Insights
Publications

How Grape Growers Can Protect Their Interests When a Winery Approaches Insolvency

August 4, 2020 Articles
North Bay Business Journal

A lot goes into the making of great wine, and when a winery becomes financially unstable, there are multiple 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.

Although a grower may be in a better position to ensure payment than other parties, it must take steps to protect their interests.

What’s a grower’s lien?

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.

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, which 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.

How to fully secure your lien

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.

Importantly, once the grapes or wine leave the winery’s possession, the grower’s lien is extinguished, and it is currently unclear 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.

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.

Once a lawsuit is initiated, such lien shall remain in effect until the final determination of such proceeding. A grower also can seek a preliminary injunction and/or temporary restraining order to prevent the winery from selling or otherwise transferring the grapes or wine. And once their claim is reduced to a judgment, the grower can execute on the judgment by levying on the grapes and or wine (i.e., having the sheriff seize the wine and sell it to pay off the grower).

Because a grower’s lien arises automatically upon delivering the grapes to the winery, it is considered a “secret lien” – as it is not publicly recorded, so other creditors may be unaware of its existence, including other growers. As a result, a secured lender may be able to foreclose on all the winery’s collateral without notifying the growers who provided the grapes.

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.

Firm Highlights

Publication

Non-Residential Lease Default Workouts, Security Deposits and Bankruptcy

What are the bankruptcy implications of the treatment of a tenant’s security deposit following a payment default?  Many non-residential tenants are now or are likely in the future to be unable to pay rent...

Read More
Publication

Protecting Suppliers and Customers of Insolvent or Bankrupt Companies

Some 3,600 companies having already  filed for Chapter 11 protection  in the first half of 2020—more than in any year since 2012—and many are bracing for an even greater surge of bankruptcy filings before...

Read More
Publication

Treatment of Commercial Leases in Tenant Bankruptcy - The Basics

As the COVID-19 pandemic continues to wreak havoc with the nation’s economy, we have started to see bankruptcy filings by well-known companies such as GNC, J. Crew, Neiman Marcus, Modell’s, 24 Hour Fitness, Gold’s...

Read More
News

Alexis Sinclair Joins Farella Braun + Martel’s Financial Services Industry Group

SAN FRANCISCO, October 14, 2020: Northern California legal powerhouse Farella Braun + Martel is pleased to announce that business transactions lawyer Alexis Sinclair has joined the firm as special counsel in its Financial Services...

Read More
Publication

SEC Expands Definition of “Accredited Investor” – Here Are 5 Key Takeaways

The SEC recently adopted amendments to Rule 501(a) of Regulation D of the Securities Act of 1933 that expand the definition of “accredited investor” by adding new categories of eligibility based on professional knowledge...

Read More
Publication

Wine Businesses, Lenders, and Difficult Conversations

The COVID-19 pandemic and public health efforts to combat it will impact different wine businesses in different ways. Those that depend on on-premise and direct-to-consumer (DTC) sales, such as restaurant, hospitality, and tasting room...

Read More
Publication

Hospitality Companies and Their Lenders: Preparing for Difficult Conversations

In a sudden reversal of generally expansionary trends, the hospitality business has been among the most immediate and badly hit economic sectors as a result of the COVID-19 pandemic, and the resulting stay-at-home and...

Read More
Publication

Three Steps Licensees Can Take to Protect Their IP Rights in Bankruptcy

During periods of widespread economic disruption such as the present, operating businesses must be able to identify and respond to threats to the financial health of their contracting counterparts in order to protect key...

Read More
Publication

Questions Wineries Need to Answer Before Talking With Lenders About Coronavirus-Caused Financial Woes

The coronavirus pandemic and public health efforts to combat it will impact different wine businesses in different ways. Those that depend upon on-premise and direct-to-consumer (DTC) sales — such as restaurant, hospitality, and tasting room...

Read More
Publication

Maximizing Business Insurance Coverage Benefits After a Fire

Unfortunately, we again write while wildfire is devouring homes and businesses in Napa and Sonoma, and threatening many more. We’ve previously posted tips about first steps that you should take in the event your...

Read More