1. Picking a Fight: How to Navigate (or Avoid) Wine Industry Disputes in Precarious Times Matt Eisenberg, Attorney at Law, Moderator Ron Larson, General Counsel, Sutter Home Winery Hon. W. Scott Snowden, Ret., JAMS arbitrator September 14, 2009 Wine Industry Financial Symposium

2. The 10 tions CreationCreation Communication during OperationCommunication during Operation Repudiation (then Procrastination)Repudiation (then Procrastination) NegotiationNegotiation Mediation/Arbitration/LitigationMediation/Arbitration/Litigation ResolutionResolution

3. CREATION: Let there be light! Security InterestSecurity Interest Growers LienGrowers Lien Price FormulasPrice Formulas Viticultural PracticesViticultural Practices Quality, Harvest & DeliveryQuality, Harvest & Delivery Severance and Attorney FeesSeverance and Attorney Fees

4. Security Interest Must be granting language in contract, even if simple.Must be granting language in contract, even if simple. Then file UCC-1 as soon as possible with Secretary of State in California (no Debtors signature required). First in line, first in right.Then file UCC-1 as soon as possible with Secretary of State in California (no Debtors signature required). First in line, first in right. Advantages over Growers Lien: allows for non-judicial foreclosure, self-help (repossession without breach of peace), notice from lenders of foreclosure and clear inclusion of non-grape/wine products and proceeds. But usually subordinate to lender.Advantages over Growers Lien: allows for non-judicial foreclosure, self-help (repossession without breach of peace), notice from lenders of foreclosure and clear inclusion of non-grape/wine products and proceeds. But usually subordinate to lender. Guaranty as an alternative: new winery or subsidiary of larger company may give to initiate good contracts. Could do in exchange for growers lien waiver.Guaranty as an alternative: new winery or subsidiary of larger company may give to initiate good contracts. Could do in exchange for growers lien waiver.

5. Growers Lien Frazier Nuts, Inc. v.. American Ag Credit (2006) 141 Cal. App. 4th 1263 (appeal denied)Growers Lien attaches to cash proceeds or receivables on any sale of wine. Trumps lender secured by A/R. Frazier Nuts, Inc. v.. American Ag Credit (2006) 141 Cal. App. 4th 1263 (appeal denied)Growers Lien attaches to cash proceeds or receivables on any sale of wine. Trumps lender secured by A/R. Allowing winery to sell wine first and then pay Groweronly with agreement of Grower (through an escrow, bond, letter of credit). Can be an effective tool for winery in distress.Allowing winery to sell wine first and then pay Groweronly with agreement of Grower (through an escrow, bond, letter of credit). Can be an effective tool for winery in distress. Bankruptcy and the race to the courthouse. Superior to most liens (even UCC-1s) with exception of wage/salary and warehousemans lien.Bankruptcy and the race to the courthouse. Superior to most liens (even UCC-1s) with exception of wage/salary and warehousemans lien. Custom crush context: Know who your buyer islien only valid against buyer with processors license. Make sure name on contract is same as name on license.Custom crush context: Know who your buyer islien only valid against buyer with processors license. Make sure name on contract is same as name on license. Enforcement of lien:Enforcement of lien: Notify CDFA and file complaint for non-payment or even for repudiation in advance of harvest.Notify CDFA and file complaint for non-payment or even for repudiation in advance of harvest. File lawsuit (judicial foreclosure). No right of repossession or self-help.File lawsuit (judicial foreclosure). No right of repossession or self-help.

6. Price Formulas Per Ton Contract: more common but more prone to disputes over viticultural practices, hang time, etc.Per Ton Contract: more common but more prone to disputes over viticultural practices, hang time, etc. Per Acre Contract: more discretion to winery as to practice but uncertainly as to cost of goods. Good for higher end wines but more vulnerable now.Per Acre Contract: more discretion to winery as to practice but uncertainly as to cost of goods. Good for higher end wines but more vulnerable now. Bottle price formula: contract is illegal and unenforceable unless price set by January 10 of each year. Food and Ag Code Section 55601.5(g). Somerset Importers Limited vs. Continental Vintners, 790 F2d 775. License fee alternative.Bottle price formula: contract is illegal and unenforceable unless price set by January 10 of each year. Food and Ag Code Section 55601.5(g). Somerset Importers Limited vs. Continental Vintners, 790 F2d 775. License fee alternative.

7. Viticultural Practices Increased involvement of winery.Increased involvement of winery. Exhibits with agreed practices; regular meetings and revised exhibit. Extra costs set forth.Exhibits with agreed practices; regular meetings and revised exhibit. Extra costs set forth. Drafting methods for avoidance of disputes in per ton contracts: Dehydration Adjustment (provides an increase in price for each degree of Brix over the contract maximum); fixing tonnage in vineyard prior to harvest.Drafting methods for avoidance of disputes in per ton contracts: Dehydration Adjustment (provides an increase in price for each degree of Brix over the contract maximum); fixing tonnage in vineyard prior to harvest.

8. Quality, Harvest & Delivery Grape Quality parameters and Harvest Decision process should be clearly set forth in agreement.Grape Quality parameters and Harvest Decision process should be clearly set forth in agreement. Renegotiation of contract in days or weeks prior to delivery if Winery appears unable to perform:Renegotiation of contract in days or weeks prior to delivery if Winery appears unable to perform: Custom crush optionsubject to availability of custom crush facility. Agree to a reversion of grapes to Grower/facility to allow for sale in the event of non- payment after wine made. Watch out for avoidable preferences in a bankruptcy context.Custom crush optionsubject to availability of custom crush facility. Agree to a reversion of grapes to Grower/facility to allow for sale in the event of non- payment after wine made. Watch out for avoidable preferences in a bankruptcy context. Inspection (local vs. state) and Rejection process (written evidence/records and notice).Inspection (local vs. state) and Rejection process (written evidence/records and notice).

9. Severance and Attorney Fees Sample Severance provision:Sample Severance provision: If any term, provision, covenant or restriction of this Agreement is held by a court of competent final jurisdiction or other final authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party.If any term, provision, covenant or restriction of this Agreement is held by a court of competent final jurisdiction or other final authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Attorney Fees:Attorney Fees: Expand beyond Prevailing Party to include all collection costs and fees, including those related to bankruptcy proceeding.Expand beyond Prevailing Party to include all collection costs and fees, including those related to bankruptcy proceeding. Allowable as secured claim in bankruptcyAllowable as secured claim in bankruptcy

10. Communication During Operation Require communication in agreement:Require communication in agreement: Regular meetings regarding practices, etc.Regular meetings regarding practices, etc. Updating of exhibits at least annually.Updating of exhibits at least annually. Third party tie-breakers agreed in advance.Third party tie-breakers agreed in advance. Circumstances giving rise to changes: weather (water); economy, size of harvest. Need to remain flexible and creative.

11. Repudiation (then Procrastination) Anticipatory RepudiationAnticipatory Repudiation Demand for Adequate Assurances (UCC § 2-609) based on reasonable concern/insecurity.Demand for Adequate Assurances (UCC § 2-609) based on reasonable concern/insecurity. Timing and OptionsTiming and Options Pre-Harvest: CDFA complaint; find other buyers if possible and fix damages (duty to reasonably mitigate damages); commence legal action. Pre-Harvest: CDFA complaint; find other buyers if possible and fix damages (duty to reasonably mitigate damages); commence legal action. Post-harvest: advise winery of Growers Lien; CDFA; commence legal action. Post-harvest: advise winery of Growers Lien; CDFA; commence legal action. Processors License not required for purchase of bulk wine, only grapes, so leverage through CDFA is limited if winery wants to buy bulk wine.Processors License not required for purchase of bulk wine, only grapes, so leverage through CDFA is limited if winery wants to buy bulk wine.

12. Negotiation The coolest head prevailsThe coolest head prevails Deliberation Deliberation Centrality of "people problems Centrality of "people problems Involvement of skilled, "result- oriented" negotiators Involvement of skilled, "result- oriented" negotiators

13. MediationArbitration Litigation Arbitration vs. Litigation CostCost TimeTime Personal attentionPersonal attention Due ProcessDue Process Scope of discretionScope of discretion "Satisfactoriness" of outcome"Satisfactoriness" of outcome AppealAppealMediation OverviewOverview Contractually required mediationContractually required mediation Mediation/arbitration agreementsMediation/arbitration agreements

14. Resolution Dialogue is the most effective way of resolving disputes Dialogue is the most effective way of resolving disputes Tenzin Gyatso, The 14th Dalai Lama Tenzin Gyatso, The 14th Dalai Lama