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P.T.K., L.L.C. v. Governing Body of the Borough of Fort Lee


May 21, 2008


On appeal from a Final Agency Decision of the Department of Law and Public Safety, Division of Alcoholic Beverage Control, Nos. 7107 and 7111.

Per curiam.


Submitted April 21, 2008

Before Judges Graves and Sabatino.

This administrative law case involves the attempted transfer of a liquor license in the Borough of Fort Lee ("the Borough"). The proposed transferee, P.T.K., L.L.C. ("P.T.K.") appeals a final agency decision of the Director of the Division of Alcoholic Beverage Control ("ABC") denying the transfer because of various regulatory considerations. We affirm.

The liquor license in question is presently held by Hangar, Inc. ("Hangar"), which operates an establishment on Route 4 East in the Borough known as "Studio 4" or the "Hangar Nightclub." P.T.K. is a limited liability corporation. The sole shareholder of P.T.K. is Lorraine Karounos, who has no prior experience in the restaurant or liquor industry. Her husband, Ted (or "Teddy") Karounos, has previously owned and operated facilities with liquor licenses at one or more other locations.*fn1

In February 2004, an operating agreement for P.T.K. was executed, designating Mr. Karounos as its manager for a two-year term. The Director's final agency decision characterized the rights and duties assigned to Mr. Karounos under that agreement as "broad, unfettered and akin to rights of ownership."

In April 2004, P.T.K. and Hangar entered in a contract for the sale of Hangar's liquor license. Several months after that sales contract was signed, Hangar and P.T.K. also entered into two successive management agreements in September 2004 and February 2005. The management agreements are signed by Mr. Karounos on behalf of P.T.K., despite the fact that Mr. Karounos is not a P.T.K. shareholder. The February 2005 management agreement provides, among other things, that P.T.K. would have the exclusive right to establish prices, purchase inventories and supplies, hire, train and fire employees, maintain the books and records, prepare advertising, and otherwise "[p]erform all acts reasonably necessary in connection with the operation of the nightclub in a[n] efficient and proper manner." The management agreement also entitled P.T.K. to a monthly management fee, defined as "[100 percent] of the [n]et [p]rofits" of the nightclub.

In May 2004, P.T.K. submitted an application to the Borough for approval of a so-called person-to-person transfer of the Hangar license to P.T.K. The Borough assigned the application for investigation to Police Detective James Hunt.

Dissatisfied with the lack of progress in Detective Hunt's investigation and the Borough's failure to render a formal decision on its application, in July 2005 P.T.K. filed an administrative appeal with the ABC to review the matter under N.J.A.C. 13:2-7.7(d) and treat the Borough's inaction as a de facto denial. Meanwhile, Hangar applied to renew its license for the 2005-06 and 2006-07 terms. The Borough also failed to act on that application, and Hangar likewise filed an appeal with the ABC in July 2005. The related matters were referred to the Office of Administrative Law. The Borough participated in those proceedings as a respondent.

After several days of hearings, the administrative law judge ("ALJ") rendered an initial decision in January 2007. The ALJ recommended that the license be renewed and also recommended approval of its proposed transfer to P.T.K. The Borough filed exceptions to the recommendations with the Director.

Upon considering the Borough's exceptions, the opposition filed by P.T.K. and the administrative record as a whole, the Director issued a final agency decision on July 13, 2007. The Director adopted the ALJ's recommendation that Hangar's license be renewed, but rejected the recommendation to approve the transfer to P.T.K.

In his final decision, the Director determined, among other things, that the Borough had not been unreasonable in failing to render a decision on P.T.K.'s transfer application. He noted that the application was not complete in all material respects by June 2, 2005, the date that the Borough informed P.T.K. that it would deny the transfer application. In particular, the Director observed that P.T.K. had not obtained and presented to the Borough a tax clearance certificate, a document which he deemed necessary for the transfer under N.J.S.A. 33:1-17.1.

Aside from that procedural defect, the Director concluded that P.T.K.'s application was substantively flawed due to P.T.K.'s interest in the premises arising from its management agreement with Hangar. That interest had not been timely disclosed to the Borough. The Director reasoned that P.T.K.'s undisclosed interest, which he noted gave it the right to make business decisions for the nightclub and to keep all of its net profits, amounted to "enjoying the benefits of ownership of a [liquor] license" without first obtaining regulatory approval to do so.

The Director also expressed concerns that, although Mrs. Karounos was listed as the sole owner of P.T.K. and had helped obtain a home equity line of credit for the business, her testimony suggested that her involvement otherwise in the business's operations was "virtually nil." The Director further noted that, during the time that P.T.K. managed the nightclub, there had been thirty-eight incidents at the nightclub that resulted in calls to the local police.

On appeal, P.T.K. essentially argues that the Director's final decision is arbitrary and capricious, and that it is not supported by substantial evidence in the record. More specifically, P.T.K. contends that (1) the Director should have adopted the ALJ's recommendations without alteration; (2) the ALJ's decision was binding because the Director took too long to review it; (3) the Director's findings were clearly erroneous in several respects, including the need for a tax clearance certificate; (4) the Director unduly deferred to the Borough's position; and (5) the Director erred in finding that P.T.K. had an undisclosed interest in the nightclub that warranted the sanction of a transfer denial. These arguments are countered in separate briefs from both the Borough and the ABC.*fn2

We have fully considered the record, the various points raised in the briefs, and the applicable law. Having done so, we affirm the Director's final decision, essentially for the reasons cogently set forth in his July 13, 2007 order. We add only a few comments.

In general, "[a]n administrative agency's final quasi-judicial decision will be sustained unless there is a clear showing that it is arbitrary, capricious, or unreasonable, or that it lacks fair support in the record." In re Herrmann, 192 N.J. 19, 27-28 (2007) (citing Campbell v. Dep't of Civil Serv., 39 N.J. 556, 562 (1963)). As the Supreme Court noted in Herrmann, "[t]hree channels of inquiry inform the appellate review function." Id. at 28. These are:

(1) whether the agency's action violates express or implied legislative policies, that is, did the agency follow the law; (2) whether the record contains substantial evidence to support the findings on which the agency based its action; and (3) whether in applying the legislative policies to the facts, the agency clearly erred in reaching a conclusion that could not reasonably have been made on a showing of the relevant factors.

[Ibid. (quoting Mazza v. Bd. of Trs., 143 N.J. 22, 25 (1995)).]

"When an agency's decision meets [these] criteria, then a court owes substantial deference to the agency's expertise and superior knowledge of a particular field." Ibid.

Consistent with these general principles of administrative deference, our courts have traditionally recognized that the state and local governments possess considerable regulatory authority to protect the public health and welfare in the issuance, transfer and oversight of liquor licenses. See N.J.S.A. 33:1-3.l(b)(9); Lyons Farms Tavern, Inc. v. Mun. Bd. of Alcoholic Bev. Control, 55 N.J. 292, 302 (1970); Borough of Fanwood v. Rocco, 33 N.J. 404, 415 (1960). As our Supreme Court has noted, "[b]ecause the power to regulate the sale of intoxicating liquors is 'practically limitless,' [courts] hesitate to substitute [their] judgment for the [ABC's] own policy determinations concerning regulation of the alcoholic beverage industry." R & R Mktg., L.L.C. v. Brown-Forman Corp., 158 N.J. 170, 176 (1999) (quoting Joseph H. Reinfeld, Inc. v. Schieffelin & Co., 94 N.J. 400, 412 (1983)); see also Div. of Alcoholic Bev. Control v. Maynards, Inc., 192 N.J. 158, 176 (2007). Consequently, appellate courts reviewing such final agency decisions of the ABC Director do so through a prism of substantial deference. Maynards, supra, 192 N.J. at 183.

We also are cognizant that the issuance or denial of liquor licenses, including transfer applications, generally implicates the discretion of the municipality in its role as the local issuing authority. Lubliner v. Bd. of Alcoholic Bev. Control of Paterson, 33 N.J. 428, 446 (1960). The applicant for a license transfer bears the burden of proving that its request should be approved. N.J.A.C. 13:2-7.7(c). If the municipality does not grant its request, the applicant must show on appeal that the decision represented a clear abuse of discretion. Lyons Farms Tavern, supra, 55 N.J. at 303; Blanck v. Mayor of Magnolia, 38 N.J. 484, 489 (1962).

Bearing in mind these principles, we are satisfied that the final agency decision in this matter was consistent with the law, supported by adequate evidence, and neither arbitrary nor capricious. This is true as to the Director's rulings both on procedure and substance.

As a matter of law, we agree with the Director that P.T.K. was required under N.J.S.A. 33:1-17.1 to present a tax clearance certificate to the Borough before its transfer application would be complete. Although P.T.K. was not formed until 2004, the existing licensee, Hangar, was in business as of December 31, 2003, thereby triggering the need for the certificate. Ibid. (requiring a certificate if either the licensee "or" the prospective licensee was subject to review in the prior calendar year). The record shows that P.T.K. did not obtain such a certificate until May 2005. It did not present it to the Borough until June 21, 2005, after the Borough had already notified P.T.K., by letter dated June 2, 2005, that its application was incomplete and thus would be denied. Hence, the Director's finding of incompleteness was legally correct. See also N.J.A.C. 13:2-7.7(b)(1).

With respect to P.T.K.'s undisclosed interest in the nightclub, we recently underscored in Fayette Fair Trade, Inc. v. Governing Body of Perth Amboy, 395 N.J. Super. 453 (App. Div. 2007), the importance of full and timely disclosure of a person's interest in an establishment that sells liquor. Id. at 466-67. We validated the ABC's policy concern that "a liquor license must be within the supervision and control of the registered licensee." Id. at 467; see also N.J.S.A. 33:1-26 (making it a misdemeanor for a non-licensee to exercise the rights and privileges of a licensee). We agree with the Director's ruling that P.T.K.'s management agreement with Hangar clearly delegated to P.T.K. very substantial control of the nightclub's day-to-day operations and the right to draw all of the nightclub's net profits. The Director's concerns were justly amplified by Mrs. Karounos's delegation of managerial responsibility to her husband. The denial of the transfer in light of these arrangements, which were only disclosed belatedly, is eminently reasonable.*fn3

We disagree with P.T.K. that the Director failed to give proper deference to the ALJ's factual findings. We recognize that the ALJ found Detective Hunt, who testified for the Borough, lacking in credibility in his account of the steps he took in investigating the transfer application. However, the Director explicitly did not rely upon Detective Hunt's testimony in his legal and regulatory analysis.

In addition, the nightclub has had a history of prior complaints involving noise, urination in the parking lot, fights, and an incident that led to a fatal car accident off-site. All of this warrants close scrutiny of a newcomer taking over the establishment.

We have considered the remaining points and subpoints raised by P.T.K., and they lack sufficient merit to be discussed in this opinion. R. 2:11-3(e)(1)(D) and (E).

The Director's final decision is hereby affirmed.

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