42.12.212    LOAN STANDARDS

(1) The department will further evaluate a designated loan to determine if the transaction is in reality a loan or an ownership interest. A review of the transaction will be conducted by using standards found either in the Uniform Commercial Code, the Internal Revenue Code, or standards which are in accordance with generally accepted commercial lending practices.

(2) The department will decline to find a loan arrangement where the money borrowed has not been returned when due and alternate arrangements have not been memorialized in a written contract. Such an extended financial arrangement must be documented and available to the department.

(3) The department will require any noninstitutional lender to complete documents authorizing examination and release of information, a personal history statement, and fingerprint cards on forms provided by the department, as well as any contract, purchase agreement, or other documents from the lender deemed necessary to assess the suitability of an applicant's source of funding as required in 16-4-401, MCA.

(a) A loan agreement may not restrict the movement or transfer of a license.

(b) Cross collateralization language is unenforceable as it relates to loans secured by the liquor license as collateral.

(c) In the event of default, the lender's rights are protected under 16-4-801, MCA. Upon default, the license must be placed on nonuse status pending transfer to a qualified purchaser or temporary operating authority. The lender is prohibited from leasing the collateral.

(4) Institutional lenders may secure loans made to a license applicant or licensee with security interests in assets belonging to the license applicant or licensee. In securing institutional loans with security interests in the assets of a license applicant or licensee, an institutional lender may limit the movement of the assets, including a liquor license.

(5) For loans made to a license applicant or licensee, an institutional lender may require loan guarantees and may secure guarantee agreements with assets of the guarantor.

(6) A guarantor may make a payment on an institutional loan secured by a license, regardless of whether the institutional lender has exhausted its remedies against the licensee, and such payment will not cause an undisclosed ownership violation for the licensee, only if the following are applicable:

(a) the guarantor must be an owner of applicant/licensee, i.e., partner, shareholder, member;

(b) the payment is made with the owner/guarantor's own funds or funds borrowed from an institutional source or department-approved noninstitutional source;

(c) if the guarantor is not an owner, payment may only be made as a loan to the owners or licensed borrower/entity. Funds used to loan the money for the payment under the guarantee, must be the guarantor's own funds or funds borrowed from an institutional source. The guarantor must first be found by the department to be suitable as a source of credit as part of the application or loan approval process by submitting to the department a personal history statement and a complete set of fingerprint cards;

(d) a licensee having a loan secured by its license, and for which a loan guarantor has made payments on such loan on behalf of the licensee, must notify the department within 30 days of the guarantor's payment or on the date on which the licensee's renewal application is due, whichever occurs first, whether the payments made under a loan guarantee agreement have been elected to be treated as loans, as paid in capital, or as other equity contributions; and

(e) if the guarantor elects to treat the payments as loans to the licensee, the licensee must follow requirements for disclosing noninstitutional lenders.

(7) If the guarantor elects to treat payments as an equity contribution, and such election changes the percentage of ownership in the license, the licensee must notify the department at the time of the election to disclose the change in percentage.

(8) Prior department approval is not required on loans to a licensed entity by an approved (licensed) owner of the entity (shareholder, member, partner) under the following conditions:

(a) the loan is used to meet an obligation of the licensed entity that cannot be met with its existing operating accounts and reserves;

(b) the funds loaned to the licensed entity must be those of the owner or funds borrowed from an institutional source;

(c) the loan must be memorialized by an agreement between the licensed entity and owner. The loan agreement must meet the department's evaluation standards;

(d) the borrower's and lender's financial records must accurately reflect the transaction; and

(e) failure to maintain adequate records of the transaction or source of funds loaned will be considered a violation of this rule.

History: 16-1-303, MCA; IMP, 16-4-401, 16-4-402, 16-4-404, 16-4-801, MCA; NEW, 1998 MAR p. 2088, Eff. 7/31/98; AMD, 2003 MAR p. 21, Eff. 1/17/03; AMD, 2011 MAR p. 165, Eff. 2/11/11.