It has been six months since Underground Cellar (UC) – the wine club that offered upgrades too good to be true – filed for bankruptcy under the DBA of Phoeno Wine Company.
In that time frame, the wine club’s founder, Jeff Shaw; the venture capital firm that was the major creditor; the Trustee for the bankruptcy case; and judge Karen B. Owens in Delaware are still wrangling for a solution.
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Several hearings and an auction have taken place in court, in mid-October, since I last reported on the case. During this period two new bidders and the Menlo Park-based lender TriplePoint (TP) Private Venture Credit Inc – that sank $8 million into the UC startup – have intervened trying to stop UC's former CEO, secretary and CFO Jeff Shaw from buying the company back. Bradley Coppella, a forensic accountant who is based in Philadelphia, who like me, lost thousands in purchases from UC, says that essentially, "the can got kicked down the road in terms of a final decision".
TP turned up its nose at founder Shaw's $600,000 offer to buy back the company and the venture capital firm made a "credit bid" to outbid Shaw. This proposal would have offered thousands of different creditors new terms with which they might retake possession of their wines.
However, Shaw’s original plan was to allow those who had purchased wines to have them delivered with an additional shipping fee; that was supposed to be included with the original purchase. The latest offer from TP would have consolidated more assets for the venture capital firm by adding a 30 percent fee in addition to the original price paid by customers who had already paid in full for the products. That would, in legal terms, intimate that TP owned the wine, which is still a point in question for the Delaware judge. According to Coppella, the judge voiced a big "shame on you" towards TP's move to double charge creditors who had already purchased the wines.
It all comes down to the legal definition of who owns these wines. The judge, according to Coppella, was not convinced that TP owned the wine –calling it a bona fide dispute in a motion – and was therefore justified to add additional charges to customers. He said that the judge might even insist that TP, in order to prove its ownership of the wines, file claims against all of the 24,000 creditors who purchased wine. The case has long been unusual, as the purchased wines were stored in a cellar operated by Shaw and only delivered on request by the purchasers/creditors.
So, the legal question remains if the creditors actually owned the wines they purchased if they weren't delivered directly to them. So, it comes down to a little technicality that the wines are still stored in UC's warehouse, at a cost of approximately $100,000 a month according to Coppella. As a result of the growing storage costs, the Trustee has petitioned to abandon any financial interest and all custody of the wine.
Coppella adds: "Whoever is determined to own these assets, there will be lots of customers who choose to abandon the wines or who don't get the notice. So, "whoever wins will have plenty of value left with $11.1 million in wine value in the inventory".
I recently sat down with Coppella to get further updates on the wine club that scammed thousands of consumers. Jeff Shaw and the Chater 7 Trustee Don A. Beskrone, of the Delaware-based law firm of Ashby & Geddes – which takes control of the debtor's assets and seeks to distribute them on behalf of the creditors – declined to comment for this story.
All responses have been edited for clarity.
Why did the Judge allow Triple Point (TP), the biggest creditor, to outbid Shaw?
The new developments are the result of TP choosing to exercise rights it has always had, due to its priority standing amongst the other creditors [former customers, vendors, etc.] The judge hasn’t really made a decision; she actually gave them a bit of an admonishment for doing this so late in the process and set a new hearing date for November 7, so that all stakeholders have a chance to weigh in on these new developments.
Why didn't Shaw’s offer provide enough value to TP?
Shaw’s offer of $600k [which may have been subsequently revised upward] meant that after the Trustee and others were paid, TP would have likely received a pittance relative to the value that Jeff stood to gain from the assets. This wasn’t sufficient in TP's view.
What happened to the other bids and bidders?
The Trustee made all bidders sign NDAs and I don't believe we know the identities of most, if any, of the other bidders. But with TP able to submit a credit bid of up to $8 million, no other bidder is going to beat that.
When did you say the case may be over?
With the sale to Shaw having fallen apart and the Trustee filing a motion to abandon the wine and end the bankruptcy case, unless TP and the other creditors reach an agreement very soon the case will be over.
The Trustee recognizes that prolonging the bankruptcy process will no longer provide any reasonable benefit to the estate unless the assets can be sold quickly, given the ongoing monthly warehouse fees, legal fees and other costs being incurred. [Coppella adds that the Trustee estimated the cost to be approximately $100,000 a month just for the warehouse.]
So, there will be no further hearings? Or objections to be filed?
The November 7 hearing, and October 31 objections deadline, is still scheduled to take place. That hearing will now likely determine whether the judge will approve the Trustee's motion to end the bankruptcy case, unless TP and the customers can reach an agreement before then.
How is this legal?
The Trustee has failed his fiduciary duty to act in the best interests of the estate. There is no evidence that he has pursued clawbacks against the UC executives who received large payouts [up to $70K for one employee in March as previously detailed in my other stories] right before the bankruptcy was filed. So, plenty of money has been left on the table that could have potentially been recovered to compensate TP and/or help fund the distribution of the customers' wine.
From day one, the Trustee has had a very close working relationship with TP while leaving the customer group in the dark. He has filed numerous documents under seal and made bidders sign nondisclosure agreements so that certain information doesn't become public. Despite the Trustee hiring accountants early in this case, we haven't been provided any accounting details such as a balance sheet with the assets and liabilities of the estate. All of the bidders presumably would have received this [including TP], so it's unclear why the Trustee doesn't believe that the other creditors have a right to this information.
Do you expect any wine to be left over? And what options do creditors have at this point?
The best hope at this point is that TP reaches a reasonable agreement with the customers so that the sale to TP can be approved and a mechanism put in place for customers to reclaim their wine.
Have any additional efforts been made to inform creditors about what is going on in the case?
While there isn't a lot of specific information that's required to be shared in a bankruptcy case. However, there is a US bankruptcy trustee handbook that outlines some of the requirements of a trustee, but I don't believe that the Trustee has fully complied with this. In a Chapter 7 case like this, with few liquid assets, the only people who get paid tend to be the ones running the show. Everyone else has to fight over the scraps.
Why is this case unique?
What is unusual about this case is that the majority of the remaining assets don't belong to the estate at all, they belong to the customers. As of right now, nearly six months have passed since the bankruptcy filing date.
The Trustee, his attorneys and accountants have only managed to get paid for this long because of the potential value that exists in those customer assets. And yet, he has shown no interest in resolving the question of who actually owns the wine, claiming that it is too logistically difficult to segregate and distribute each customer's wines.
Rather than incur six months of rent, the Trustee early on could have made arrangements for the warehouse or an outside contractor to come in and distribute the customer wine for a fraction of that amount, then auction off the remaining unclaimed wine to pay those parties' expenses and give the rest to TP. Instead, he has dragged out this case at the expense of everyone else, accomplishing very little in the process.
