1
Picking a Fight How to Navigate (or Avoid)
Wine Industry Disputes in Precarious Times

• Matt Eisenberg, Attorney at Law, Moderator
• Ron Larson, General Counsel, Sutter Home Winery
• Hon. W. Scott Snowden, Ret., JAMS arbitrator
• September 14, 2009
• Wine Industry Financial Symposium

2
The 10 tions

• Creation
• Communication during Operation
• Repudiation (then Procrastination)
• Negotiation
• Mediation/Arbitration/Litigation
• Resolution

3
CREATIONLet there be light!

• Security Interest
• Growers Lien
• Price Formulas
• Viticultural Practices
• Quality, Harvest Delivery
• Severance and Attorney Fees

4
Security Interest

• Must be granting language in contract, even if
  simple.
• Then file UCC-1 as soon as possible with
  Secretary of State in California (no Debtors
  signature required). First in line, first in
  right.
• Advantages over Growers Lien allows for
  non-judicial foreclosure, self-help (repossession
  without breach of peace), notice from lenders of
  foreclosure and clear inclusion of non-grape/wine
  products and proceeds. But usually subordinate
  to lender.
• Guaranty as an alternative new winery or
  subsidiary of larger company may give to initiate
  good contracts. Could do in exchange for
  growers lien waiver.

5
Growers Lien

• Frazier Nuts, Inc. v.. American Ag Credit (2006)
  141 Cal. App. 4th 1263 (appeal denied)Growers
  Lien attaches to cash proceeds or receivables on
  any sale of wine. Trumps lender secured by A/R.
• Allowing winery to sell wine first and then pay
  Groweronly with agreement of Grower (through an
  escrow, bond, letter of credit). Can be an
  effective tool for winery in distress.
• Bankruptcy and the race to the courthouse.
  Superior to most liens (even UCC-1s) with
  exception of wage/salary and warehousemans lien.
• Custom crush context Know who your buyer islien
  only valid against buyer with processors
  license. Make sure name on contract is same as
  name on license.
• Enforcement of lien
• Notify CDFA and file complaint for non-payment or
  even for repudiation in advance of harvest.
• File lawsuit (judicial foreclosure). No right of
  repossession or self-help.

6
Price Formulas

• Per Ton Contract more common but more prone to
  disputes over viticultural practices, hang time,
  etc.
• Per Acre Contract more discretion to winery as
  to practice but uncertainly as to cost of goods.
  Good for higher end wines but more vulnerable
  now.
• Bottle price formula contract is illegal and
  unenforceable unless price set by January 10 of
  each year. Food and Ag Code Section 55601.5(g).
  Somerset Importers Limited vs. Continental
  Vintners, 790 F2d 775. License fee alternative.

7
Viticultural Practices

• Increased involvement of winery.
• Exhibits with agreed practices regular meetings
  and revised exhibit. Extra costs set forth.
• Drafting methods for avoidance of disputes in per
  ton contracts Dehydration Adjustment (provides
  an increase in price for each degree of Brix over
  the contract maximum) fixing tonnage in vineyard
  prior to harvest.

8
Quality, Harvest Delivery

• Grape Quality parameters and Harvest Decision
  process should be clearly set forth in agreement.
• Renegotiation of contract in days or weeks prior
  to delivery if Winery appears unable to perform
• Custom crush optionsubject to availability of
  custom crush facility. Agree to a reversion of
  grapes to Grower/facility to allow for sale in
  the event of non-payment after wine made. Watch
  out for avoidable preferences in a bankruptcy
  context.
• Inspection (local vs. state) and Rejection
  process (written evidence/records and notice).

9
Severance and Attorney Fees

• Sample Severance provision  
• If any term, provision, covenant or restriction
  of this Agreement is held by a court of competent
  final jurisdiction or other final authority to be
  invalid, void or unenforceable, the remainder
  of the terms, provisions, covenants and
  restrictions of this Agreement shall remain in
  full force and effect and shall in no way be
  affected, impaired or invalidated so long as the
  economic or legal substance of the transactions
  contemplated hereby is not affected in any
  manner materially adverse to any party.
• Attorney Fees
• Expand beyond Prevailing Party to include all
  collection costs and fees, including those
  related to bankruptcy proceeding.
• Allowable as secured claim in bankruptcy

10
Communication During Operation

• Require communication in agreement
• Regular meetings regarding practices, etc.
• Updating of exhibits at least annually.
• Third party tie-breakers agreed in advance.

• Circumstances giving rise to changes weather
  (water) economy, size of harvest. Need to
  remain flexible and creative.

11
Repudiation (then Procrastination)

• Anticipatory Repudiation
• Demand for Adequate Assurances (UCC 2-609)
  based on reasonable concern/insecurity.
• Timing and Options
• Pre-Harvest CDFA complaint find other buyers if
  possible and fix damages (duty to reasonably
  mitigate damages) commence legal action.
• Post-harvest advise winery of Growers Lien
  CDFA commence legal action.
• Processors License not required for purchase of
  bulk wine, only grapes, so leverage through CDFA
  is limited if winery wants to buy bulk wine.

12
Negotiation

• The coolest head prevails
•  Deliberation
•  Centrality of "people problems
•  Involvement of skilled, "result-oriented"
  negotiators

13
MediationArbitrationLitigation

• Arbitration vs. Litigation
• Cost
• Time
• Personal attention
• Due Process
• Scope of discretion
• "Satisfactoriness" of outcome
• Appeal
• Mediation
• Overview
• Contractually required mediation
• Mediation/arbitration agreements

14
Resolution

• Dialogue is the most effective way of resolving
  disputes 
• Tenzin Gyatso, The 14th Dalai Lama