LEGACY BANKRUPTCY SNAREARROWOOD, OTHER WINERIES STAND TO SUFFER AS BATTLE OVER OWNER'S DEBT TO HEDGE FUND PROMISES TO DRAG ON

The largest bankruptcy case to hit the wine industry in years is shaping up

to be a bruising legal battle that could jeopardize the fate of several

renowned wineries, including Glen Ellen's Arrowood Vineyards & Winery.

The Legacy Estates Group, owners of Freemark Abbey Winery in St. Helena

since 2001, filed Chapter 11 bankruptcy last month, nine months after

acquiring Arrowood and Byron winery, in Santa Maria.

The group purchased the two wineries in March from Constellation Brands,

using a $53 million loan from a Houston-based hedge fund.

In its Nov. 18 bankruptcy filing, the company claims it owes $83 million to

more than 450 creditors. The company lays much of the blame for its

predicament at the feet of the hedge fund, Laminar Direct Capital. Legacy

claims the interest rates it is being charged on three loans are so high -- 11

percent to 16 percent -- that they are an ''onerous obligation'' sapping the

company of the cash it needs to operate.

Legacy officials initially told the company's 67 employees that it hoped

the bankruptcy would prevent the hedge fund from breaking up the company and

allow it to quickly find new financing.

But now, the case appears headed for a long, nasty fight.

Laminar contends that Legacy officials tricked it into loaning the money by

lying about the company's finances.

''You hope that this will straighten itself out, but I have my doubts and

concerns,'' said Richard Arrowood, who no longer owns the winery but remains

head winemaker.

Legacy is owned by brothers Calvin and Dev Sidhu, who grew up in Washington

state and Canada and whose family has a long history of farming in India.

Calvin Sidhu, chief executive of Legacy, claims he was working hard to find

additional financing, but was limited because the loan structure was

''inflexible'' and carried heavy penalties for paying off the loans in the

first year.

''(The loans ensure) Laminar will be able to take over the company the

moment the company is faced with even a minor financial hurdle,'' Sidhu said.

But Laminar says the financial problems at Legacy are anything but minor.

The fund accused Legacy officials of lying about a key $5 million

transaction. The company was supposed to raise $8 million in private

investment as a condition for the $53 million loan. But Laminar says $5

million of the $8 million in ''equity'' Legacy claimed to have raised was not

equity at all, but an advance on future sales from its distributor,

Wilson-Daniels, a division of Young's Market Co.

''The Debtor's statements were false and appear to have been designed to

defraud Laminar into funding the loans when the condition was not met,''

Laminar states in the filings.

The allegation Laminar is making is a serious one, akin to a mortgage

applicant's lying to a bank about the source of his or her down payment, said

David Freed, a principal in Silverado Premium Properties, a Napa vineyard

investment firm.

Silverado is one of 36 growers who sold grapes to Legacy wineries this year

and claim they are owed a total of $5.1 million. Silverado claims it is owed

$232,720, according to filings.

The timing of the bankruptcy could not be worse for growers, Freed said,

because it comes at the end of harvest, when growers have their own bills to

pay.

''Growers are being hurt because they don't know how many cents on the

dollar they're ever going to be able to get out of this thing,'' Freed said.

Legacy officials have publicly said they will repay all their creditors in

full. Freed laughs at the claim, citing the company's $83 million in debts

against an unknown amount of assets.

The value of the three wineries is a point of contention in the case.

Legacy claimed in its filings that its wineries were worth a total of $90

million to $110 million. But Laminar challenged Sidhu's valuation claims,

calling them ''unfounded'' and ''hearsay.''

''Amazingly, the Debtor does not even name the investment bankers or the

appraisers, much less include any written work product or declarations from

these investment bankers or appraisers,'' Laminar writes.

David Hendricksen, chief operating officer of Legacy, said he was not able

to address the details of Laminar's claims, but called them ''posturing.''

''We are confident that their characterization is inaccurate,'' Hendricksen

said.

The company will outline additional facts in upcoming filings soon, he

said. The next court date is set for Wednesday.

While the biggest, Laminar is far from the only group owed large sums of

money by the Sidhus.

Legacy and a related company controlled by the Sidhus, Connaught Capital

Partners, owe $21.4 million to John Bryan, one of the founders of Freemark

Abbey.

Winemaker Richard Arrowood worries the longer the case drags on, the worse

the potential damage to the company's reputation and grower relationships he

worked so hard to develop over the years. While he is concerned about the

Arrowood name, he says his primary concern is in preserving the winery's

reputation for the sake of its employees.

''I'm going to do everything I can do to make sure that no matter how this

shakes out, the name Arrowood will not be brought down in this,'' Arrowood

said.

Vic Motto, a St. Helena wine industry consultant, said the Freemark Abbey,

Arrowood and Bryon brands are excellent, but their good name is imperiled by

the bankruptcy.

''Those brands are very well regarded through the country, and they've been

put in the hands of other people, and that is causing a lot of problems,''

Motto said.

You can reach Staff Writer

Kevin McCallum at 521-5207 or kmccallum@pressdemocrat.com.