Wine Distributor Found Liable for Conversion of Funds After Failing to Pay the Producer

There are some interesting lessons in a recently decided wine producer/distributor dispute.  The plaintiff, Delegat’s Wine Estate Limited an New Zealand wine producer, sued American Wine Distributors, Inc., – a California based wine distributor for payment “for Delegat’s wine sold to customers in the United States in or around fourth quarter 2007”.  The amount the producer was seeking was over $336,000.  The operative complaint in the action can be found here.

The complaint is unique because one of the interesting controversies in this matter was that the producer alleged that it retained “title to the wine products shipped to” the distributor at all times and the distributor contended that rather than simply warehousing the wine, the distributor purchased and resold the wine from the producer.  This is the difference between a bailment and a commercial debt and, if a state’s liquor laws allow bailment of goods with a wholesaler, you may be faced with a similar  determination about how you will define the terms of your arrangement through contract. [A copy of the parties’ distribution and administrative services contract from the court file can be found here.]

With a bailment, the distributor doesn’t have title or ownership of the producer’s product – they are holding the product, distributing it and returning the funds to the producer – basically, they’re holding the product on consignment and paying the producer when they get paid.  With a commercial transaction, the distributor is buying the product outright from the producer at the time, or before, they receive it and turning around and selling it to retailers.  In the bailment, the money the distributor receives are “bailed funds” which means the producer has every right to the funds because the distributor is holding the funds in trust and the distributor is not allowed to spend the funds unless the producer has been paid. With the commercial transaction, the money that the distributor gets from its sales belongs to the distributor and if the distributor owes money to the producer, it is a regular dispute between the two and governed as a simple commercial dispute – the producer has no interest in any particular funds.

The issue was important in this case because there were allegations that money had been transferred to other companies related to the distributor and if the producer had title to that money, it would be easier to unwind those transactions later and get the money back.

This case actually went to trial and a jury issued a verdict in favor of the producer.  For those of you interested in what a verdict form looks like – here’s the one from this trial.

Given that one of the issues was who actually had title to the wine and whether this was a bailment – the jury questions are incredibly insightful.  You can look at some of the jury questions here.

The total judgment awarded amounts to roughly $482,000.  Over at Wine Industry Insight, they’re reporting that the distributor may be closing.

The issue of bailments is an interesting and tricky topic governed by each state’s individual liquor laws.  For those expecting some extra security it’s a good idea to look into the issue when negotiating your agreements.

As a supplemental note, one of the main allegations that the producer made involved representations that that distributor put on its website –  the producer actually excerpted portions of the representations and graphics from the distributor’s website and put them in the complaint as allegations regarding representations that the distributor made about its business, capabilities and operations.  As we’ve seen before, the representations you make on your website can come back to haunt you.