Disc Heat, LLC v. Kansas Department of Revenue
13-05069
Bankr. D. Kan.Nov 18, 2013Background
- Disc Heat, LLC operates the Suede piano bar in Wichita and relies on its liquor license to reorganize.
- Kansas licensed alcohol activities are regulated by the Alcoholic Beverage Control (ABC) within the Kansas Department of Revenue (KDR).
- The State revoked Disc Heat’s liquor license after discovering undisclosed ownership (principal Edem Banda owned 100%) during license renewals in 2009 and 2010.
- Disc Heat sought §105(a) injunction in bankruptcy court to stop the license revocation, but §362(b)(4) expressly exempts police power actions from the automatic stay.
- The District Court dismissed the adversary proceeding for lack of proper party capacity and for failure to state a cognizable federal-injunction claim, concluding a license is not a property interest and that the ABC/KDR cannot be sued separately.
- The court ultimately held that the adversary proceeding should be dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can bankruptcy court enjoin police power action under §105(a) despite §362(b)(4)? | Disc Heat asserts §105(a) allows necessary actions to carry out reorganization. | State law police power actions are not enjoined by the automatic stay; §362(b)(4) exempts such actions. | Dismissed; injunction not warranted. |
| Who is the proper party to sue—the ABC as a division of KDR or KDR itself? | Disc Heat attempts to sue the agency responsible for its license. | ABC cannot sue or be sued; only the State and appropriate state entities may be sued. | Dismissed for lack of proper party capacity. |
| Is a Kansas liquor license a property interest that can be encumbered or transferred in bankruptcy? | Disc Heat treats the license as essential to reorganization and value for creditors. | Under Kansas law, the license is a personal privilege, not property, and transfer is restricted. | License is not property; §105(a) injunction would not aid creditors; dismissal affirmed. |
Key Cases Cited
- Hopkins v. State, 237 Kan. 601 (1985) (agency lacks capacity to sue or be sued absent statutory authority)
- Mid American Credit Union v. Board of County Comm’rs, 15 Kan. App. 2d 216 (1991) (state and Department of Revenue may be sued together; KDR cannot be sued alone)
- Bogus v. Am. Nat. Bank, 401 F.2d 458 (1968) (Wyoming liquor license transfer/assignment considerations differ from Kansas rules)