In re Claar Cellars LLC

• Decision Date: 14 January 2021
• Docket Number: Lead Case No. 20-00044-WLH11 (Jointly Administered)
• Citation: 623 B.R. 578
• Parties: IN RE: CLAAR CELLARS LLC, and RC Farms LLC, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Washington

623 B.R. 578

IN RE: CLAAR CELLARS LLC,

and

RC Farms LLC, Debtors.

Lead Case No. 20-00044-WLH11 (Jointly Administered)

United States Bankruptcy Court, E.D. Washington.

Dated: January 14, 2021

Roger William Bailey, Joshua J. Busey, Bailey & Busey LLC, Yakima, WA, Toni Meacham, Toni Meacham, Attorney at Law, Connell, WA, Steven H. Sackmann, Sackmann Law Office, Othello, WA, for

MEMORANDUM OPINION

Whitman L. Holt, Bankruptcy Judge

The wine business is difficult even during the best of times. The year 2020 was not the best of times.

Two affiliated debtors engaged in the wine business seek confirmation of a chapter 11 plan that is opposed by their primary secured creditor, HomeStreet Bank. HomeStreet in turn proposed a competing chapter 11 plan that the debtors oppose. After fully considering the evidence presented at a lengthy evidentiary hearing and substantial briefing by the parties, the court has determined that the debtors' plan does not meet the requirements for confirmation but that HomeStreet's plan does. As a result, the court will confirm HomeStreet's plan.

BACKGROUND & PROCEDURAL POSTURE

Since the 1980s, Robert and Crista Whitelatch have participated in the wine industry by growing vinifera grapes in the White Bluffs region of Washington State.¹ In the 1990s, the Whitelatch family expanded operations by producing and selling finished wine under the Claar Cellars label. Claar Cellars now makes numerous varietal and blended cuvees. Over the years, Claar Cellars has received an array of awards and other recognitions for the quality of its wines and the sustainability of its growing and production practices.

The components of the Whitelatch family's enterprise are presently divided among three legal entities:

• Debtor Claar Cellars LLC owns a winemaking facility, support buildings, inventory, and equipment used to process grapes into wine, store bulk and finished wine, and market bulk and bottled wine to buyers.

• Debtor RC Farms LLC owns several parcels of real property. Most of the land constitutes vineyards and the remainder is used for various other purposes (including an agricultural pivot circle referred to as the "Circle Ground"). After harvest, RC transfers its grapes to Claar. Historically, Claar pays RC for the grapes in amounts sufficient to satisfy the expenses RC incurs from its agricultural operations.

• Nondebtor Whitelatch Living Trust, dated March 15, 1995, is a trust formed by Mr. and Mrs. Whitelatch for estate planning purposes. The trust owns various property, including a parcel of real property containing vineyards farmed by RC as well as a structure that serves as both a residence and shop.

Starting in 2016, the debtors began to finance operations with money borrowed from HomeStreet. Claar borrowed under a secured line of credit and an equipment loan, both of which are guaranteed by RC, the Whitelatch Living Trust, and Mr. and Mrs. Whitelatch and their two sons individually. RC borrowed under a term loan; this indebtedness is secured by mortgages on some (but not all) of RC's and the Whitelatch Living Trust's real property and is guaranteed by Claar and the nondebtor individuals guaranteeing the Claar obligations.

The debtors' operations suffered during the period spanning 2016-2019. Claar's revenues dropped steadily each year, sometimes by more than 30% on a year-over-year basis, and the debtors' tax returns reflect mounting operating losses. The business declines eventually triggered a breach of financial covenants in the HomeStreet credit documents. The business relationship deteriorated further as Claar failed to repay the line of credit upon maturity on September 1, 2019, and the debtors ceased making their respective contractual payments on the equipment and term loans.

In response, HomeStreet accelerated all the indebtedness against all obligors. After this action failed to prompt repayment, HomeStreet sued the obligors in Franklin County Superior Court. Among other relief, HomeStreet sought appointment of a custodial receiver regarding certain property the defendants own. In December 2019, the state court appointed Critical Point Advisors, LLC as custodial receiver regarding the debtors' property and some property held in the Whitelatch Living Trust. In January 2020, the debtors countered by filing the instant chapter 11 petitions. The petitions – filed before effectiveness of the state court's receivership order according to the debtors – invoked the automatic stay and allowed the debtors access to the restructuring powers contained in the Bankruptcy Code. The state-court action remains pending, however, and any applicable provisions of the receivership order became operative against the nondebtor defendants in that action.²

These have been active chapter 11 cases featuring many jousts between the debtors and HomeStreet (some of which also involved the unsecured creditors' committee, the receiver, other creditors, and the United States trustee). For purposes of this opinion, significant events include:

• HomeStreet contested the debtors' ability to use HomeStreet's cash collateral, including to make certain proposed postpetition intercompany transfers between the debtors. The court overruled HomeStreet's objection, in part based on RC's agreement to grant HomeStreet adequate protection in the form of a lien on RC's otherwise unencumbered real property.³

• The debtors commenced an adversary proceeding against HomeStreet and the state-court receiver seeking a temporary restraining order and permanent injunction to stay litigation against the nondebtor defendants in HomeStreet's state-court action. To allow the parties to focus on the confirmation process, the court granted, and extended, a stay. The stay expires upon issuance of this opinion.

• Bankruptcy Judge Mary Jo Heston of the Western District of Washington facilitated settlement discussions between the parties to address the possibility of a consensual plan. Despite the efforts of all involved, the discussions failed to achieve the desired result. In connection with this process, the debtors agreed to permit their plan exclusivity period to lapse, which in turn allowed HomeStreet to propose the competing plan at issue here.

• The debtors moved for an order granting RC authority to sell the Circle Ground for approximately $749,000. HomeStreet objected, raising several drafting and technical concerns about the transaction documents. At an August 2020 hearing, the debtors conceded the validity of some stated concerns and agreed to work with the buyer to address the issues. The court indicated that it would sign a sale order without further hearing once the parties resolved the remaining issues. The Circle Ground sale has not been finalized or closed. At the confirmation hearing, debtors' counsel recited the debtors' desire to effectuate this sale pursuant to a bankruptcy plan so that the transaction will "not be taxed under any law imposing a stamp tax or similar tax" pursuant to Bankruptcy Code section 1146(a).⁴

The debtors and HomeStreet ultimately filed and pursued confirmation of their respective plans. This confirmation battle has been contentious and zealously litigated. The parties have disagreed about the contents of their respective disclosure statements, the timing and process for a confirmation hearing, the merits of the respective plans, assorted discovery and evidentiary issues, and other ancillary matters.

The confirmation hearing spanned eight days during which the court admitted numerous exhibits and heard the following testimony:

• Robert Whitelatch . Mr. Whitelatch is one of the members and primary manager of the debtors. He provided extensive testimony over several days, including offering an overview and lay valuation of the debtors' different assets, a lengthy history of the debtors' operations from farming to wine sales, and his anticipated future operations and related projections. Mr. Whitelatch further testified about the prices he believes are appropriate for a sale of all the debtors' assets. He explained that he would sell immediately if he obtained these prices but will wait if he does not. Mr. Whitelatch also testified that business might recover within the term of the debtors' plan so as to allow the reorganized debtor to refinance the HomeStreet debt, although he recognized challenges associated with obtaining new financing. On cross examination, Mr. Whitelatch experienced difficulty supporting the optimistic projections associated with the debtors' plan. Overall, the court found Mr. Whitelatch honest and sincere in his testimony, although at times antagonistic toward HomeStreet's counsel. Mr. Whitelatch's commitment to the debtors' cause was evident not only during his testimony, but also by the fact that he and Mrs. Whitelatch attended every day of the confirmation hearing in person.

• Erik McLaughlin . Mr. McLaughlin has an extensive background in the wine industry and currently owns and operates a business involved in mergers, acquisitions, and advisory services in the wine industry. Mr. McLaughlin echoed the sentiments expressed by other witnesses that the wine industry has seen a glut of wine grapes in recent years causing an oversupply amplified by decreasing demand. Mr. McLaughlin opined that the market downturn is further exacerbated by Chateau Ste. Michelle's overwhelming influence over Washington's wine industry. Consistent with other witnesses, Mr. McLaughlin further testified that the market downturn will continue until the occurrence of one or a mix of factors that increases demand or decreases supply. Beyond offering his general views about the Washington wine industry, Mr. McLaughlin testified about how he had attempted to intermediate a possible transaction via a letter of intent that Resource Land Holdings negotiated with HomeStreet; this testimony was consistent with that of Mr. Johnson and Mr. Leininger discussed below. Overall, Mr. McLaughlin seemed knowledgeable about the wine

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