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North Bay Business Journal

Monday, May 19, 2014, 6:20 am

Growers can lien on distressed wineries

By Gary Kaplan and Kelly Woodruff

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    Kelly Woodruff and Gary KaplanA lot goes into the making of great wine, and when a winery becomes financially unstable, there are a lot of competing interests that need to be satisfied, including the banks that provide the winery with financing, the growers that provide the winery with grapes, the employees who provide services to the wine maker and the company that bottles and/or stores the wine.

    If you are a grower of grapes that you supply to a winery for making wine, you may be in a better position to ensure payment than other parties, but you must be sure to take steps to protect your interests.

    Under California law, every producer of farm products (including grapes) who sells “product” to a licensed processor automatically has a lien on all of the product sold and all processed items made from the product until the grower is paid in full for its product.

    ‘Perfected’ but ‘fully secured’?

    The grower’s lien is “perfected” — valid against third parties — automatically upon delivery of the grapes to the processor (winery), without the need for filing or recording any document or providing any notice to third parties.

    Furthermore, a grower’s lien extends to all product and processed items in the possession of the processor. That includes wine that is stored in a warehouse by the winery), and no segregation of a particular grower’s product is required.

    Therefore, unless the winery segregates the grapes received from different growers — for example, using only one grower’s grapes in the winery’s cabernet sauvignon — the grower’s lien extends to all the wine in the winery’s “possession” that contains any of that grower’s grapes.

    However, simply because a grower’s lien extends to all the winery’s finished product containing the grower’s grapes does not necessarily mean the grower is “fully secured.” If the total amount of multiple grower’s liens exceeds the total value of the finished product, the growers will share in the collateral pro rata, regardless of when the grapes were delivered. In other words, it is not first come, first served.

    Extends to finished wine?

    It is also important to note that once the grapes or wine leave the winery’s possession, the grower’s lien is extinguished, and it is currently unclear in California whether the grower would have a continuing lien in the proceeds from the sale of the finished wine. Although a winery that sells farm products, including wine, without paying the grower that provided the grapes is subject to criminal liability and may face suspension or revocation of its producer’s license, this may not be sufficient to stop the sale or transfer of the wine.

    Therefore, a grower would be wise to make every effort to enforce its lien — including by attempting to obtain an injunction or temporary restraining order — to prevent a winery in distress from selling any of the wine before the grower gets paid.

    Power through enforcement

    A grower’s lien generally has priority over all other liens or claims, except labor claims for services rendered to the winery after delivery of the grapes and warehouse liens for any warehouse that may be storing the winery’s wine. Although the producer’s lien is considered a preferred lien in California, if a grower goes unpaid for its grapes and seeks to enforce its lien, generally the grower’s only option is to initiate a lawsuit to reclaim the grapes, juice or wine from the winery. In many instances, this can be cost-prohibitive.

    If not cost-prohibitive, however, enforcement of a grower’s lien can be a powerful tool. Once a lawsuit is initiated, a grower can seek a preliminary injunction and/or temporary restraining order to prevent the winery from selling or otherwise transferring the grapes or wine, which would have the effect of extinguishing the lien. And once the claim is reduced to a judgment, the grower can execute on the judgment by levying on the grapes and or wine. That means, having the sheriff seize the wine and sell it to pay off the grower.

    Reveal the ‘secret lien’

    Because a grower’s lien arises automatically upon delivering the grapes to the winery, it is considered a “secret lien.” That means other creditors may not be aware of the lien, including other growers. As a result, a secured lender may be able to foreclose on all the winery’s collateral without the growers who provided the grapes ever being notified.

    Therefore, growers dealing with a slow-paying winery would be wise to have the winery affirmatively grant the grower a security interest in the wine in a written agreement, and also file a UCC-1 financing statement to provide notice to third-parties of their lien.

    ***

    Gary Kaplan (gkaplan@fbm.com) and Kelly Woodruff (kwoodruff@fbm.com) are partners in the San Francisco office of Farella Braun + Martel LLP (fbm.com). Farella also has an office in St. Helena.

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