Memorandum of Decision Re: Grower's Lien Rights

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re CHARLES F. SHAW VINEYARD &                                                 No. 91-12712 WINERY, LTD.,      Debtor. ___________________________/ CHARLES E. SIMS, Trustee,      Plaintiff,    v.                                                                                                      A.P. No. 93-1118 KORBRAND CORPORATION, et al.,      Defendants. _____________________________/
Memorandum of Decision
     Prior to its bankruptcy, debtor Shaw Vineyard & Winery, Ltd., produced wine made from its own grapes and the grapes of other growers. It had an outstanding loan from Napa Valley Bank secured by its real property and other assets, including inventory and receivables.      Shaw had entered into an agreement with Kobrand Corporation whereby Kobrand had exclusive rights to market Shaw's wine. In addition, Kobrand loaned Shaw $500,000.00 secured by a junior deed to Shaw's real property.      In late 1991, within 90 days of Shaw's bankruptcy, Kobrand took possession of wine made by Shaw which had been produced from grapes grown by the Batteullo Family Trust, Thomas Kenefick, and Craig Battuello. Shaw filed its bankruptcy petition before receiving any payment from Kobrand.      This adversary proceeding is a four-way dispute between the bankruptcy trustee, Kobrand, the bank, and the growers. Kobrand asserts that it has the right to offset what it owes for wine (about $738,000.00) against Shaw's debt to it. The growers take the position that the $450,000.00 due from Kobrand on account of the wine is subject to the growers' statutory liens of $247,000.00.      The trustee takes the position that the growers' liens are valid but avoidable and he is accordingly entitled to the proceeds from the sale of the wine. The bank takes the position that the growers no longer have a lien, that Kobrand is not entitled to an offset, and that it is entitled to the entire $738,000.00 on account of its security interest in the Shaw's receivables.      Now before the court are several motions having in common one specific issue: whether the growers' liens evaporated when Kobrand took possession of the wine. For the reasons stated below, the court finds that the liens have not survived.      California Food and Agriculture Code section 55631 et seq. give the growers a statutory lien on the wine. Section 55634 provides that the lien "is on . . . any processed form of the product . . . which is in the possession of the processor without segregation of the product." Section 55638 forbids the sale of product subject to the lien unless the proceeds of the sale are used to satisfy the liens. Notwithstanding section 55638, Kobrand and the bank argue that because the wine is no longer in Shaw's possession the liens have been extinguished.      The two cases discussed at length by all parties, In re Loretto Winery, 898 F.2d 715 (9th Cir.1990), and In re T.H. Richards Processing Co., 910 F.2d 639 (9th Cir.1990), both stand for the principle that the growers' lien laws should be interpreted liberally to protect growers. However, the issue now before this court is whether the growers' lien laws can be interpreted in a liberal enough matter to give the lien effect when the produce has been transferred to a third party who has not paid for them. Dicta in both Loretto and Richards support the plain meaning of the statute that possession by the processor is the sine qua non for assertion of growers' lien rights.      Although it has tried, the court can find no basis for avoiding the express language of the statute that the lien is dependent on possession. The agricultural lien laws are obviously the source of considerable negotiation and compromise between growers, producers and lenders; the court would be denigrating the validity of the legislative process by reading into the law something more than is there.      This does not necessarily mean that the growers are without a remedy. The transfer of the wine to Kobrand was unlawful pursuant to Food and Agriculture Code section 55638 and a misdemeanor pursuant to section 55905. Where a processor delivers produce to a third person as a credit against a debt to him, there is authority that the third person may be liable as a joint tortfeaser to a lienholder if he took with knowledge of the lien. See 3 C.J.S., Agriculture, section 114, p.657; 5 Witkin, Summary of California Law (9th Ed.), Torts, section 9, p.65-66. Moreover, if the transfer of the wine to Kobrand is avoided as a preference or otherwise the growers' liens might be revived.1 See In re Antinarelli Enterprises, Inc., 107 B.R. 410, 415-16 (D.Mass.1989).      This case involves complex issues, vague law, and important rights. The only patently meritless position taken by any of the parties is Kobrand's request for sanctions. Regardless of what Kobrand has or has not done yet, the trustee's complaint validly puts the issue of Kobrand's setoff rights before the court. Kobrand's request for sanctions will be denied, and Kobrand is advised not to request sanctions again without cause. Its motion for summary judgment against the trustee will be denied as premature.      There are many issues remaining to be decided in this case, and perhaps pleadings to be amended; final disposition is not yet appropriate. However, it shall be deemed without substantial controversy, pursuant to FRCP 56(d), that the growers have no lien on the wine in Kobrand's possession or the proceeds of the sale of the wine because by statute the liens are dependent on the producer's possession and do not extend to proceeds. Except for this ruling, the motions now before the court will be denied without prejudice as premature. Counsel for the trustee shall submit an appropriate form of order, which counsel for Kobrand, the bank, and the growers have approved as to form.
Dated: February 14, 1994                                                                                               ___________________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy Judge
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     1. Kobrand asserts that the delivery of the wine to it was in the normal course of business, and accordingly immune from attack as a preference. The court is skeptical that an illegal transfer can ever be considered to be in the ordinary course of bus