Black founders of Healdsburg's Esterlina Vineyards accuse bank of discriminatory lending

Members of a prominent African-?American wine family are alleging their bank steered their Healdsburg winery into costly high-interest loans because they are black, triggering a downward spiral that forced them to file bankruptcy and relinquish their winery.

Brothers Eric and Craig Sterling, whose family founded Esterlina Vineyards and Winery, leveled the allegations of discriminatory lending in a new complaint filed last week against the winery’s lender, Bank of the West.

A bank spokeswoman declined to comment Monday on the allegations, the latest salvo in a yearlong legal battle between the Sterling family and Bank of the West.

A U.S. Bankruptcy Court judge granted the bank permission Friday to take ownership of the Healdsburg winery, according to court records.

The bank, in turn, is selling the Esterlina production facility, tasting room and 20-acre estate above Dry Creek Valley to vintner Eric Flanagan, according to court records.

The Sterling family, which retained the Esterlina brand and a sister wine brand, Everett Ridge, announced the sale to wine club members on Friday.

“The Esterlina and Everett Ridge labels will be sold in a separate transaction. One of which we hope to be able to purchase. We do not know the plans of either the new facility owners or the new Esterlina or Everett Ridge brand owners (if it isn’t us),” the email stated.

The Sterlings were one of a handful of African-American families to own a winery on the North Coast, where the vast majority of winery owners and top managers are white.

In their fight against Bank of the West, the brothers have hired San Francisco attorney Waukeen Q. McCoy, who represented a group of African-American women in a racial discrimination suit against the Napa Valley Wine Train last year. The women, who were kicked off the train and accused of being overly loud and boisterous, received an apology from the train’s CEO and settled the case in April for an undisclosed sum.

In an interview, McCoy said he wants a hearing in front of a judge to examine the Esterlina loans. He said it may not be enough to allow the Sterling family to regain control of the winery, but he intends to hold Bank of the West accountable for the family’s losses.

“That would be a hefty sum,” McCoy said.

The family entered the wine business in 1995, when Murio Sterling began growing grapes in Sonoma County’s Alexander Valley.

In 2000, Sterling and his four sons purchased a tiny hilltop winery in Mendocino County and launched Esterlina - Spanish for “sterling.” By 2005, it was doing $1 million in sales, according to court records.

They purchased Everett Ridge Winery in Healdsburg in 2006 and moved Esterlina into the facility in an attempt to expand their business.

A series of loans made by Bank of the West to finance the acquisition and operation of the Dry Creek Road winery are at the heart of a cross-complaint filed last week in Sonoma County Superior Court by the Sterling family as they battled with the bank for control of the property.

The family was overdue on $7.2 million in loans from Bank of the West by April 2015, according to a bankruptcy court filing. Craig Sterling, an attorney, and Eric Sterling, a physician, personally guaranteed the loans, according to the court filing.

In their complaint, the two brothers alleged Bank of the West put them into loans with higher interest rates and less favorable terms than loans provided to white vintners in similar situations, in violation of various civil rights laws.

The chain of events began in 2006, when the Sterling family began working with Bank of the West to acquire their Healdsburg winery. The Sterlings alleged the bank reneged on a promise to provide financing to buy the property, forcing them to use a bridge loan while long-term ?financing was arranged.

The brothers alleged that a bank officer said the bridge loan was only going to be temporary and replaced with a more favorable loan in one to two months.

The family went along with the terms or they risked losing a $315,000 deposit on the winery, McCoy said.

Their complaint alleges the 13.5 percent interest rate for the bridge loan “was far higher than rates offered to comparative white owned and/or non-African-American owned business, and in fact was higher than rates then offered to credit card holders with no security.” The brothers contend they were not able to reduce the principal on that loan, despite paying “tens of thousands of dollars” to the bank.

The Sterlings allege the bank convinced their company to amend their loan in 2007 and enter an interest rate swap agreement because rising rates could place the winery in financial jeopardy.

“In fact, BOW (Bank of the West) did not expect interest rates to rise; it expected interest rates to fall because the financial markets were becoming very soft as the housing crisis progressed to the Great Recession,” the two alleged.

The bridge loan was replaced with a term loan for up to $3.4 million at the prime rate plus 2.1 percent. The bank also required Eric Sterling to take out an additional $1.95 million loan to refinance another loan he had made.

The brothers alleged that after the agreement, interest rates dropped significantly, but their termination payment would be $1 million to break the agreement. They alleged they paid about $300,000 annually more than they should have.

“Even as BOW’s representatives knew that Esterlina was in dire financial distress, BOW chose to do nothing to fix a problem it helped create,” the cross-complaint reads.

The two also alleged that the bank rejected a request to renegotiate the interest rate swap agreement, “which would have allowed the company to operate normally.”

The family has been attempting to sell the winery for at least two years, according to the lawsuit. They alleged the bank improperly injected itself into the sales process in December 2014, thwarting a deal.

Bank of the West filed suit against the two brothers in Sonoma County Superior Court in April 2015 over the unpaid loans.

The Sterling family filed bankruptcy in August 2015 to stop foreclosure proceedings initiated by the bank. The bank’s proposal to acquire the winery for a credit bid of $325,000 was approved Friday by U.S. Bankruptcy Judge Thomas E. Carlson, court records show.

Flanagan, the buyer lined up to purchase the Sterling property from Bank of the West, said in an interview Saturday that he expects the deal to close sometime this week. Flanagan has secured a $5.2 million loan from Live Oak Bank to purchase the holdings, court records showed.

He is the proprietor of Flanagan Wines and part of an investment group that last year bought a 32-acre vineyard near Occidental planted by former tech and wine executive Lew Platt.

As of Friday, Esterlina winery was shuttered, according to the family’s email.

Stephen Sterling, who served as vice president of sales and marketing for the business, said the family still retains vineyards in the Cole Ranch appellation in Mendocino County.

Stephen has served on the board of directors for the Wine Business Institute at Sonoma State University.

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell..