[caption id="attachment_18662" align="alignright" width="292" caption="Ken English, Henry Evans and Rick Van Duzer"][/caption]
NORTH COAST – With the change in sales of higher-end wine in 2009, some winegrape growers found that the wineries they were selling to had more commitments to purchase grapes than the rate of case sales would warrant.
Carol Kingery Ritter, an associate in the business and real property department of Napa-based Dickenson Peatman & Fogarty, said some grower clients had buyers that didn't want to receive as much tonnage as had been contracted, partly from a shortage of cash and an increase in inventory related to sluggish case sales.
"We've seen people dealing with repudiated contracts, and some wineries are asking to renegotiate longer-term contracts," Ms. Ritter said.
This has been happening for both the one- or few-harvest contracts for fruit to expand or launch a brand and certain multi-decade agreements that lock in sourcing key to a brand image, such as a vineyard-designate wine.
Common legal tools growers use to get paid include California statutory producer's liens, called grower's liens; Uniform Commercial Code financing statements, or UCC-1; and "adequate assurance" letters, which ask whether the buyer can follow through on contractual obligations, namely buying at the specified price and quantity.
Yet with the close-knit nature of the North Coast wine business, legal experts stress that working out disagreements should be the first resort, particularly when considering the limited number of grape buyers in the market these days and the perishable nature of harvested grapes.
The producer's lien, provided for in Section 55631 of the state Food and Agriculture Code, gives the grower the right to attach the juice or wine made from the grapes. Growers don't have to declare that right, but they can waive it in a grape purchase contract. That lien supersedes most claims for payment.
However, grape-market conditions in 2009 and continuing into 2010 could complicate foreclosure on that lien in court, according to local wine law experts. Damages are determined basically by the contract price of the grapes minus the value of the processed grapes.
Trouble is, heavy discounting of a number of North Coast wines retailing for more than $20 a bottle created a situation in which the value of the wine could be less than the contracted price, which had been high until early 2009. That's when it became apparent the economic recession was curtailing consumption of expensive wine in general and in the important on-premise sales channel in particular.
Thus, the value of wine in tank and bottle could be worth less than the grape-to-wine formula used in setting the contract price, leaving the grower's lien undersecured.
Unless the early indications of stabilization in pricing for some higher-end wines seen at the end of 2009 continue into this year, growers could face a similar situation this year, according to wine law attorneys.
"In producer's lien law, the foundation is built on value being added in production, but when it's gone, leverage to get paid is less," said Ken English of Napa-based Gaw Van Male. "I've, in two occasions, said to wineries, 'We have a producer's lien; pay up,' and they told us, 'Do you want the wine back?'"
And if the grower does take possession of the wine through foreclosure on the lien, the grower then will need an alcoholic beverage license to sell the wine and a bonded facility to hold it, according to Mr. English. Some growers are pursuing that approach, he said.
Though the grower's lien is a tool for securing payment, it may not cover grape purchasers that are so-called virtual vintners, or holders of state beverage licenses 17 and 20, because they technically aren't processors, according to Ms. Ritter.
The 2006 California appeals court ruling in Frazer Nuts Inc. v. American AgCredit strengthened the producer's lien. While the lien statute allowed attachment of the processed product, the ruling extended the security to the processor's accounts receivable after the product had been sold and allowed the grower to be paid before secured lenders.
That priority above secured lenders has prompted wineries increasingly to ask growers to waive their lien rights to avoid potential loan default for not protecting lender security priority, according to Ms. Ritter.
Because of that and in the previously mentioned situations that aren't subject to a grower's lien, the UCC-1 statement is being considered again, as it was early in the decade following the tech-bubble recession. Some growers seek a UCC-1 statement, which can define collateral such as receivables and other assets, in addition to a lien.
"With a UCC agreement, it becomes clearer than with a grower's lien that the security follows the wine with a security interest in accounts receivable," said Hank Evans, a partner specializing in contract law at Farella Braun & Martel.
Legal experts question whether the court extension of lien rights to receivables and to superior creditor priority will be overturned.
The UCC-1 can allow for foreclosing on the wine without a lawsuit, while the lien requires a lawsuit for foreclosure, according to Rick Van Duzer, a litigator also with Farella Braun. Lenders must also provide notice of foreclosure to statement holders, while lienholders may not get such notice.
"When you're negotiating a new contract and you know you have a winery that is new and not well-heeled financially, it will not hurt you to request up front a UCC-1 security interest," he said. "It's not as easy as it sounds."
Yet unlike grower's liens, the priority of UCC-1 claims is based on the order in which they were recorded. Some new wineries issue a number of such statements to acquire key sourcing.
When a grower learns of a buyer's teetering finances, a tool employed somewhat in 2009 was the adequate-assurance letter. The California Commerical Code requires the winery to respond within 30 days, but it's not clear how detailed that assurance has to be, ranging from financial statements to the equivalent of "I've been good for it," according to legal experts.
However, there can be serious consequences if the grower determines the assurance isn't adequate, declares the contract void, sues for breach of contract and finds a new home for the grapes, according to Mr. Van Duzer.
"The risk is if a court finds it was not reasonable grounds then the grower is exposed to damages for breach of contract in that the grapes were not delivered," he said.
