Growers: Protecting Yourself Against Winery Insolvencies

5/18/2009 Articles

California grape growers are used to relying on their statutory producer's lien (Food and Agricultural Code Sections 55631-55633) to protect against the risk of non-payment. However, when put to the test in a highly stressed financial environment, many vineyard owners find that this so-called "grower's lien" has serious limitations as a practical means of securing prompt payment.

Since many growers are now facing this issue, and many more are likely to in the 2010 harvest, we wanted to alert our clients and friends to several additional protections they may want to consider, either in their grape contracts or in workout agreements with wineries who are late in making payments under the grape contract:

1. UCC Remedies. Have a provision in your contract granting a UCC (Uniform Commercial Code) security interest in the sold grapes and resulting wine. The language can be simple and opens up additional rights and remedies, such as non-judicial foreclosure and continuation of the lien notwithstanding sale of the resulting wine to a third party, not available with a grower's lien. A UCC security interest also authorizes you to file a UCC-1 to alert other creditors to your lien on the juice and wine produced from your grapes. If you file a financing statement, you'll at least get notice before a lender forecloses. (There are some potential priority issues if a bank forecloses on the wine inventory and sells it, instead of the winery selling it.)

2. Attorneys' Fees. Attorneys' fees are part of allowed claims for secured creditors in bankruptcy (and, under recent case law, perhaps unsecured creditors as well). The threat of paying your lawyers' fees can discourage a winery from throwing up frivolous road blocks when you try to collect payment for your grapes. And it means that you may ultimately be paid for what you spend in trying to get paid. Include an attorneys' fees clause that covers all your costs and fees of collection in a winery bankruptcy (not just fees for a "prevailing party," which is language that doesn't much apply in a bankruptcy or liquidation).

3. Interest. Interest is allowed in bankruptcy, and California cases have held that you can charge a 1.5% late fee per month for late payments without violating California usury laws. Be sure to put a late fee in your contract for when you're not paid on time. You did not volunteer to be the winery's unpaid bank. Every voluntary lender is charging the winery for the use of their money and you should too. If nothing else, it gives the winery an incentive to pay you earlier, and something you give up if they do pay you by a new deadline.

4. Don't Subordinate. Don't subordinate your growers' lien rights to other secured lenders' liens, unless you're getting paid a big chunk up front (or somehow otherwise being compensated) to take the risk as part of the deal.

5. Third Party Processors and Warehousemen. Be more concerned where there's also a third party processor/entity storing the wines, because they may have lien rights for unpaid fees that may be senior to your grower's lien and complicate your efforts to repossess wine.

6. Seat at the Bankruptcy Table. If the winery is late paying, and wants to work out some deal, consider adding to any deferred payment agreement the above protections (1-3), and in that context also add a provision that the winery agrees that if it files bankruptcy, growers should be represented by a growers' committee at the bankruptcy debtor's expense. This gives you a seat at the table if the worst happens.

Farella Braun + Martel brings together the talent and experience of attorneys in our Wine Industry and Bankruptcy and Creditor's Rights groups to help our wine industry clients to develop and implement strategies to achieve viable, practical resolutions to difficult issues in today's challenging business environment. For more information, please contact Farella Braun + Martel attorneys Hank Evans, Dean Gloster, Matt Lewis at 415.954.4400 or Katherine Philippakis at 707.967.4000.