Security Of Grower Liens Uncertain In Hill Winery Bankruptcy

[NOTE: Links below marked by (WEN) are to actual court documents and available to premium subscribers to Wine Executive News.]

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The Hill Winery collapse has snared 31 grape growers who are owed a total of $1,946,544.

Most worry that the statutory liens on the fruit they sold may not be worth a hill of beans. They might be correct. Or not. As usual in legal matters … it’s complicated.

A complete list of growers can be found in here: Summary of Schedules-WEN. 17 of the growers are listed in Schedule D as secured creditors (page 10 of that pdf) and 14 incorrectly as unsecured, nonpriority on schedule F (page 20).

Trustee Wants To Sell $1+ Million In Wine “Free And Clear Of All Liens”

Grower lien concerns were amped-up late last week when the U.S. bankruptcy trustee Lois I. Brady, who was appointed by the court on June 25, requested permission on Juily 11, to sell wine which is still subject to grower liens “free and clear of all liens.”

An experienced legal source not affiliated with the Hill bankruptcy told Wine Industry Insight that this  permissible because, “a federal bankruptcy judge is God with a gavel.”

Sales To China, Big Box Retailer

The trustee’s “free and clear” request, if approved by Bankruptcy Judge Alan Jaroslovsky, would include two sales already in hand:

• $750,000 of bulk wine to a Chinese company (Exhibit 2-WEN, vendor identified), and
•  $304,199 of case goods to a big box retailer (Exhibit 1-WEN-vendor identified).

The money, according to a July 11 court document filed by the trustee, would be used to fund continued operation of the bankrupt business, but not to pay lienholders directly. (Motion To Sell Wine Free & Clear Of Liens-WEN).

That confuses some growers, but does not leave them without some hope of recovering some of their lien funds.

Confused, Disappointed Growers

“I have no idea what to think,” one grower told Wine Industry Insight. “They [the court proceedings] talk about selling wine made from my grapes being free and clear of all liens. Does that erase my liens? That’s not right.”

The small grower, who said s/he was embarrassed to be identified because s/he could not afford a lawyer, “especially if they’re going to wipe out my claim anyway. It would be nice for the state ag people to help out here … at least give us some advice and explain things. Something … anything.”

Another grower with similar sentiments, filed her own court document — without a lawyer — objecting to the free and clear sale.

Vallecito Vineyard owner Lori Bloathner, who, according to court documents, is owed $39,707 wrote in her court filing:

“I feel it is imperative that all secured creditors with liens on wine be able to present a list of claims and compare the list with the current situation and agree to terms for payment as product is sold,” Blothner wrote. “An open line of communication could accelerate sales of bulk or bottled wines. Personally, I would like my fruit, now wine, returned to me.”

(Her entire document, free link to all: Vallecito Vineyard Objection To Motion To Sell Wine Free & Clear Of Liens)

Situation May Be Better Than It Seems

Speaking hypothetically about “free and clear” lien practices in bankruptcies in general, attorney John Heffner of Dickenson, Peatman & Fogarty in Napa said that these sorts of sales are common because “they are a routine way bankruptcy courts deal with disputes among lien holders.”

Previous Wine Industry Insight articles have pointed out that many of the same assets in this bankruptcy have been pledged as collateral to multiple lenders, not all of whom were aware of the other liens.

Heffner said that the existing liens, including growers’ will be transferred from wine to the money received from sales. In cases like this, he said, liens – including growers’ liens — are not being wiped away, just transferred to a different form of collateral.

A Useful Tactic

While Heffner would not address the specifics of the Hill Wine Company, a legal source familiar with the proceedings said that the “sale free and clear has advantages under the right circumstances.

“It means that the debtor [Hill Wine Company] has money now to continue paying for the proper storage of the wine inventory, so it can be sold at the highest price possible.  It further means that the debtor can continue to insure the wine inventory, so if something tragic happens before the wine is sold, the creditors won’t be out of luck.

“Further, there is some hope that the debtor can be sold at a price ‘in excess of $6 million,’ according to the Trustee’s papers.But that potential valuation apparently requires that the debtor be a ‘going concern.’ Such a sale would benefit secured creditors and unsecured creditors.”

Court documents indicate that other creditors, including many growers and Umpqua Bank, disagree with the notion that the company can successfully be an “ongoing concern.”

The Process Is Not Without Risk

“Yes, there is always the risk that a debtor’s motion to use cash collateral for ongoing operations will simply cause all proceeds to vanish,” that legal source conceded, “But, motions to use cash collateral are typically the result of a general agreement between most of the secured creditors and a bankruptcy debtor and reflect a shared view that everyone’s collateral will have a higher value if the debtor can use some of that collateral to continue to operate.”

And Where Is The CDFA?

According to the website of the California Department of Food and Agriculture, a verified complaint against Hill Wine Company was acknowledged in March of this year.

Steve Lyle, CDFA’s Director of Public Affairs said, “We were in the process of taking action when bankruptcy was filed and the court took jurisdiction, ending our involvement.”

When asked about grower inquiries for assistance, Lyle replied, “It is the bankruptcy court that has jurisdiction in this matter, not CDFA.”

Bankruptcy courts have a free provision for interested parties to request notices of actions and other information about court cases. The bankruptcy court records show no requests in this case by CDFA.

Previous Hill Wine Company Bankruptcy News From Wine Industry Insight:

• TTB Carpet Bombs Hill Wine Co With Felony Allegations
• Confused Hill Wine Co Chapter 11 Lurches Forward
• Hill Wine Co Bankruptcy Snares Big Names, Big Time

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