'It's not over': Dozens of federal winery permit suspensions so far over delayed payment from wholesalers
V intners had better take a close look at their wholesaler arrangements, industry attorneys say, as federal regulators get more funds to continue enforcement this year against ship-first-get-paid-on-sale deals. Dozens of local wineries have been investigated so far.
The U.S. Tax & Trade Bureau, which regulates beverage alcohol, since August 2018 has taken action against 28 mostly small North Coast vintners and importers in what were alleged to be illegal consignment sales, according to a list of actions on the agency’s website as of Dec. 31. The wine companies were allowed to take one-day suspensions of their basic operational permits in exchange for not pursuing the matters further at hearings, according to the documents.
“This is not over,” said Bahaneh Hobel, Napa-based leader of the alcohol beverage practice at law firm Dickenson Peatman & Fogarty, said at the WINExpo conference in December. Hobel focuses on regulation and licensing cases, and she has been involved in a dozen of those consignment cases.
The agency continues to build its case against one particular company that received the shipped beverages, according to Hobel. Though the suspension orders don’t name the wholesaler in each case, the prime target in more than a dozen of the suspensions so far is New York-based Angels’ Share Wine, according to blog posts by its legal team at Hinman & Carmichael of San Francisco.
“The TTB has told Angels’ Share’s attorneys it will not bring its case against Angels’ Share until all the cases involving the producers have been completed,” wrote partner John Hinman in September.
At issue in the cases is whether they were actually consignment deals — selling with the understanding that payment would come after the product sale — or extended-payment arrangements, according to Hobel and Hinman.
They are defined by the 1935 Federal Alcohol Administration Act as “arrangements wherein the trade buyer is under no obligation to pay for distilled spirits, wine, or malt beverages until they are sold by the trade buyer.”
The vintners’ attorneys have countered that in the cases in question there was no right of return of unsold wine and taxes had to be paid on it, meaning that the wholesaler actually owned the wine. Federal law does allow for prompt returns of such goods that are different from what was ordered, defective or damaged, Hobel said.
“It’s defined as selling with a privilege of return,” she said of the federal view on consignments.
The winery defense teams have pointed out that federal and state law give suppliers and importers a relatively free hand in setting the time frame for payment from wholesalers, while federal law limits the credit term extended to retailers up to 30 days.
“Under federal law, there is no maximum period to pay wholesalers, so it can be 180 or 360 days,” Hobel said.
But there was a limit to what a number of the vintners involved could afford to pay for legal defense, so they settled for a “first strike” against their permits and no admission of violation, according to Hobel and Hinman.
“TTB is still investigating people, so it’s a good time to look at your practices,” she said. Upward of $5 million has been allocated to the TTB for trade practices enforcement in fiscal 2019 and 2020.
A key contract clause Hobel said vintners should include on their invoices to help avoid TTB action over consignment sales are explicitly stated credit terms. Under federal and California law, a supplier can extend credit to retailers only up to 30 days, and retailers are liable under state law if they get terms that are more generous.
“Make sure you follow up for payment,” Hobel said. “Because if you just wait and wait, and you have this implied agreement, they could really come back for you.”
And she recommends that invoices do not include language that could be construed by federal regulators as allowing the wholesaler to wait until the goods are sold until they pay.
One of the issues that came up with the New York wholesaler in many of these TTB consignment enforcement actions in the past two years is the difference in licensing, Hobel said. Vintners were understanding this company to be a broker, which is technically an employee or contractor of the producer, but it was licensed as a wholesaler.
“It happens in this industry a lot,” she said. “People just see an easier way to do business, and they do it without really thinking about whether it’s legal or not.”
Jeff Quackenbush covers wine, construction and real estate. Contact him at firstname.lastname@example.org or 707-521-4256.