Can a Tennessee liquor wholesaler be owned by a parent company instead of by individual people?

Subject

Opinion No. 11-48, Wholesaler liquor licenses, May 26, 2011

Plain-English summary

Tennessee runs its alcoholic beverage industry on a three-tier system: manufacturers, wholesalers, retailers. A wholesaler is the middleman, buying from manufacturers and selling to in-state retailers. The Alcoholic Beverage Commission asked whether it could license a wholesaler corporation whose stock was owned by another corporation, LLC, or trust, instead of by individual humans.

The statute, Tenn. Code Ann. § 57-3-203(f)(1), says all of a wholesaler-corporation's capital stock must be owned by "individuals" who meet residency and clean-record qualifications: residents of Tennessee for at least five years preceding the stock acquisition (or fifteen consecutive years at any point), and free of certain prohibition-era or liquor-revenue convictions in the prior five years. The next subsection, (f)(2), refers to a "person" owning stock, which is defined in Tenn. Code Ann. § 1-3-105(20) to include corporations, firms, companies, and associations.

That created an ambiguity. The AG read the two subsections together and concluded the legislature meant to confine wholesaler ownership to human beings. "Individual" in everyday usage means a single human, and reading "person" the same way avoids absurdity and preserves the statute's underlying purpose: keeping the wholesaler tier transparent and resistant to organized-crime penetration. The Second Circuit's Arnold's Wines decision supported the AG's reading of why states adopt three-tier systems. Corporate ownership stacks would let true ownership hide behind layers, defeating the transparency goal.

Practical upshot: a wholesaler license cannot go to a corporation whose stock is held by a parent corporation, an LLC, or a trust. The stockholders must be qualifying individuals.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Tennessee's alcoholic-beverage statutes have been amended periodically. The U.S. Supreme Court's 2019 decision in Tennessee Wine and Spirits Retailers Association v. Thomas, 588 U.S. 504 (2019), reshaped some of the constitutional dimensions of state alcohol licensing (focused on retailer residency, not the wholesaler-ownership question addressed in this opinion). Verify current statute and constitutional limits before relying on this opinion.

Background and statutory framework

The three-tier system. Tenn. Code Ann. §§ 57-3-202 through -204 set out Tennessee's three-tier system: (1) manufacturer, (2) wholesaler, (3) retailer. The manufacturer sells to a licensed in-state wholesaler. The wholesaler delivers to a licensed in-state retailer. The retailer sells to consumers.

The qualification statute. Tenn. Code Ann. § 57-3-203(f)(1) requires a wholesaler corporation's stock to be owned by individuals who:

• Have been residents of Tennessee for at least five years preceding stock acquisition, OR have at some point been Tennessee residents for at least fifteen consecutive years, AND
• Have not been convicted within five years preceding stock acquisition of any state or federal prohibition law or liquor-revenue law violation.

The ambiguity. Subsection (f)(1) uses "individuals." Webster's defines an individual as "of or pertaining to a single human being." Subsection (f)(2) uses "person." Tenn. Code Ann. § 1-3-105(20) defines "person" generally in the Code to include corporations, firms, companies, and associations (unless context requires otherwise).

The resolution. The AG applied In re Hogue, 286 S.W.3d 890 (Tenn. 2009), and In re Estate of Soard, 173 S.W.3d 22 (Tenn. App. 2005): construe inconsistent parts of a statute in harmony and avoid absurd outcomes. Reading "person" in (f)(2) as referring to human beings (a subset of "person" under the general definition) harmonizes the two subsections and serves the statute's purpose.

The purpose. The AG drew on Arnold's Wines, Inc. v. Boyle, 571 F.3d 185 (2d Cir. 2009), to explain why states keep wholesaler-tier ownership transparent. The three-tier system is widely understood as a barrier to organized-crime entry into the post-Prohibition alcohol industry. Multi-layer corporate ownership obscures who actually controls a wholesaler, defeating that transparency. The AG also cited Tennessee statutes on corporate, LLC, and partnership disclosure (Tenn. Code Ann. §§ 48-26-102, 48-224-104, 61-1-403), which generally do not require public disclosure of who owns shares, members, or partnership interests.

Common questions

Can a trust own wholesaler stock?

Per this opinion, no. A trust is an artificial entity, not an "individual." Even if all trust beneficiaries qualified, the trust itself does not count as a qualifying stockholder under § 57-3-203(f)(1).

What about a single-member LLC owned by a qualifying individual?

The opinion's text and reasoning point to "no." The statute requires stock to be owned by individuals. An LLC is not an individual, even if its sole member would qualify. The AG was concerned with what entity actually appears on the cap table; a qualifying individual could hold the stock personally, but interposing an LLC would not satisfy the statute.

Could a wholesaler structure around this by giving each beneficial owner stock directly?

The statute would be satisfied if each individual stockholder met the residency and clean-record tests. That is, a group of qualifying individuals can collectively own a wholesaler. The bar is on running the stock ledger up through artificial entities.

Does the residency requirement apply throughout ownership, or only at acquisition?

The statute references the five-year (or fifteen-year-consecutive) residency standard as a condition on persons "who at any time have been residents of the state of Tennessee" and on acquisition. The AG did not address what happens if an owner moves out of state after acquiring stock; the opinion answered only the entity-type question. Compliance reviews should consult the statute and the Commission's regulations.

Why did the AG go beyond textual analysis to discuss organized crime?

Because the statute was ambiguous on its face (between "individuals" in (f)(1) and the general "person" definition that could reach corporations in (f)(2)). Courts construe ambiguous statutes in light of legislative purpose. The Second Circuit's Arnold's Wines opinion explains the historical reason for state three-tier systems: post-Prohibition, states wanted layered, transparent supply chains to keep organized crime out of the legal alcohol industry. That purpose is best served by individuals-only ownership at the wholesaler tier.

Does this opinion address retailer licensing the same way?

No. The opinion concerns wholesaler licenses under Tenn. Code Ann. § 57-3-203. Retailer licensing is governed by different statutes (Tenn. Code Ann. § 57-3-204 et seq.) with different qualification rules. The reasoning here might or might not transfer; the AG did not opine on retailer ownership.

Citations

• Tenn. Code Ann. § 57-3-203(f); § 57-3-203(f)(1)
• Tenn. Code Ann. §§ 57-3-202, 57-3-204
• Tenn. Code Ann. § 1-3-105(20)
• Tenn. Code Ann. §§ 48-26-102, 48-224-104, 61-1-403
• Westinghouse Electric Corp. v. King, 678 S.W.2d 19 (Tenn. 1984); Eastman Chem. Co. v. Johnson, 151 S.W.3d 503 (Tenn. 2004); Sallee v. Barrett, 171 S.W.3d 822 (Tenn. 2005); Lee Medical, Inc. v. Beecher, 312 S.W.3d 515 (Tenn. 2010); In re Hogue, 286 S.W.3d 890 (Tenn. 2009); In re Estate of Soard, 173 S.W.3d 22 (Tenn. App. 2005); Dellinger v. State, 279 S.W.3d 282 (Tenn. 2009)
• Arnold's Wines, Inc. v. Boyle, 571 F.3d 185 (2d Cir. 2009)
• Carole L. Jurkiewicz & Murphy J. Painter, Why We Control Alcohol the Way We Do, in Social and Economic Control of Alcohol 1 (2008)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-048.pdf

Original opinion text

Wholesaler liquor licenses

QUESTION

May the Alcoholic Beverage Commission issue a wholesaler's license to a corporation whose stock is wholly owned by another corporation, limited liability company, or trust that meets the statutory requirements of Tenn. Code Ann. § 57-3-203(f), or must the applicant corporation's stock be owned solely by individuals?

OPINION

Pursuant to Tenn. Code Ann. § 57-3-203(f), the Alcoholic Beverage Commission may issue a wholesaler's license only to a corporation whose stock is owned by individuals who meet certain statutory requirements, and not to a corporation owned by another form of business such as another corporation, limited liability company, or trust.

ANALYSIS

Tenn. Code Ann. § 57-3-203(f) sets forth the qualifications for obtaining a wholesale liquor license. If the applicant is a corporation, such qualifications include:

All of its capital stock must be owned by individuals who have been residents of Tennessee for not less than five (5) years next preceding or who at any time have been residents of the state of Tennessee for at least fifteen (15) consecutive years, and who have not been convicted within a period of five (5) years preceding acquisition of such stock for violation of either state or United States prohibition laws or revenue laws relating to intoxicating liquors.

Tenn. Code Ann. § 57-3-203(f)(1) (emphasis added).

The primary objective of statutory construction is to ascertain and give effect to the intent of the legislature. Westinghouse Electric Corporation v. King, 678 S.W.2d 19, 23 (Tenn. 1984). If the statutory language is unambiguous, that intent is to be found in the plain meaning of the statutory language. Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 507 (Tenn. 2004). A statute is ambiguous if its language reasonably lends itself to more than one interpretation. Sallee v. Barrett, 171 S.W.3d 822, 828 (Tenn. 2005). If a statute is found to be ambiguous, courts will resort to other canons of statutory construction to ascertain the legislative intent. Lee Medical, Inc. v. Beecher, 312 S.W.3d 515, 527 (Tenn. 2010).

The statute is ambiguous. On one hand, subsection (f)(1) states that a corporation may obtain a wholesaler license but only if all of its stock is owned by individuals who have been residents of Tennessee for not less than five years. Defined in common parlance, "individual" means "of or pertaining to a single human being." Webster's New Collegiate Dictionary 565 (1995). One reading of that subsection therefore supports an interpretation that requires stockholders to be live human beings.

On the other hand, however, subsection (f)(2) uses the term "person" to describe a stockholder in a corporation that holds a wholesaler's license. The term "person" is defined in Tenn. Code Ann. § 1-3-105(20) to include a corporation, firm, company, or association. Reading that subsection in isolation could support a construction that would permit stock ownership by corporations, limited liability companies, and other artificial entities.

Under rules of statutory construction, if a statute is ambiguous, courts construe the statute as a whole to determine the general intent and purpose of the legislature. In re Hogue, 286 S.W.3d 890, 894 (Tenn. 2009). If possible, inconsistent parts should be construed in a manner that avoids the conflict and brings them into harmony with each other. In re Estate of Soard, 173 S.W.3d 22, 28 (Tenn. App. 2005). In construing a statute, courts avoid an interpretation that would lead to an absurd outcome. Dellinger v. State, 279 S.W.3d 282, 291 (Tenn. 2009).

Reading subsections (1) and (2) as a whole and in harmony indicates that the legislature intended to restrict stock ownership in corporations holding wholesaler's licenses to human beings only. The term "individual" refers to human beings only, and construing the term "person" in the same manner does no violence to the language because human beings are included within the meaning of that term as well.

Such a construction is also consistent with the purpose of the statute. Tennessee has adopted a three-tiered system for the sale of alcoholic beverages in the State. Such a system was adopted to maintain an orderly market, as well as to prevent its domination by organized crime. It was believed that the three-tier system makes it more difficult to penetrate the market by precluding the existence of a "tied" system between producers and retailers, a system generally believed to enable organized crime to dominate the industry. Arnold's Wines, Inc. v. Boyle, 571 F.3d 185, 187-188 (2d Cir. 2009).

This licensing scheme also discourages financial and other prohibited relationships among manufacturers, wholesalers, and retailers through promotion of transparency in the industry; it thus further discourages market entry by organized crime. Construction of the statute to permit the issuance of wholesaler licenses to corporations whose stock is owned by other corporations and other artificial entities would defeat these purposes. It stands to reason that requiring members of a corporation to be "a single human being" would assist in the facilitation of the transparency necessary to ensure an orderly market place. However, if "individual" were interpreted to mean "corporation," or some other business entity, this could create a situation where there would be layers of ownership and it would thus not be readily ascertainable who the applicant/wholesaler truly was or whether there existed any financial or other relationships prohibited by Tennessee alcoholic beverage laws.

Therefore, it is the opinion of this Office that a wholesaler's license may not be issued to a corporation whose stock is owned by another corporation, limited liability company, or trust.

ROBERT E. COOPER, JR.
Attorney General and Reporter

JOSEPH F. WHALEN
Associate Solicitor General

LYNDSAY FULLER SANDERS
Assistant Attorney General

Requested by:
Danielle Elks
Executive Director
226 Capitol Blvd., Suite 300
Nashville, TN 37243-0755

Footnotes:

1 Tenn. Code Ann. § 1-3-105 contains definitions of terms used in the Code unless the context requires otherwise.

2 The three tiers are: (1) the manufacturer, (2) the wholesaler, and (3) the retailer. Under this system, the manufacturer sells to a licensed in-state wholesaler, and the wholesaler delivers the alcohol to a licensed in-state retailer. The retailer, in turn, sells the alcohol to consumers. Tenn. Code Ann. §§ 57-3-202 through -204.

3 One of the results of Prohibition was bootleg activity, which fueled the creation of organized crime families that governments spent years trying to dismantle. Carole L. Jurkiewicz & Murphy J. Painter, Why We Control Alcohol the Way We Do, in Social and Economic Control of Alcohol 1, 6 (Carole L. Jurkiewicz & Murphy J. Painter eds., 2008).

4 The statutes governing corporations, partnerships, and limited liability companies do not require public disclosure of the name of the partners, shareholders, or members. See, e.g., Tenn. Code Ann. § 48-26-102 (shareholders are entitled to inspection of the corporate records); Tenn. Code Ann. § 48-224-104 (members are entitled to inspection of the LLC records); and Tenn. Code Ann. § 61-1-403 (partnerships shall provide partners access to the partnership records). Such organizations can thus become devices to conceal the identities of persons having ownership interests.