Harvest Time and Grape Growers’ Liens – Custom Crushers Beware

A few years ago, we wrote about the producer’s lien.  As I explained in my prior post, the law provides a grape grower with an automatic lien against any wine made from the grower’s grapes.  This lien, called a “producer’s lien,” means that the winery cannot lawfully sell the wine without paying the grower.  It gives a grower great legal protection.

While the concept behind the producer’s lien is simple, it can get complicated in practice.  For example, a recent situation involved a grower who sold grapes to a winery, but delivered the grapes to a custom crush facility for crushing and fermentation.  The winery then failed to pay both the grower and the custom crush facility.  Does the grower still have a producer’s lien?  Does the custom crush facility have a producer’s lien?

In this situation, the custom crush facility claimed it was a “producer” and consequently entitled to a lien against the wine it had now made for the winery.  The custom crush facility would not, therefore, release the wine to the grower or the winery until it was paid.  The grower, however, also claimed a lien against the wine, and demanded that the custom crush facility give the wine to the grower, even though the grower had not been paid.  The winery also demanded the wine, because it needed to sell the wine to pay both the custom crush facility and the grower.

Unfortunately for the custom crush facility, only the grower can claim a producer’s lien.  While the custom crush facility might argue it is a “producer”, the producer’s lien applies only to a producer who “sells any product which is grown by him. . .”  (See  CaliforniaFood and Agricultural Code § 55631.)  The custom crush facility didn’t grow anything; it couldn’t, therefore, obtain a producer’s lien.

This means that the grower can force the custom crush facility to return the wine to the grower so the grower can sell the wine to recover what it is owed.  The grower obtains the lien automatically (and this lien takes priority over all other liens), but the grower may need to take legal action to force the custom crush facility to cooperate and turn over the wine to the grower.

But what is the custom crush facility to do?  In this situation, the custom crush facility will need to take action to obtain a junior lien against the wine.  It will want to make sure that, if the grower sells the wine, it can still get whatever money is left after the grower’s bills are paid.  It does not automatically obtain the benefit of a lien, as the grower does.  It has to go out and get its lien.

Happily in this situation, the grower, the custom crush facility, and the winery were all able and willing (with the assistance of counsel) to cooperate without legal action.  The grower sold the wine and took a portion of the proceeds to satisfy its bills.  The custom crush facility then took some of the proceeds left over to satisfy its bills.  And, there was still a little left over for the winery.

If you have any questions about contract disputes or producer’s liens, please contact us.

Copyright Dickenson Peatman & Fogarty at www.lexvini.com

New Legislation to Help California Grapegrowers Collect

To be a winegrape buyer you have to get a processors license from the California Department of Food and Agriculture’s market Enforcement Branch (the “MEB”).  When a buyer doesn’t pay for the grapes though, the seller can resort to a lawsuit or the seller can file a complaint with the MEB under the Processors Law. (Cal. Food & Ag. Code Sections 55521 et seq.)  Under the Processors Law the MEB’s hammer has been the suspension or revocation of a winery’s processors license.  Pay the grower what is owed or MEB may shut down your processors license, rendering a defaulting buyer technically unable to make or sell wine.

That may sound simple enough, and the hammer is very real, but the punishment exacted may not be proportionate to the harm done.  Suspending or revoking a processors’ license, even temporarily, may not actually get the grower paid quickly, and has actually had the result of some defaulting buyers simply ignoring the MEB’s decision unless and until they can afford to pay.  A few wineries have just shut down instead of paying, the MEB’s suspension being the last straw.   

Through AB 907, Assembly Speaker pro Tempore Fiona Ma has proposed changes to the Processors Law that would give the MEB greater latitude to fashion remedies through fines and assessments of administrative costs against wineries that don’t pay their growers.  The fines would be up to $10,000, and the recovery of administrative costs would be assessable up to $6,000. Another key amendment proposed by AB 907 is allowing the MEB to require a winery that has had problems paying its growers to put up a surety bond in order to keep its license.  Currently, the MEB can only require a guaranty of payment from a processors’ license applicant, with the recession teaching too many creditors the hard lesson that guaranties are not always worth the paper they are written on.  Posting a surety bond is a pretty simple arrow, and a cost-effective one, to add to the MEB’s quiver, and one that is common in many other industries. 

While grower organizations are in favor of AB 907, winery organizations are tepid toward it.  But, there really hasn’t been a hue and cry about AB 907, which may be because winery organizations don’t want to waste capital at the Capitol on something that really will only affect a relative handful of grape buyers anyway. 

AB 907 is currently referred to the Senate Agriculture Committee for further deliberation.  We’ll keep apprised as AB 907 goes through volatizing.

For further information on business law matters, including grape purchase contracts, contact Scott Greenwood-Meinert at [email protected]
Copyright Dickenson Peatman & Fogarty at www.lexvini.com

The Producer’s Lien: An Often Overlooked Legal Remedy in Grape Contract Disputes

In the wine industry, one of the most common legal disputes is breach of contract between grape growers and wineries.  Often times, grape growers are surprised to learn that, upon the delivery of grapes to a winery, they automatically have a statutory lien against any wine made from those grapes.  This lien, called a “producer’s lien,” means that the winery cannot lawfully sell the wine without paying the grower.  The lien can be found in California Food and Agricultural Code § 55631 et seq.  See following link for statute text:
Additionally, this lien takes priority over many other security interests.  (See Frazier Nuts, Inc. v. American Ag Credit (2006) 141 Cal. App. 4th 1263)
The amount of the lien is the amount the winery contractually owes the grape grower for the grapes or, if an amount is not specified in a contract, the value of the grapes upon their delivery to the winery.
Sometimes, however, a grower inadvertently waives his or her right to this lien.  Often times, a contract between a grape grower and a winery includes a clause whereby a grower warrants that the grapes are not subject to any lien or other encumbrance.  The parties generally intend such a clause to ensure the winery that the grower has the legal right to sell the grapes.  Courts, however, may interpret this clause as the grower’s waiver of the producer’s lien.  If one wishes to avoid waiver of the right to the producer’s lien, such a clause should warrant that the grapes are not subject to any lien or encumbrance other than the producer’s lien.
Enforcing a producer’s lien can be time-consuming.  If the winery has not paid the grower, the grower can initiate an action in court to foreclose on the lien.  Because actual foreclosure can take months, the grower may also immediately seek a preliminary injunction from the court to prevent the winery from selling or destroying the wine pending foreclosure.  Eventually, assuming the grower proves his or her case, the court will issue an order giving the grower the right to possess the wine.  The grower must then work with the sheriff’s department to obtain physical possession of the wine.  Even if the wine has been blended with other wine, a grower can still take possession of the wine.
One of the difficulties with a producer’s lien, however, is that a grower must then have the appropriate licenses to market and sell the foreclosed wine.  If the grower lacks such license, then the grower must work with a license broker or other authorized person to sell the wine.
If you have any questions about contract disputes, including contracts between grape growers and wineries, please contact us.
Copyright Dickenson Peatman & Fogarty at www.lexvini.com