In a narrow holding on questions certified by the Fifth Circuit U.S. Court of Appeals, the Texas Supreme Court concluded Friday that a publicly held corporation, in a bankruptcy sale, may convey its permits to sell liquor to another publicly held corporation that did not enjoy a grandfather exemption against a state law ban on a public corporation’s ownership of package-store permits.
In Gabriel Investment Group v. Texas Alcoholic Beverage, the Supreme Court determined that Gabriel’s grandfathered protection against the state liquor law prohibition does not constrict it from selling package-store permits to corporations.
“We understand the questions to ask whether [Alcoholic Beverage Code] section 22.16(f) continues to exempt a public corporation if that corporation sells some or all its shares to a non-exempt corporation, and, if so, whether the exempt corporation can acquire additional package store permits,” the majority opinion by Justice Jimmy Blacklock framed the Fifth Circuit’s questions. “We answer both questions yes.”
To listen to the amicus argument by the trade group Texas Package Store Association tell it, all hell will unravel for a restriction intended to protect “favorable business climate in the State of Texas and also to help ensure that retail sales of liquor in Texas are done in a manner that protects the welfare, health, peace, temperance, and safety of the people of the State of Texas.”
“Simultaneous application of the statute to two corporations—one exempt and one non-exempt—inescapably includes applying the statute to the exempt corporation, in violation of section 22.16(f),” the grandfather provision, the Supreme Court reasoned. “Although this result may lead to consequences many have not heretofore anticipated, we consider it to be dictated by the statute’s text, and the Legislature is of course free to respond to our decision as it sees fit.”
The applicable provision, the court explained, relates to a 1995 amendment by which the Legislature added the following restriction on public corporations: A package-store permit may not be owned or held by a public corporation, or by any entity directly or indirectly owned or controlled, in whole or in part, by a public corporation, or by any entity which would hold the package store permit for the benefit of a public corporation. The prohibition on public-corporation involvement with package-store permits never covered all public corporations. Instead, it contained two exemptions: a package store in a hotel and a public corporation holding a package-store permit that existed before the Legislature amended the rules to allow a corporation that held a package-store permit before the law was changed.
That allowed Gabriel Investment Group Inc., operating 45 stores in Texas under the trade names “Gabriel’s” and “Don’s & Ben’s Liquor” to seek a clarification: May it use its corporate-owned package-store permits as a means to escape bankruptcy reorganization for a company that existed since the 1940s but got in under the wire by incorporating just before the law changed. In essence the Legislature exempted from the corporate prohibition any public corporation that, as of April 1995, already had permits or had permit applications pending.
The current challenge, and the Fifth Circuit’s certified questions, sprang from Gabriel’s 2019 Chapter 11 bankruptcy. As part of its bankruptcy plan, Gabriel proposed to divide itself: (1) a privately held corporation that would continue operating as a chain of 32 Texas liquor stores and (2) a public corporation that would continue, as Gabriel Investment Group, to own and acquire package-store permits under the grandfathered exemption. Gabriel proposed to sell all or part of its shares to another public corporation, apparently, the court wrote, a major publicly traded company.
In the threshold to this litigation Gabriel asked the Texas Alcoholic Beverage Commission if a stock sale to a public corporation not exempt under its grandfather clause would affect Gabriel’s permits. The commission answered: Gabriel would no longer enjoy its legal protections if it sold shares to a non-exempt public corporation, one not covered by the grandfathered exemption. Gabriel and the commission filed cross-motions for summary judgment. The bankruptcy court sided with the Alcoholic Beverage Commission and Gabriel appealed to the federal district court, which affirmed. The district court held that only corporations that satisfy the grandfathered subsection can own or control a package-store permit. “Thus,” the supreme court explained, “the exemption does not extend to a public corporation that directly or indirectly owns or controls an entity that holds a permit or would benefit from the permit, even if the entity that holds the permit is exempt.”
Gabriel appealed. The Fifth Circuit certified the questions to the Supreme Court for the court’s interpretation of state law.
“The two exempt corporations that qualified in 1995 surely had many shareholders or multiple owners at the time, and it would have been expected that these shares could change hands over the years,” the Supreme Court reasoned. “Yet the Legislature did not include any limitation on ownership of shares in exempt corporations. Instead, it declared only that the prohibition on corporate ownership ‘shall not apply’ to these corporations.
“Still,” the court surmised, “TABC seeks to do just that.”
The commission would apply the broad prohibition on corporate ownership to invalidate Gabriel’s permits if it sells shares to another public corporation.
The liquor sale-permit prohibition in one section of the law does prohibit public corporations from holding package-store permits or having an interest in entities that do, the court said. But the grandfather provision, it stated, unqualifiedly exempts corporations like Gabriel from the sweep of its bar against non-public corporation holding package-store permits. The exemption “shall not apply” to them. The commission, however, reads the statute to mean that ownership of an exempt corporation by a non-exempt corporation prohibits the exempt corporation from having a permit. In this way, TABC would “apply” the corporate-ownership subsection not just to the non-exempt corporation, but also to the exempt one.
Treating Gabriel as the “entity” in subsection (a) and then taking its permits away because of who owns its shares ineluctably “applies” subsection (a) to Gabriel in direct violation of the grandfather provision, the court concluded.
Behind the Supreme Court’s answer to the certified questions is a simmering dispute in state court challenging the liquor-permit restriction barring corporations from owning such permits. And beyond that is the Supreme Court’s now-famous 2015 eyebrow-threading case, Patel v. Tex. Dep’t of Licensing & Regulation.
“This is precisely the kind of protectionist legislation, meant to insulate existing businesses from competition, that this Court’s landmark decision in Patel dispelled,” Walmart argued. But, it argued, that liquor-law provision “is even more oppressive than the provisions at issue in Patel because it is a categorical, absolute prohibition against publicly traded corporations from competing in the retail distilled spirits market.”
In answer to the package-store trade association’s amicus argument, that permitting the grandfather clause to allow corporate ownership would be “a Trojan horse into the Texas retail liquor market,” Walmart argues that the trade association has misstated Walmart’s “serious constitutional challenges” the corporate-ownership restrictions pending before the Travis County District Court. “The same is true here, too, where TPSA [the trade group] is clawing to hold onto its members’ state-protected domain,” Walmart contended.
The trade association’s assertions will be litigated before the state court and package-store trade association’s “tendentious and premature presentation should not influence this unrelated case,” Walmart urged.
Stay tuned.
Russell S. Post and David J. Beck of Beck Redden in Houston for Gabriel Investment Group Inc. Post argued for Gabriel.
Ken Paxton, Brent Webster, Grant Dorfman, Shawn E. Cowles, Rachel R. Obaldo, Rance Craft, Jason B. Binford and Matthew Bohuslav of the Texas Attorney General’s Office for the Texas Alcoholic Beverage Commission. Craft argued for the commission.