Judge Nugent

13-05069 Disc Heat, LLC v. Kansas Department of Revenue (Doc. # 17)

Disc Heat, LLC v. Kansas Department of Revenue, 13-05069 (Bankr. D. Kan. Nov. 19, 2013) Doc. # 17

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SIGNED this 18th day of November, 2013.




IN RE: )
DISC HEAT, LLC, ) Case No. 13-10568
) Chapter 11
Debtor. )

Plaintiff, )

vs. ) Adversary No. 13-5069

Defendant. )


The State of Kansas cannot issue a liquor license to anyone who intends to carry


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on the business “as agent of another.”1 According to the State, when the debtor in this
case, Disc Heat, LLC, renewed its license in 2009 and again in 2010, it acted as the
agent of Edem Banda, its principal. The State contends that at both times, another
person owned 100 percent of the LLC, and that Disc Heat did not disclose that
ownership interest. When the State discovered this, it revoked Disc Heat’s license. Disc
Heat pursued an administrative appeal of the revocation and, when that failed, sought
state court judicial review. While that review was pending, Disc Heat filed this chapter
11 bankruptcy case and adversary proceeding, seeking this Court’s order enjoining the
revocation under 11 U.S.C. § 105(a), even though a governmental entity’s exercise of
its police powers is expressly excepted from the automatic stay by § 362(b)(4). The
State moved to dismiss Disc Heat’s adversary proceeding, alleging a spectrum of
grounds ranging from failure to sue the appropriate entity to Eleventh Amendment
sovereign immunity.2 Disc Heat failed to respond to the motion. I conclude that it
should be granted.3

Disc Heat operates the Suede piano bar and lounge in downtown Wichita.
Taking the allegations of its complaint as true, Suede needs its liquor license to
successfully reorganize its affairs. In its complaint and in preliminary injunction

KAN. STAT. ANN. § 41-311(a)(8) (2012 Supp.). See also § 41-2623(a)(1) (2012 Supp.).
Adv. Dkt. 8 and 9. The movant Kansas Department of Revenue appears by
Assistant Kansas Attorney General Derenda J. Mitchell. The debtor Disc Heat was
represented by Nicholas J. Grillot in this adversary proceeding.
Disc Heat has filed no objection or other form of response to the State’s motion. D.
Kan. Rule 7.4(b) applies to motions filed in this Court and provides that if the nonmoving
party fails to respond, “the court will consider and decide the motion as an
uncontested motion.”


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proceedings before the Court, Disc Heat has argued that this fact is a sufficient basis
for enjoining the State from prosecuting the license revocation proceedings under the
general powers conferred on bankruptcy courts by § 105(a). That section allows the
court to issue orders that are “necessary or appropriate” to carry out the provisions of
Title 11. Disc Heat essentially asserts that its retention of the license is necessary to
its effective reorganization and that the bankruptcy court has power to facilitate that
retention even though police power actions by the State are clearly excepted from the
§ 362 stay.4

Assuming that a federal court can ever have jurisdiction to thwart the state law
regulatory process as Disc Heat asks in its complaint, the debtor should at least sue
the proper party. The sole named defendant in this case is the “Kansas Department of
Revenue, Alcoholic Beverage Control.” The KDR is a subordinate government agency
that cannot sue or be sued by itself -- nothing in the statutes grants it that capacity.5
Like any other subordinate state agency, it may only be sued in conjunction with the
State of Kansas.6 Likewise, there is no statutory authority granting the ABC, a division

See § 362(b)(4) (excepting from the stay “the commencement or continuation of anaction or proceeding by a governmental unit or any organization . . . to enforce suchgovernmental unit's or organization's police and regulatory power . . . .”).
Hopkins v. State, 237 Kan. 601, 606, 702 P.2d 311 (1985) (interpreting the KansasTort Claims Act, noting that a subordinate government agency lacks capacity to sueor be sued absent statutory authority; Kansas highway patrol did not have capacityto be sued, KAN. STAT. ANN. § 74-2105 et seq.).
See KAN. STAT. ANN. § 75-6102(a) (2012 Supp.); see also Mid American Credit
Union v. Board of County Com’rs, 15 Kan. App. 2d 216, 224, 806 P.2d 479 (1991)
(state and Department of Revenue may be sued together, but KDR may not be suedalone).


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of the KDR, the capacity to sue and be sued.7 Thus, Disc Heat has failed to properly
invoke such jurisdiction as this Court may have. That alone is grounds for dismissal.

And even if Disc Heat had sued the proper party or parties, the relief it seeks
is simply not available here. Contrary to its Disc Heat’s legal claims, a Kansas liquor
license is not a property interest. KAN. STAT. ANN. § 41-326 states that a license “shall
be purely a personal privilege . . and shall not constitute property.”8 Nor can a license
be encumbered or transferred. Only upon a court order can a liquor license descend
under the probate laws. Because the transfer of a license is either prohibited or heavily
conditioned, it is not a source of value that can be distributed to Disc Heat’s creditors,
even though it is crucial to the ongoing operation of Disc Heat’s bar. We distinguish
this case from Bogus v. American National Bank, a Tenth Circuit case involving a
bankruptcy trustee’s attempt to avoid a lien in a Wyoming liquor license that the
debtor granted outside the preference period, but assigned and surrendered to the
bank for sale within the period.9 Applicable Wyoming state law permitted the
assignment and transfer of liquor licenses under certain conditions and expressly
permitted one to be assigned as collateral.10 The Kansas liquor laws expressly prohibit
that. A § 105(a) injunction would be of little benefit to the creditors of Disc Heat nor

See KAN. STAT. ANN. § 75-5117 (2012 Supp.) and KAN. ADMIN. REG. § 14-16-14 et
seq and § 14-21-1 et seq (2013)
§ 41-326 (2012 Supp.).
Bogus v. Am. Nat. Bank, 401 F.2d 458, 459 (10th Cir. 1968)
Id. at 459-61.


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would it “carry out the provisions of this title” which expressly except police power
actions of the type debtor seeks to enjoin from the scope of the automatic stay.

Having fully considered the legal arguments advanced by the State in its motion,
I conclude that it should be granted for the reasons stated therein and the reasons
discussed above. This adversary proceeding should be DISMISSED. A judgment on
decision shall issue this day.

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