, the funder’s lien might become worthless.

In New York, if you sell the bar, the new owner is not entitled to take over your liquor license. It was issued to you. The State Liquor Authority says the license cannot be transferred, but only applied for by the buyer itself. If you are considering selling a bar in NYC, the buyer has to notify the local community board thirty days before applying to the State Liquor Authority. You also cannot allow the buyer to run the bar under your license. You also cannot share any of the income or profits until the buyer has its own liquor license or temporary permit.

In California, escrow stays open until the Department of Alcoholic Beverage Control (ABC) approves the buyer and premises. The agency can refuse to authorize the transfer if you owe money on back taxes. Even after the agency approves, the escrow must pay any tax agencies you owe first, then your creditors in the lawful order. ABC considers creditor claims a private matter and will not judge whether a specific claim is valid. If there is not enough money to pay back all creditors, secured creditors are third in line after taxes and wages, and only to the extent of the collateral’s value. If you dispute a claim, escrow holds disputed claims for 25 days, and then pays to the seller unless a creditor successfully attaches the money.

Separately, in New York, the court where the funder files a confession of judgment has to be where you either (1) lived at the time of the contract, or (2) live now. Texas went further: a new statute there makes confessions of judgment void when signed in a MCA agreement (as of September 1, 2025).

If you settle with the funder for less than you owe, the IRS may treat the difference - the amount of debt forgiven - as regular income for tax purposes. One exception is if you are “insolvent”: your debts exceed the fair market value of all your assets immediately before the settlement. But, crucially, the law will only protect you to the extent that your debts exceeded your asset value on that date. When a lender in the lending business cancels $600 or more of your debt, it must file Form 1099-C.

Your next step now is to pull out your MCA agreement and review whether it actually says it has a security interest in your liquor license. Look at the UCC-1 filing to see if it includes the license number. Check whether the filing has lapsed. Finally, if you are considering selling the bar, remember to give yourself plenty of time, and don’t let the buyer operate the business under your license. The rules vary from state to state, so ask an attorney where you are based before trying to sell or close up shop.