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

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. CREATION:Let there be light! • Security Interest • Grower’s 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 Debtor’s signature required). First in line, first in right. • Advantages over Grower’s 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 grower’s lien waiver.

5. Grower’s lien • Frazier Nuts, Inc. v.. American Ag Credit (2006) 141 Cal. App. 4th 1263 (appeal denied)—Grower’s 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 Grower—only 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-1’s) with exception of wage/salary and warehouseman’s lien. • Custom crush context: Know who your buyer is—lien only valid against buyer with processor’s 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 a reduction 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 option—subject 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 Grower’s Lien; CDFA; commence legal action. • Processor’s 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. Mediation—arbitration—litigation 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