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

Farella Braun + Martel LLP
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Farella Braun + Martel LLP

North Bay Business Journal - August 4, 2020
 
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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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