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MAJOR UPDATE: American Wine Distributors To Close After Losing Lawsuit & Biggest Client

American Wine Distributors (AWD) will close after a losing a federal court case brought by New Zealand’s Delegats Wine Estates, formerly AMD’s largest client.

The U.S. District court in San Francisco and a jury panel have awarded Delegats $189,924 in damages and interest on top of $336,131 in Delegats’ receivables which AWD has admitted owing.

According to the jury verdict, AWD and its founder, Michael Denny, breached their fiduciary duty and improperly converted $115,000 of Delegat’s  funds to their own uses.

Please check back: This article will be updated periodically as information becomes available.

May 28, 2013 – The following update has  been received from Michael Denny:

AWD entered into a written agreement with Delegat’s Wine Estate Limited in 2005 to import Delegat’s wine for redistribution into the United States.

That agreement provided that AWD would purchase wine from Delegat’s and resell it to customers solicited by a US subsidiary of Delegat’s.  AWD would collect the proceeds from AWD’s sales, deduct AWD’s charges for services, expenses and pay Delegat’s the remainder as the purchase price of Delegat’s wine.

The relationship between AWD and Delegat’s benefitted both companies greatly.  Delegat’s sales in the United States exploded from 20,000 cases in 2006 to 60,000 cases in 2008 through AWD’s distribution system.

During that time AWD made a total of only $100,000 in gross profits from the relationship. But they enjoyed a large cash flow from collections for sales AWD used to finance an expansion of their business.  AWD made timely payments of all amounts due to Delegat’s until January of 2009.

Things went terribly bad for AWD toward the end of 2008.  AWD invested several hundred thousand dollars to improve its infrastructure in anticipation of future growth, but the economic downturn resulted in AWD’s revenues falling drastically during the normally very busy holiday season.

The father of Michael Denny, AWD’s founder and president, died in December of 2007. Towards the end of 2008, Denny’s mother requested that a $200,000 loan Denny’s parents guaranteed to the company, be repaid in view of medical bills and the uncertainly of advanced age.

Also, at the time of the 2008 financial collapse, all banks were looking closely at small business accounts. AWD’s bank told Denny they were reevaluating whether or not to continue a $350,000 line of credit that was critical to AWD’s operations. AWD was reminded the credit was a cash flow line and not a long-term loan. The bank expected the money to be used and paid back in short periods of time.

Finally, just before Christmas of 2008, Delegat’s unexpectedly announced they would be terminating its relationship with AWD within a few months, depriving AWD of over $200,000 of cash flow they had relied on.

By late December 2008, Denny determined that given the company situation, AWD could not fulfill all its obligations and that they would have to prioritize the use of funds. AWD continued to make timely payments to employees, suppliers other than Delegat’s, landlord, bank and its other obligations. But as a consequence, could not pay Delegat’s all amounts due under AWD’s contract with them.  To satisfy Delegat’s AWD knew they would have to draw down their entire cash flow line and it would take years to repay the bank. Denny contacted the bank to discuss the situation. They understood and approved of a plan to structure payments with Delegat’s. AWD defaulted on payment in 2009 and Delegat’s began unwinding operations with AWD.

During that time, AWD remitted to Delegat’s over $350,000 received from sales of Delegat’s wine, assigned to Delegat’s over $850,000 of outstanding accounts receivable owed to AWD so they could collect the amounts directly and released $65,000 of wine AWD held in inventory. In short, AWD did everything possible to protect the interests of Delegat’s during the transition.

From May 2009 through November 2010, AWD made payments averaging $10,000 per month to Delegat’s while attempting to negotiate an agreement to pay AWD’s entire debt. During that time the principal balance owed was reduced to $336,000. AWD stopped these payments only after Delegat’s rejected any feasible payment plan and vigorously pursued litigation.

Although AWD continuously sought to achieve a payment plan acceptable to Delegat’s, they persisted in incurring what AWD estimates to be well over $100,000 in legal fees to pursue a judgment in federal court. In the end, AWD offered Delegat’s $150,000 cash and to pay the entire remaining amount due in two years including interest. Delegat’s would accept nothing but a full cash payment to stop legal action.

Throughout the trial, and despite the language of the AWD contract, Delegat’s insisted and convinced the jury the wine in the possession of AWD remained the property of Delegat’s and that AWD was only a collection agent.  This was determined in spite of the fact Delegat’s could not legally sell wine in the United States and had appointed AWD as importer of record and the primary American source.

As a consequence, and with the assistance of untrue testimony from AWD’s former finance manager who was allegedly terminated for theft, the jury found the funds owed by AWD to Delegat’s were not simply a normal commercial debt but resulted from AWD’s “conversion” of funds belonging to Delegat’s.  The Court entered a judgment that, with interest, approaches $500,000.

Denny continues to believe he and AWD acted reasonably and in good faith in failing to pay Delegat’s the total amount owed in 2009.  There is no question that, had AWD paid Delegat’s the full amount owed, the resulting bank and supplier problems would have made it impossible to continue in business. If AWD had failed then, all their employees would have lost their jobs and it is likely all AWD’s assets, including the receivables and inventory returned to Delegat’s, would have been frozen in legal proceedings indefinitely.

Instead, for the past three years, AWD has continued to employ 30 people and provide vital services to over 200 suppliers. Except for Delegat’s, every employee, supplier, governmental agency, and landlord were paid in full and in a timely manner through the past week. The company remained profitable and fully able to pay Delegat’s the entire amount owed with a reasonable payment plan.

Unfortunately, the judgment in favor of Delegat’s forced Denny to accept the fact AWD cannot continue to operate in light of expected enforcement activity by Delegat’s.  They were unreasonable before the trial and are expected to be unreasonable now. While AWD suppliers are protected under a security agreement, Denny feels it would be best for AWD to close and help clients transition to new service providers.

Denny spent the past two weeks working day and night to find alternative homes for AWD’s clients and believes that, while they might be inconvenienced, they will not suffer significant financial harm.  Denny is also working with suppliers to return wine purchased and assist them with collecting outstanding accounts receivable. Denny is committed to making every effort to minimize client losses.

While Denny lost his business that was the core of his professional life for 25 years, the primary economic burden has fallen to Delegat’s. Rather than acting professionally in a difficult business situation, they pursued a vindictive, expensive and eventually completely ineffective course of action. They will have to decide if it was worth it.

Post script: There is one disgruntled former client and their attorney using this unfortunate situation to air a personal grudge on the internet. After many years and hundreds of satisfied clients, there always has to be a bad apple. None of what they are saying is true. There was no money owed. There was not and won’t be any “class action” lawsuits because there are no other disgruntled suppliers.  Please ignore.

For Michael’s many friends from his 40 years in the industry, he wants you to know he’s doing fine. You can contact him at his new email addressMike@DennyConnect.com

1:39 p.m., Feb. 29 – The following statement has just been received from Michael Denny:

AWD entered into a written agreement with Delegat’s Wine Estate Limited in 2005 to facilitate the importation of Delegat’s wine into the United States.

That agreement provided that AWD would purchase wine from Delegat’s and resell the wine to customers solicited by a subsidiary of Delegat’s operating in the United States.  AWD would collect the proceeds from AWD’s sales, deduct AWD’s charges for services and expenses incurred in the importation process and pay Delegat’s the remainder as the “purchase price” of Delegat’s wine.

Initially, AWD agreed to pay Delegat’s the amount owed to Delegat’s on a monthly basis but soon agreed to pay the amounts owed on a weekly basis.

Also, in a departure from its normal practice, AWD agreed at Delegat’s request to pay Delegat’s all amounts received from AWD’s customers and then bill Delegat’s for AWD’s services and costs.

The relationship between AWD and Delegat’s benefitted both companies greatly.  Delegat’s market share in the United States exploded from 20,000 cases in 2006 to 60,000 cases in 2008 through AWD’s distribution system.

During that time AWD made a total of only $100,000 in profits from the resale of Delegat’s wine, but AWD enjoyed a large cash flow from collections from sales of Delegat’s wine  that AWD used to finance the expansion of AWD’s business.  AWD made timely payments of all amounts due to Delegat’s until January of 2009.

Things went terribly bad for AWD toward the end of 2008.  AWD had invested several hundred thousand dollars in improving its infrastructure in anticipation of future growth, but the economic downturn in 2007 and 2008 resulted in AWD’s revenues falling drastically in the normally very busy pre-holiday season as consumers curtailed their purchases of alcoholic beverages.

Then the father of AWD’s founder, Mike Denny, died in early December of 2008, and Mr. Denny’s mother requested that Mr. Denny repay $100,000 of a loan that Mr. Denny’s parents had guaranteed in view of the medical bills incurred by Mr. Denny’s father.

AWD’s primary bank informed Mr. Denny that the bank was reevaluating whether or not to extend a $350,000 line of credit that was critical to AWD’s operations.

Finally, just before Christmas of 2008, Delegat’s unexpectedly announced that Delegat’s would be terminating its relationship with AWD within a few months, depriving AWD of over $200,000 of cash that AWD had relied upon during the period between collecting the proceeds for AWD’s sales of wine produced by Delegat’s and the date that AWD had agreed to remit those funds to Delegat’s.

By late December 2008, Mr. Denny had determined that AWD could not fulfill all of its obligations and that AWD would have to prioritize the use of its funds.  Mr. Denny repaid $100,000 of the loan his parents had guaranteed to protect his widowed mother.

AWD continued to make timely payments to its employees, its suppliers other than Delegat’s, its landlord and its other obligations, but as a consequence, could not pay Delegat’s all amounts due under AWD’s contract with Delegat’s.  AWD defaulted on payment of $332,000 due to Delegat’s in early January 2009, another $82,000 due to Delegat’s in late February 2009 and a final $50,000 due to Delegat’s in April 2009.

During the same time period, however, AWD remitted to Delegat’s over $350,000 received from sales of Delegat’s wine, assigned to Delegat’s over $850,000 of outstanding accounts receivable owed to AWD for sales of wine produced by Delegat’s so that Delegat’s could collect the amounts directly and released $65,000 of wine produced by Delegat’s that AWD held in its inventory.

From May 2009 through November 2010, AWD made monthly payments averaging $5,000 per month to Delegat’s while attempting to negotiate an agreement to pay AWD’s debt to Delegat’s, reducing the principal balance owed to Delegat’s to slightly more than $336,000, stopping these payments only after Delegat’s rejected any feasible payment plan and vigorously pursued litigation against AWD.

Although AWD continuously sought to achieve a payment plan acceptable to Delegat’s, Delegat’s persisted in incurring what AWD estimates to be well over $100,000 in legal fees to pursue a judgment against AWD and Mr. Denny in federal court.

Throughout the trial, and despite the language of the AWD contract, Delegats insisted and convinced the jury that the wine produced by Delegat’s in the possession of AWD remained the property of Delegat’s and that AWD was only a collection agent for Delegat’s, in spite of the fact that Delegat’s, could not legally sell wine in the United States and had appointed AWD as importer of record and the primary American source in many United States jurisdictions.

As a consequence, and with the assistance of untrue testimony from AWD’s former finance manager that AWD alleges had been terminated for theft, the jury found that the funds owed by AWD to Delegat’s were not simply a normal commercial debt but resulted from AWD’s “conversion” of funds belonging to Delegat’s.  The Court has now entered a judgment against AWD and Denny that, with interest, approaches $500,000, including punitive damages based on findings that in paying back Mr. Denny’s mother and not paying Delegat’s, Mr. Denny and AWD acted with “oppression, fraud or malice.”

Mr. Denny continues to believe that he and AWD acted reasonably and in good faith in failing to pay Delegat’s the total amount owed to that company.  There is no question that, had AWD paid Delegat’s the full amount owed in January and February 2009, AWD would have been unable to continue in business.

If AWD had failed at that time, over 26 employees would have lost their jobs and many other suppliers of product to AWD would not have been paid.  Many smaller suppliers, who depended upon AWD to distribute their product in the United States, would have been driven out of business.  In all likelihood, all of AWD’s assets, including the receivables and inventory returned to Delegat’s, would have been frozen in legal proceedings indefinitely.

Instead, for the past three years, AWD has continued to employee approximately 26 people and continued to provide vital services to many smaller importers of wine.  Except for Delegat’s, every employee, supplier, governmental agency, and landlord were paid in full and in a timely manner through the past week.

Unfortunately, the judgment in favor of Delegat’s has forced Mr. Denny and AWD to accept the fact that AWD cannot continue to operate in light of expected enforcement activity by Delegat’s.

Mr. Denny has spent the past ten days working day and night to find alternative homes for AWD’s warehousing and delivery clients and believes that, while they may be inconvenienced, they will not suffer substantial financial harm.  Mr. Denny is also working with suppliers to return wine purchased from the suppliers and to assist the suppliers to collect directly the outstanding accounts receivable for AWD’s sales of the suppliers’ wine pursuant to security agreements in favor of the suppliers.

Mr. Denny is committed to making every effort to minimize any financial loss to any of the suppliers to AWD and expects that any losses will not be unduly burdensome.

In the meantime, Mr. Denny, who had no substantial assets other than his ownership of AWD, has resigned himself to the loss of his livelihood but continues to be extremely distressed by any loss to AWD’s suppliers and vendors, including the loss to Delegat’s, and by the loss of his reputation in the industry that has been the center of his life for decades.

Mr. Denny’s distress is compounded by the fact that the only plausible motivation for Delegat’s to incur enormous expense to obtain a judgment against a company and individual that have no assets, and thereby destroy any chance to obtain payment, is pure and simple vindictiveness.

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