Picking a Fight: How to Navigate (or Avoid) Wine Industry Disputes in Precarious Times Matt Eisenberg, Attorney at Law, Moderator Ron Larson, General Counsel,

““Picking”Picking” a Fight: How to a Fight: How to Navigate (or Avoid) Wine Navigate (or Avoid) Wine

Industry Disputes in Industry Disputes in Precarious TimesPrecarious Times

Matt Eisenberg, Attorney at Law, ModeratorMatt Eisenberg, Attorney at Law, ModeratorRon Larson, General Counsel, Sutter Home Ron Larson, General Counsel, Sutter Home

WineryWineryHon. W. Scott Snowden, Ret., JAMS arbitratorHon. W. Scott Snowden, Ret., JAMS arbitrator

September 14, 2009September 14, 2009Wine Industry Financial SymposiumWine Industry Financial Symposium

The 10 “tions”The 10 “tions”

• CreationCreation

• Communication during OperationCommunication during Operation

• Repudiation (then Procrastination)Repudiation (then Procrastination)

• NegotiationNegotiation

• Mediation/Arbitration/LitigationMediation/Arbitration/Litigation

• ResolutionResolution

CREATION:CREATION:Let there be light!Let there be light!

• Security InterestSecurity Interest

• Grower’s LienGrower’s Lien

• Price FormulasPrice Formulas

• Viticultural PracticesViticultural Practices

• Quality, Harvest & DeliveryQuality, Harvest & Delivery

• Severance and Attorney FeesSeverance and Attorney Fees

Security InterestSecurity Interest

• Must be granting language in contract, even if Must be granting language in contract, even if simple.simple.

• Then file UCC-1 as soon as possible with Secretary Then file UCC-1 as soon as possible with Secretary of State in California (no Debtor’s signature of State in California (no Debtor’s signature required). First in line, first in right.required). First in line, first in right.

• Advantages over Grower’s Lien: allows for non-Advantages over Grower’s Lien: allows for non-judicial foreclosure, self-help (repossession without judicial foreclosure, self-help (repossession without breach of peace), notice from lenders of foreclosure breach of peace), notice from lenders of foreclosure and clear inclusion of non-grape/wine products and and clear inclusion of non-grape/wine products and proceeds. But usually subordinate to lender.proceeds. But usually subordinate to lender.

• Guaranty as an alternative: new winery or Guaranty as an alternative: new winery or subsidiary of larger company may give to initiate subsidiary of larger company may give to initiate good contracts. Could do in exchange for grower’s good contracts. Could do in exchange for grower’s lien waiver.lien waiver.

Grower’s LienGrower’s Lien

• Frazier NutsFrazier Nuts, , IncInc. . v.v.. . American Ag CreditAmerican Ag Credit (2006) 141 Cal. App. 4th (2006) 141 Cal. App. 4th 1263 (appeal denied)—Grower’s Lien attaches to cash proceeds 1263 (appeal denied)—Grower’s Lien attaches to cash proceeds or receivables on any sale of wine. Trumps lender secured by A/R.or receivables on any sale of wine. Trumps lender secured by A/R.

• Allowing winery to sell wine first and then pay Grower—only with Allowing winery to sell wine first and then pay Grower—only with agreement of Grower (through an escrow, bond, letter of credit). agreement of Grower (through an escrow, bond, letter of credit). Can be an effective tool for winery in distress. Can be an effective tool for winery in distress.

• Bankruptcy and the race to the courthouse. Superior to most Bankruptcy and the race to the courthouse. Superior to most liens (even UCC-1’s) with exception of wage/salary and liens (even UCC-1’s) with exception of wage/salary and warehouseman’s lien.warehouseman’s lien.

• Custom crush context: Know who your buyer is—lien only valid Custom crush context: Know who your buyer is—lien only valid against buyer with processor’s license. Make sure name on against buyer with processor’s license. Make sure name on contract is same as name on license.contract is same as name on license.

• Enforcement of lien:Enforcement of lien:• Notify CDFA and file complaint for non-payment or even for repudiation Notify CDFA and file complaint for non-payment or even for repudiation

in advance of harvest.in advance of harvest.• File lawsuit (judicial foreclosure). No right of repossession or self-help.File lawsuit (judicial foreclosure). No right of repossession or self-help.

Price Formulas Price Formulas

• Per Ton Contract: more common but more prone to Per Ton Contract: more common but more prone to disputes over viticultural practices, hang time, etc.disputes over viticultural practices, hang time, etc.

• Per Acre Contract: more discretion to winery as to Per Acre Contract: more discretion to winery as to practice but uncertainly as to cost of goods. Good practice but uncertainly as to cost of goods. Good for higher end wines but more vulnerable now.for higher end wines but more vulnerable now.

• Bottle price formula: contract is illegal and Bottle price formula: contract is illegal and unenforceable unless price set by January 10 of unenforceable unless price set by January 10 of each year. Food and Ag Code Section 55601.5(g). each year. Food and Ag Code Section 55601.5(g). Somerset Importers Limited vs. Continental Somerset Importers Limited vs. Continental VintnersVintners, 790 F2d 775. License fee alternative. , 790 F2d 775. License fee alternative.

Viticultural PracticesViticultural Practices

• Increased involvement of winery.Increased involvement of winery.

• Exhibits with agreed practices; regular Exhibits with agreed practices; regular meetings and revised exhibit. Extra costs set meetings and revised exhibit. Extra costs set forth.forth.

• Drafting methods for avoidance of disputes in Drafting methods for avoidance of disputes in per ton contracts: Dehydration Adjustment per ton contracts: Dehydration Adjustment (provides an increase in price for each degree (provides an increase in price for each degree of Brix over the contract maximum); fixing of Brix over the contract maximum); fixing tonnage in vineyard prior to harvest.tonnage in vineyard prior to harvest.

Quality, Harvest & Quality, Harvest & DeliveryDelivery

• Grape Quality parameters and Harvest Decision Grape Quality parameters and Harvest Decision process should be clearly set forth in agreement.process should be clearly set forth in agreement.

• Renegotiation of contract in days or weeks prior Renegotiation of contract in days or weeks prior to delivery if Winery appears unable to perform:to delivery if Winery appears unable to perform:• Custom crush option—subject to availability of Custom crush option—subject to availability of

custom crush facility. Agree to a reversion of grapes custom crush facility. Agree to a reversion of grapes to Grower/facility to allow for sale in the event of to Grower/facility to allow for sale in the event of non-payment after wine made. Watch out for non-payment after wine made. Watch out for “avoidable preferences” in a bankruptcy context.“avoidable preferences” in a bankruptcy context.

• Inspection (local vs. state) and Rejection process Inspection (local vs. state) and Rejection process (written evidence/records and notice).(written evidence/records and notice).

Severance and Severance and Attorney FeesAttorney Fees

• Sample Severance provision:  Sample Severance provision:  • If any term, provision, covenant or restriction of If any term, provision, covenant or restriction of

this Agreement is held by a court of competent final this Agreement is held by a court of competent final jurisdiction or other final authority to be invalid, void or jurisdiction or other final authority to be invalid, void or unenforceable, the remainder of the terms, provisions, unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party.not affected in any manner materially adverse to any party.

• Attorney Fees: Attorney Fees: • Expand beyond “Prevailing Party” to include all collection costs Expand beyond “Prevailing Party” to include all collection costs

and fees, including those related to bankruptcy proceeding.and fees, including those related to bankruptcy proceeding.• Allowable as secured claim in bankruptcyAllowable as secured claim in bankruptcy

Communication During Communication During OperationOperation

• Require Require communication in communication in agreement: agreement: • Regular meetings Regular meetings

regarding practices, regarding practices, etc.etc.

• Updating of exhibits at Updating of exhibits at least annually.least annually.

• Third party tie-Third party tie-breakers agreed in breakers agreed in advance. advance. • Circumstances giving rise to changes: weather (water); economy, size of harvest. Need to remain flexible and creative.

Repudiation (then Repudiation (then Procrastination)Procrastination)

• Anticipatory RepudiationAnticipatory Repudiation

• Demand for Adequate Demand for Adequate Assurances (UCC § 2-609) based Assurances (UCC § 2-609) based on reasonable concern/insecurity.on reasonable concern/insecurity.

• Timing and Options Timing and Options • Pre-Harvest:Pre-Harvest: CDFA complaint; CDFA complaint;

find other buyers if possible and find other buyers if possible and fix damages (duty to reasonably fix damages (duty to reasonably mitigate damages); commence mitigate damages); commence legal action.legal action.

• Post-harvest:Post-harvest: advise winery of advise winery of Grower’s Lien; CDFA; commence Grower’s Lien; CDFA; commence legal action.legal action.

• Processor’s License not required Processor’s License not required for purchase of bulk wine, only for purchase of bulk wine, only grapes, so leverage through grapes, so leverage through CDFA is limited if winery wants to CDFA is limited if winery wants to buy bulk wine.buy bulk wine.

NegotiationNegotiation

• The coolest head The coolest head prevailsprevails

•   DeliberationDeliberation

•   Centrality of Centrality of "people "people problems”problems”

•   Involvement of Involvement of skilled, "result-skilled, "result-oriented" oriented" negotiatorsnegotiators

Mediation—Arbitration—Mediation—Arbitration—LitigationLitigation

Arbitration vs. LitigationArbitration vs. Litigation

• CostCost

• TimeTime

• Personal attentionPersonal attention

• Due ProcessDue Process

• Scope of discretionScope of discretion

• "Satisfactoriness" of outcome"Satisfactoriness" of outcome

• AppealAppeal

MediationMediation

• OverviewOverview

• Contractually required Contractually required mediationmediation

• Mediation/arbitration Mediation/arbitration agreementsagreements

ResolutionResolution

““Dialogue is the most effective way of Dialogue is the most effective way of resolving disputes”resolving disputes”  

Tenzin Gyatso, The 14th Dalai LamaTenzin Gyatso, The 14th Dalai Lama