Fargo City Commission Special Meeting - February 24, 2022

Agreeable with a call for a Special Meeting issued by Mayor Mahoney, the Board of City Commissioners of the City of Fargo, North Dakota, convened in a Special Meeting in the City Commission Chambers at City Hall at 12 o'clock p.m., Thursday, February 24, 2022.
The Commissioners present or absent were as shown following:
Present: Gehrig, Piepkorn, Preston, Mahoney.
Absent: Strand
Mayor Mahoney presiding.

Hearing to Consider the Liquor License Violation by Northstar Hospitality, LLC, d/b/a SouthTown PourHouse:
A Hearing had been set for this day and hour to consider the liquor license violation by Northstar Hospitality, LLC, a North Dakota Limited Liability Company, d/b/a SouthTown PourHouse in accordance with Fargo Municipal Code 25-1512(E).

City Attorney Nancy Morris said the Hearing today is on Remand from District Court regarding an earlier finding by the City Commission that Northstar Hospitality, LLC d/b/a SouthTown PourHouse failed to meet the required 50 percent food sales for its Class “FA” Alcoholic Beverage License in that Duane’s House of Pizza sales are not properly included in the food sales ratio. She said the licensee appealed that decision, arguing the finding was arbitrary and capricious and was denied a full hearing on the matter before the City Commission. The District Court remanded the case for rehearing, she said, finding the City Commission should have heard the issue in the first instance, rather than on appeal from the Liquor Control Board.

City Auditor Steve Sprague said in May of 2018 an “FA” liquor license transferred to Northland Hospitality, LLC d/b/a as SouthTown PourHouse and SouthTown opened in the fall of 2018. He said prior to SouthTown opening, he and owner Chad Klimek had conversations and one of the things Mr. Klimek said was SouthTown would be featuring Duane’s Pizza; however, he did not ask if the pizza sales could count towards meeting the 50 percent sale requirement. He said one of the reasons he knows Mr. Klimek did not ask him about the pizza sales is that question would have been unusual enough that he would have told Mr. Klimek he would have to consult with the City Attorney and the City would have requested additional documentation, which did not happen. He said in December 2019, a liquor audit was conducted and that information went to the Liquor Control Board in May of 2020, it was appealed to the City Commission in July 2020 and then to District Court in October 2020. With the City’s liquor licenses, he said, certain licenses are required to have food sales and those are restaurant licenses. He said sales are reported annually at license renewal time and then audits are done on a three-year rotation. An independent audit firm also looks at the books of the different licensees to determine if they are meeting that requirement, he said. As an aside, he said, 33 audits were done during the last round of liquor audits and of the 33, only one was less than 55 percent. The result of a first liquor audit failure is the business must close one hour early for six months, he said, and that is what today’s Hearing is about. At the end of the six months, he said, another audit is done and if there is a second failure, that results in 30 days without alcohol sales. If there is a third failure, he said, the license is revoked. During the audit conducted at the end of 2019, SouthTown had food sales of 53 percent with the pizza included and without the pizza, food sales dropped to 42 percent. He said there have been conversations that the City should modify its license structure and even if the City had a license available where there were no food sales rules, SouthTown would still be required to have an “FA” license due to the fact that its lease requires it. After the liquor audit, he said, the City did ask to see what kind of agreement SouthTown had with Duane’s, and it is a facility use agreement. He said the Liquor Control Board's position was the pizza sales should be excluded due to the fact that Duane’s is a separate business and Environmental Health inspects Duane's as a separate business. He said the focus today is should the sales from a separate business be allowed to be included to make the 50/50 percentage. Mr. Sprague showed video clips from previous meetings with comments from Jeff Thomas of Frank's Lounge, Chris Ullman, Fargo Cass Public Health and Bob Nelson, Liquor Control Board.

In response to a question from Mayor Mahoney asking about the possibility of SouthTown buying Duane's, Mr. Sprague said Commissioner Piepkorn met with the owners and the attorneys about the possibility for a compromise; however, that did not happen.

Commissioner Gehrig said SouthTown is operating as a bar; therefore, the City either finds a way for SouthTown to operate as a bar or SouthTown needs to change how it operates.

Tim O’Keefe, O'Keeffe O'Brien Lyson Law Firm, said he wants the minutes from previous Hearings as part of the record of this Hearing. He said Mr. Klimek would like to move forward and find some resolution. He said this came to light when other liquor license holders hired a law firm to object to how SouthTown was operating due to the fact that they viewed Duane’s as a separate entity, which it clearly is. He said the license issue started in 2018 when the application was made and Mr. Klimek remembers the conversation with Mr. Sprague differently in that before he signed the lease, he had the discussion and asked if Duane's could operate out of the restaurant and count for food sales. He said his client’s understanding of the discussion is the reason the business went forward. Mr. Klimek’s prior counsel proposed Ordinance changes and some variance suggestions, he said; however, Mr. Klimek thinks there are enough liquor Ordinances and understands he would be buying a lawsuit if he were to apply and receive a different license. He said SouthTown was not in compliance with the kitchen operation initially and that was a mistake. The kitchen was closing many nights at 10 or 11 p.m., he said, and they are required to shut the bar down an hour after the kitchen closes. They have rectified that, he said, and the kitchen is operational now from 11 a.m. to 1 a.m., he said, the pool tables and dartboards were removed to make room for 40 additional seats and minors are now allowed until 9 p.m. Without Duane’s sales counting towards food sales, he said, SouthTown is in violation of the “FA” license and food sales without Duane's will not make it to the required percentage. He said he understands the intent of the Ordinance and alcohol sales need to be adjunct to food; that is clear and the intent of SouthTown was to comply with that by bringing in Duane’s, which is a popular local favorite. Duane’s is a separate entity, he said, and perhaps there could be another arrangement; however, that would involve either Northstar Hospitality buying Duane’s or some type of franchise agreement. The Ordinance states a class “FA” licensee may sell alcoholic beverages in a “restaurant which holds a restaurant license and which derives 50 percent or more of its annual gross receipts from the sale of prepared meals and not alcoholic beverages,” he said. The Ordinance refers to “restaurant” and with SouthTown, it is one building and one kitchen even though there are two owners. This is not a situation where there is a separate building and someone is walking to another restaurant and bringing food back to sell; everything is prepared on-site from one kitchen to make it work financially for both parties. Duane's came in to SouthTown, there is an agreement as to how each operates and the City does not view that as a partnership agreement. SouthTown is clearly attempting in every way to comply with the “FA” license, he stated, and according to the term “restaurant” in the Ordinance, there is compliance. Mr. Klimek has made changes in order to sell more food, he said, and the understanding was that Duane’s sales would count. If that is going to be taken away, SouthTown is not in compliance, he stated. SouthTown could certainly come up with another agreement to make the two entities one, he said; however, that will take money, lawyers and a willingness of both parties. The way the Ordinance is worded and written, he said, SouthTown is one restaurant and food is consumed on the premises, which is within the spirit and intent of the law.

Mayor Mahoney said a customer can go to Subway and buy a sandwich and they can go to Spicy Pie and buy a pizza; however, when he goes to SouthTown, there is not a specified Duane’s area, he has to go in to SouthTown to order Duane’s for takeout. There needs to be a contract to make it look more like it is one operation, he said.

Mr. O’Keefe said it would be acceptable to his client to have a partnership contract stating they are operating as one out of one kitchen. In the facility agreement, he said, it specifies two coolers and two kitchens; however, that is not the reality. He said it was a space issue when they were contracting with the landlord and building the operation. He said Duane’s needed to make sure it had enough room for its equipment and if a partnership contract would satisfy the City's requirement, his client is willing to sit down and try to hammer something out.

Commissioner Piepkorn said the City has met several times with the owners trying to resolve this and it has not happened, which is frustrating. The City has to be fair to all liquor license holders, he said, and the “FA” rules need to be followed. He said he believes SouthTown got its “FA” license due to the fact that there were not any others available and it is on them to resolve the issues.

Mr. Sprague said he has met numerous times with the ownership group and attorneys and one of the suggestions was some kind of a partnership where they each have ownership in the other business. Another suggestion was similar to a franchise arrangement, he said, where SouthTown is hiring the employees, buying the goods sold, and paying Duane's owner for the right to use Duane’s name and recipes. He said the Ordinance was written 30 years ago and he does not think anybody would have contemplated at that time that somebody was going to bring a second business into its business and operate together.

Ms. Morris said there is one license holder and that is SouthTown PourHouse, that is where the alcohol is permitted to be sold; therefore, that is what the City is looking at, who holds the license and what are the numbers for compliance with the Ordinance. SouthTown as the license holder must sell 50 percent or more of food, she said, which is what the “FA” license requires.

In response to a question from Commissioner Preston asking if there were other “FA” licenses with a similar situation, Mr. Sprague said some of the businesses with “FA” licenses that were struggling to meet the 50 percent food requirement had the ability to get a different license that did not require food percentages; however, SouthTown’s lease only allows only an “FA” license.

In response to a question from Commissioner Preston asking with the changes made at SouthTown are they able to meet the 50 percent requirement, Mr. O’Keefe said Duane's is on SouthTown’s menu and drives food sales; therefore, if Duane's does not count, it will be difficult to meet the 50 percent. He said SouthTown would not have entered into this agreement with Duane’s or built out the way it did had they not relied on the discussions with Mr. Sprague. He said he read the Ordinance and sees an interpretation different from the City Attorney and perhaps District Court will have to get involved and be the final arbiter. He said it is one kitchen, they are not bringing food in from another building, it is sanitary and up to code. The world is changing, he said, and restaurants and bars are different.

Ms. Morris said it is ultimately the City Commission’s decision whether or not SouthTown PourHouse is in compliance with the Ordinance. She said if it is appealed to District Court, they will make a determination as to whether or not the decision was arbitrary, capricious or unreasonable based on the terms of the Ordinance. What is presented is for the finding as to whether or not the two separate businesses, whether those pizza sales should count toward the 50 percent number and there is not any dispute there are two separate businesses.

In response to a question from Mayor Mahoney asking is there some methodology or legal contract to have the bar represented in a special arrangement with Duane's, Ms. Morris said the recommendation is that this is a finding of a violation of the existing Ordinance, all other discussions are what could be addressed going forward if they changed their business operations. This is a snapshot in time, she said, Duane’s Pizza is being sold at SouthTown PourHouse and do those pizza sales count, that is the question. Whether or not District Court reaches a different agreement will be a decision as to whether or not a future violation may be found. She said if SouthTown proceeds under the same snapshot it has now, it likely will. She said SouthTown’s counsel is saying SouthTown does not have enough food sales without including the pizza; however, it will be up to SouthTown whether they want to make a change.

In response to a question from Commissioner Gehrig asking if there is just one dining room for Duane’s and SouthTown, Mr. O’Keefe said there is.

In response to a question from Commissioner Gehrig asking since there is one dining area and FCPH does two different inspections, did the owners of Duane's get a background check for the liquor license, Mr. Sprague said Duane’s has not had a background check and never applied nor been a part of the liquor licensing structure.

Commissioner Gehrig said the reason he asks is due to the fact that it may appear on the outside they are one business; however, they are clearly two. If Mr. Klimek cannot change the lease to say he can get a “Z” license, the obvious answer is Duane's and SouthTown must partner to become one business and get it in writing. For him, he said, there is one kitchen, one building, one menu; therefore, he does not see how he could say it is not one business; however, that means Duane’s would have to be part of the liquor license.

Commissioner Piepkorn said he wants it to be clear that if they can come to some agreement so it is one business, future violations will more than likely not happen; however, today they are in violation.

Mr. Klimek said from day one, he was in touch with Mr. Sprague and he would not have moved forward if he was not allowed to have Duane's Pizza count towards the sales. He said Duane's Pizza takes up the majority of SouthTown’s tables, he cannot use those tables for SouthTown food, he is stuck with a lease where only an “FA” is allowed and the landlord will never change the lease.
Commissioner Preston moved that Northstar Hospitality, LLC d/b/a SouthTown PourHouse, was in violation and did not meet the requirements of the Class “FA” Alcoholic Beverage License.

Second by Piepkorn. On call of the roll Commissioners Preston, Piepkorn, Gehrig and Mahoney voted aye.
Absent and not voting: Commissioner Strand.
The motion was declared carried.
The time at adjournment was 12:53 o’clock p.m.