What would you do if a wine merchant took your money but never delivered the bottles? You'd ask for your money back. Now what if that store went bankrupt and the lawyer charged with paying off the store's creditors sued you for your refund?
That's the situation facing dozens of former customers of Premier Cru, the infamous Berkeley, Calif., shop that went belly-up in 2016, 11 months before its proprietor, John Fox, was sentenced to six and a half years behind bars for fraud.
Since December, the trustee tasked with Premier Cru's bankruptcy has filed at least 60 lawsuits against former customers. These "adversarial complaints" are aimed at nullifying transactions that occurred anywhere from a day to more than a decade before Premier Cru filed for chapter 7.
The covey of defendants include home furnishings magnate and prominent collector Park Smith and Alibaba cofounder and Brooklyn Nets owner Joseph Tsai. They received partial deliveries of wine or partial refunds, which court-appointed trustee Michael Kasolas alleges gave them an unfair edge in bankruptcy proceedings over thousands of other former Premier Cru customers who received neither wines nor refunds.
In a term often used during the Bernie Madoff case, these actions are called claw backs. The aim is to give all similarly situated creditors a fair shake when the kitty is eventually divided up.
About 20 of the complaints are aimed at nullifying transactions in which Premier Cru delivered wine or refunded money to customers within 90 days of bankruptcy. The law requires the reversal of most such late-in-the-game transfers. The aim is to prevent savvy creditors and insiders from beating out others by swooping in when they sense the end is near.
One current defendant, Walter McLallen, took delivery Jan. 6, 2016, just two days before the bankruptcy filing, of 146 bottles purchased earlier for $17,873. One day later, defendant David Cramer got Premier Cru to ship him wine that he'd paid $16,510 for five years earlier. And venture capitalist James Tananbaum, after "threatening to initiate civil or criminal proceedings" against Premier Cru, according to Kasolas' complaint, extracted a refund of $259,083 during the 90-day pre-bankruptcy window. The trustee sued to void the refunds. Three months ago, a compromise was reached in which Tananbaum agreed to return $150,000 to the trustee's account.
Shirlin Wong, a California podiatrist who started buying wine from Premier Cru in 2003, received little of the wine she paid for. In 2015, she sued Premier Cru in state court to recover $230,000 for undelivered wines. That October, she got a settlement check for $78,936.
But last December, Kasolas sued Wong, claiming that she had received a "preferential transfer" from Premier Cru within the 90-day window. The complaint asks for payment of the exact amount paid to Wong by Premier Cru plus pre-judgment interest and court costs. A hearing in her case in San Francisco is scheduled for Feb. 14. (Neither she nor her lawyer responded to requests for comment.)
Many of the lawsuits, however, are not based on the 90-day rule. In 2010, William Gladstone's firm, Hawaii-based Gladstone Imports, purchased 480 bottles of 2007 Château Lafite Rothschild from Premier Cru for $407.95 each. The wines were delivered in 2012—speedier than Premier Cru's norm—but only after Goldstone incessantly "pestered" the shop's staff and John Fox. He also waged his campaign on social media, even after he got his wine. "I was relentless," Gladstone says. "Even so, I lost two big clients, because I couldn't deliver the wine on time." Now Kasolas is suing Gladstone Imports for the value of those 480 bottles of Lafite.
Roger Shideler, an owner of No Limits Fine Wine in Santa Ana, Calif., had a similar experience. In one of multiple angry emails to Fox, Shideler wrote on May 16, 2012, "I tell my clients I will have their wines this week and they are not here. You make a f———g liar out of me again! You have cost me well over 100K with your lies to me."
In a lawsuit against No Limits Fine Wine, Kasolas asserts that the defendant's purchase of 32,129 bottles (not all delivered) for more than $4 million was in furtherance of Premier Cru's "massive fraud." Kasolas asks for an order to be entered to recover the value of wine transfers and cash refunds "in an amount to be proven at trial." Shideler would not comment on the case.
The lawsuits against Gladstone and No Limits Fine Wine, like about half the recent filings, are based on the notion of "fraudulent conveyance." The money paid to Premier Cru, rather than securing the wines it was meant for, was used by Fox to pay off other customers or to pay for his personal expenses, including $900,000 to 12 women for "personal services."
Under bankruptcy law, the transactions between Premier Cru and its unsecured creditors can be nullified and the value of the transactions recovered for deposit to the trustee's account. Those creditors must wait in line with all other equally situated unsecured creditors for payout.
How big those payouts will be is another question. Most of the fraudulent conveyance cases are being handled on a contingency basis by Kathy Phelps, a Los Angeles lawyer. Phelps will be paid 40 percent of settlements she achieves up to $3 million and slightly less after she passes that figure.
According to Don Cornwell, a Los Angeles lawyer (and a wine collector) who has advised several of the defendants, the trustee's goal is to settle all the cases prior to trial. "I know of one creditor who was sued for more than $1 million," Cornwell told Wine Spectator, "but the trustee offered to settle for $50,000."
In another twist causing squawks, many of the defendants are being sued for the value that Phelps assigns to their wines at the time of delivery, rather than at the time of purchase. In the lawsuit against Gladstone, for example, Phelps values the 480 Lafite bottles at $600 each in 2012, a 50 percent increase over what Gladstone says was his "fair market" price two years earlier.
How had she calculated the increase? Phelps, the author of a book on Ponzi schemes, told Wine Spectator that the new price had been determined by experts, but declined to reveal their identity. "Evaluations are often subject to dispute," Phelps said. "We invite defendants to give us contrary evaluations. Every bottle has its own story."
David Rosendorf, a Florida-based bankruptcy lawyer unconnected to the Premier Cru case, suggests that customers who criticized and hounded the retailer and its president, John Fox, prior to bankruptcy, did themselves no favors. "For your mom-and-pop customer, there may have been no reason to believe that a fraud was going on. Their defense is that they received the wine in good faith and for fair value," he said. "But if someone is receiving the goods with suspicion, and complaining on emails and on Yelp that this a Ponzi scheme, they could not mount a good-faith defense."
Last week, Gladstone filed his response to the trustee's complaint, asserting that his purchases were legitimate, for fair value, and that the statute of limitations had run out on the claims against him. Gladstone further alleges that "Trustee and his counsel knew that customers would rather pay thousands of dollars to settle the bogus claims rather than to incur even larger amounts of expenses to defend themselves in response to the trustee's bogus claims." Accusing the trustee and his counsel of "extortion or attempted extortion," Gladstone demands a jury trial. Several other defendants are expected to do the same.
Mark Bostick, the trustee's lawyer, estimates that final payouts will come some time in 2018. No one will estimate how much creditors will see after the court proceedings are finished.
The Premier Cru debacle is casting a long shadow, according to Daniel Posner, head of the National Association of Wine Retailers (NAWR) and owner of a wine shop in White Plains, N.Y. "The fine wine world is a very small one," he said. "There are only so many buyers for these wines. And now they are extremely pessimistic about us. All of a sudden, you have customers who were out $50,000 from Premier Cru that are not so quick to give me money. You give them ETA's for the arrival of their wine, and they say, 'Umm … I'll wait for it to arrive.'"
Corrected: The original story misstated the number and relative value of wines Gladstone Imports purchased; it was 480, at what William Gladstone asserts was a fair market price at the time, not below market price.
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