BEDEVILED ENDEAVOR: How a family's best intentions led to one of the largest bankruptcies in U.S. wine industry history

Calvin and Dev Sidhu were once fond of telling wine writers that they named their wine company the Legacy Estate Group because they were building a wine empire as a legacy for their children.

Their family had a 400-year history of farming in the Punjab region of India, and the brothers wanted to keep that agricultural tradition alive through a wine company made up of 10 to 12 premium wineries in California, Oregon and Washington.

Instead, the Sidhu brothers have left a Wine Country legacy of broken promises, embittered former business partners and one of the largest bankruptcies in U.S. wine industry history.

The bankruptcy, filed in November, was triggered when Legacy defaulted on $53 million it borrowed to purchase two wineries in March 2005 -- Arrowood Winery & Vineyards in Glen Ellen and Byron Winery on the Central Coast.

But the roots of the company's current troubles reach back long before those ill-fated acquisitions, to a time when the Sidhus were transitioning out of the ailing Washington apple industry into the booming California wine industry.

To help finance that shift, the Sidhus borrowed money from agricultural lender Farmer Mac, using the family's orchards as collateral. That $1.9 million loan has both helped and hindered the Sidhus as they tried to assemble a portfolio of wineries.

It helped by allowing them to develop their first wine industry property -- a 600-acre ranch near Paso Robles they sold for a $2 million profit.

But it also has frustrated their efforts to attract new financing. Instead of repaying the loan, the Sidhus defaulted in early 2001 and invested the profits from their vineyard sale in the venerable Freemark Abbey Winery in St. Helena, the first of three wineries that today make up Legacy.

That decision, and the lawsuits that followed, have bedeviled the Sidhus ever since. The brothers found themselves forced to seek alternative, more expensive funding sources that ultimately drove their company into bankruptcy.

The $95 million bankruptcy entered a critical phase last week, leaving the Sidhus just a few weeks to come up with a new financing package to prevent the company from being sold out from under them.

If they cannot, 450 creditors and a bankruptcy judge will decide the Sidhus' legacy in Wine Country for them.

Calvin and Dev Sidhu grew up in Washington, where their father, Jarnail Singh, an immigrant from the Punjab region of India, owned several apple orchards.

In the late 1990s, the U.S. apple industry went into a freefall. American apple producers saw their prices plunge 65 percent in just three years as China flooded the market with cheap concentrate.

In addition to the deteriorating market, the family's orchard business faced other challenges.

In 1999, a group of migrant farmworkers was suing Singh and his farm operation, called Ram Farms. The two brothers were intimately involved in managing the farm, which was accused of a variety of wage and housing violations. A jury would side with the farmworkers a year later, awarding them $170,000 in damages.

That wasn't the only problem the family faced. Singh, a Canadian citizen, also owed $143,000 in back taxes to the Canadian government, which sought to recover the debt by attaching a lien on his Washington orchards.

At the same time, the U.S. wine industry was basking in a period of strong demand that was pushing premium grape prices toward their highest levels ever.

Calvin Sidhu, then in his early 30s, saw an opportunity to exit a declining industry and enter a growing one.

But that took money he didn't have. He turned to a veteran Spokane banker, Chuck Johnson, to help him identify wine industry properties and people who might loan him the money to buy them.

Johnson was immediately impressed with Sidhu's energy, optimism and financial acumen.

"He is one of the brightest, most charismatic people you will ever run into," said Johnson, who later went on to be chief operating officer of Freemark Abbey, the historic St. Helena winery Sidhu gained control of in 2001. "He considers himself a financial engineer."

In early 1999, Johnson helped the brothers locate a 640-acre ranch in Paso Robles with a potential for vineyards and a private investor willing to loan them the money to acquire it.

Then, in a financial maneuver with far-reaching consequences, he put them in touch with a Sonoma lender called Vintage Capital to help them borrow less expensive money through Farmer Mac.

Vintage Capital's owners, Robert and Ami Cheri Hower, helped devise a way for the Sidhus to borrow money backed by orchards owned by their father. Because he was not a U.S. resident, he was not eligible for a loan from Farmer Mac, a government-backed agricultural lender.

So the family created Ram Investments, a partnership with Calvin Sidhu as 51 percent owner and younger brother Devinder and their father as partners in the venture, according to court filings.

In July, they shifted two of their Washington orchards into Ram Investments. Using the orchards as collateral, the new company three months later took out a $1.9 million loan from Farmer Mac.

This loan would prove crucial to the brothers' aspirations in Wine Country. It allowed them to refinance and continue developing the vineyard property, which they sold in 2000 for $3.3 million. They later shifted their profit from that sale into Freemark Abbey.

But the Farmer Mac loan also has haunted the Sidhus.

Not long after selling the Paso Robles property, they defaulted on the loan in early 2001. Farmer Mac foreclosed on the orchards in Washington, and when selling that property didn't satisfy the debt, the lender came after Legacy's new assets in California.

Farmer Mac also sued the Howers and canceled its contract with them to originate loans.

Hower said he believes the Sidhus defaulted on the loan because they had made a business decision to exit the apple industry.

"They damaged the industry because they pulled a great lender that really enjoyed the wine industry from the market," Hower said.

Ami Hower said the loss of the right to package Farmer Mac loans and subsequent litigation was a huge blow to their company.

"I suppose what we could say is we made a loan and we bought the farm," she said.

Calvin Sidhu, whose formal first name is Kulwinder, and his younger brother, Devinder, who also has gone by David, both declined requests for comment over the past three weeks. Their father could not be reached for comment.

In April 2000, four days after losing the $170,000 migrant worker lawsuit in Washington, Jarnail Singh moved his Paso Robles property into Ram Investments. The court found Ram Investments liable for the judgment, which it paid.

Later in 2000, Ram sold the property to the Brown-Forman company, the owners of Fetzer Vineyards, for $3.3 million, land records show.

With the profit from that sale, the Sidhus created The Legacy Estate Group and began trying to acquire wineries.

Freemark Abbey in St. Helena was an attractive candidate for acquisition because it had an excellent reputation but weak marketing, and its founders were getting older, Johnson said.

Founder John Bryan immediately liked Sidhu. They struck a deal for Legacy to buy out Bryan's partners using a small amount of equity from the Sidhus, but mostly a bank loan, Johnson said.

The sale has been estimated at $35 million.

Johnson was thrilled to have landed the deal, but his euphoria didn't last long. He served as the winery's chief financial officer for about year before he was pushed out, he said.

"My usefulness ran out after we got the Freemark Abbey deal done," Johnson said.

Legacy continued searching for wineries to buy, but the Sidhus had a tough time putting together other deals.

In late 2001, Sidhu agreed to buy Gordon Brothers Cellars in eastern Washington for $3 million. Talks continued for months, delayed time and again by Sidhu's failure to come up with promised financing for the deal, according to court filings.

After making partial payments, Legacy took over management of Gordon Brothers in July 2002. The rest of the purchase price, however, never arrived. By early 2003, Jeff Gordon learned that Legacy had failed to pay grape growers and that the winery was being sued by a barrel supplier that also had not been paid, according to filings.

Legacy also had defaulted on a $500,000 loan it had guaranteed, and Bank of the West sued to get its money back. At one point, Calvin Sidhu said the financing never materialized because lenders had learned about a lawsuit from another transaction and refused to make the loan, according to filings.

It took Gordon more than a year to wrest control of his winery away from Legacy, which he did in March 2004 by foreclosing on the property. Gordon declined to comment, saying he wanted to put the whole affair behind him.

"It was a pretty ugly situation," Johnson said.

Freemark Abbey employees, who were told their winery was the first of many acquisitions, began taking notice when deals either fell through or never closed.

"We'd hear they were close to a deal, and then we never really heard anything else. They just kind of went away," said former winemaker Tim Bell, who left earlier this year to join Kunde Estate Winery in Kenwood. "It seemed odd."

Even as Legacy's Gordon deal was foundering, the Sidhus were making offers on other wineries, including the small Behrens & Hitchcock winery on Spring Mountain in Napa.

Owner Les Behrens said he and partner Joe Bob Hitchcock were thinking about ways the aging Hitchcock could sell his stake in the business when they were approached by Sidhu and Steve Cousins, the chief operating officer for Freemark.

Cousins and Sidhu offered a "crazy amount of money" for the winery, Behrens said. He became skeptical when they began talking about a purchase that included promissory notes but was willing to go forward with the deal anyway.

"Calvin can obviously charm the pants off a snake," he said.

The deal never happened because "they wouldn't come up to the plate" when it came time to hand over the money, Behrens said.

Cousins said the Behrens & Hitchcock purchase was "a done deal" but that "Calvin didn't come up with the money." Cousins left Freemark Abbey in March 2005, just before Legacy's purchase of Arrowood and Byron.

The deal for those two wineries involved Legacy borrowing $53 million from a Texas hedge fund called Laminar Direct Capital. Legacy used the money to buy Arrowood for $25 million, Byron for $15 million and the rest to restructure debt at Freemark.

Legacy turned to Laminar after its initial deal to buy the wineries from Constellation Brands fell apart when its original bankers backed out, according to people familiar with the deal.

The Sidhus soon defaulted on the high-interest loans, blamed Laminar for being inflexible and then filed bankruptcy in November, shortly after the end of the 2005 harvest.

Laminar has accused the Sidhus of promising to contribute $6 million in equity toward the deal, but then never coming up with the money after the deal closed. It also accused them of mismanaging the wineries. Legacy, which reported

$17 million in revenues last year, posted $11.5 million in losses in 2005.

Hower has watched the Legacy bankruptcy case because it involves allegations similar to those he accused the Sidhus of in the Farmer Mac case, namely fraud and misrepresentation to acquire a loan, and then defaulting on it.

"There is a pattern here," Hower said.

In 2003, Farmer Mac sued the Howers, claiming they caused it to fund a bad loan, and the Howers turned around and sued the Sidhus, claiming fraud.

Farmer Mac claimed it never knew about the Canadian tax lien or that one of the orchards contained an open pit waste dump and underground storage tanks. The case went to trial earlier this year in San Francisco, and a jury awarded Farmer Mac $1.5 million.

The Howers were preparing to continue their lawsuit against the Sidhus when the judge urged everyone to settle the cases, according to John Carey, the Howers' attorney.

The settlement reached two months ago called for the Howers to pay Farmer Mac $250,000 and the Sidhus to pay $400,000 by September. If the Sidhus failed to pay by then, their amount will increase to $2 million and become a fraud judgment, Carey said.

A fraud judgment would be particularly damaging because it cannot be wiped out by a bankruptcy filing, Carey said.

The Sidhus wanted to settle the case in part because they were courting new investors for their bankrupt company, and a pending federal court judgment could have spooked potential investors, he said.

The Sidhus are now entering a critical phase of the bankruptcy case. They have until Aug. 16 to pull together an investment plan that will allow them to remain in control of their wine company.

The lead bidder, a group headed by the family that owns Quintessa winery in Napa, indicated in court filings it did not plan to rehire the Sidhus if their bid was chosen.

Richard Arrowood, who founded his winery in 1984 and remains winemaker, said he welcomes the prospect of an owner who understands the industry and can restore the confidence of Arrowood's business partners. He feels horrible about the hardships the bankruptcy has created for the winery's employees, suppliers and growers, and he blames it on the cavalier attitude of those behind the deal.

"It seems to me that this management group is not about producing the best wines. It's about doing the best deal, no matter who gets hurt," Arrowood said.

You can reach Staff Writer Kevin McCallum at 521-5207 or kmccallum@pressdemocrat.com.