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Barrel sales- not futures


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I have someone interested in having us create a barrel of product for them personally. (We realize we need to sell it bottled upon completion and our state does allow direct sales to consumers). Of course this has me thinking there are likely others who would be interested in this.

This would appear to be a pre-sale since we plan to actually have product available to them once aging is done. Any money that initially changes hands could be considered a deposit and no guarantee to buy it back is offered therefore I don't think this would be considered a futures program and would avoid severe regulations.

So, is anyone doing this?

Can this simply be considered a pre-order?

Can it be considered the customers property even when it's in bond on my DSP?

Anyone know a good attorney who would have experience with contracts for such a program?

Thanks for any feedback,

Rob

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There are many distilleries that are doing this. Some call it "Adopt A Barrel". I have seen another one call it a "Cask Club".

It basically allows the distillery to pre-sell a barrel while it ages in the bonded warehouse.

Then the customer can have it all bottled whenever they want at whatever proof they want.

Most of these programs are for 1 or 2 years and the barrels are the smaller sizes, not the full sized 53 gallon barrel.

"Can it be considered the customers property even when it's in bond on my DSP?"

Yes. The distilleries that do this assign it a code and often give the customer a certificate of ownership.

But it cannot leave the bonded warehouse. I suppose the customer could do an in bond transfer to another DSP if they wanted to make those arrangements.

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Teton,

Have you looked into the legalities of this? Do you know an attorney experienced in this? I'm finding it hard to believe that someone who is not the DSP can own a barrel within the DSP. Anyone can print a certificate saying so, but does that customer truly legally own that barrel? I hope you're right but I'm not confident without some legal expertise saying so. A lot of distilleries like to do what they want and ask forgiveness later. I'm not comfortable with that strategy.

Rob

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Teton,

Have you looked into the legalities of this? Do you know an attorney experienced in this? I'm finding it hard to believe that someone who is not the DSP can own a barrel within the DSP. Anyone can print a certificate saying so, but does that customer truly legally own that barrel? I hope you're right but I'm not confident without some legal expertise saying so. A lot of distilleries like to do what they want and ask forgiveness later. I'm not comfortable with that strategy.

Rob

If you want to pay a clueless lawyer $300 per hour to tell you the obvious, so be it.

I don't have that much faith in lawyers to figure it out in a reasonable amount of time.

Most lawyers went to law school because they couldn't get a job with their liberal arts degree and math was too difficult for them.

A little research on the internet makes it fairly clear that this is not an issue if structured properly.

Heritage Distillery Cask Club

http://www.heritaged....com/cask-club/

Mississippi River Distilling Adopt a Barrel

http://www.mrdistill...ptabarrel.shtml

Oregon Spirit Distillers Adopt a Barrel

http://oregonspiritd...adopt-a-barrel/

Jack Daniels By The Barrel

http://www.jackdanie...m/by-the-barrel

Or in the alternative, you can also just sell them a kit with an empty barrel and a bunch of bottles of un-aged white dog whiskey.

This one is for two bottles of 750 ml and a 2 liter barrel.

http://www.woodinvil...wn-whiskey-kit/

But logically, you could even scale that up and sell someone a kit with a 53 gallon new barrel and enough 1.75 liter bottles of White Dog whiskey to fill it up.

Then the person could age it at home without a DSP. There is nothing illegal about that at all. As long as they pay for the White Dog legally, that is perfectly legal to do.

Although I think most people would be more comfortable owning a barrel below 10 gallons in size.

That is likely enough to last a lifetime.

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Anyone can own a barrel of whiskey. The bond covers the whiskey on the premises, regardless of ownership. Many people/organizations/etc own whiskey that is stored on the premise of MGPI, for instance. A DSP isn't required.

Of course, the (full) barrel can't leave the premise unless it moves under a TIB. The barrel must be dumped, put into bottles, and sold in bottle form. Then the bottles can be sold to that individual, or through the 3-tier system, depending on your legislation.

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Thanks for the replies. Teton, our business is to the point where I don't want to put anything at risk. Lawyering up is expensive but in the long run it is cheap insurance in the event you are doing something wrong or piss off that barrel customer. I asked because I assume (and may be wrong) that some of those companies you list did use an attorney to make sure contracts are legally sound. It was my hope someone who is doing one of these programs would have responded with an attorneys name.

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Thanks for the replies. Teton, our business is to the point where I don't want to put anything at risk. Lawyering up is expensive but in the long run it is cheap insurance in the event you are doing something wrong or piss off that barrel customer. I asked because I assume (and may be wrong) that some of those companies you list did use an attorney to make sure contracts are legally sound. It was my hope someone who is doing one of these programs would have responded with an attorneys name.

Lawyers are not insurance. The opinion of a lawyer is not worth much at all and it won't protect you worth squat if the government has another opinion.

I have seen too many worthless lawyers operate to ever think that they provide anything useful to the business. Lawyers are typically the cause of business failure, not success.

You are best off to just avoid them. They charge too much and the info they provide is worthless.

It is typically just BS that they make up on the fly and drag out so they can add on a few more hours to the bill.

If you need any legal documents, 99% of what you need can be purchased from Legalzoom.com or some other online kit.

The bulk of real legal work is boilerplate copy and paste, change a few names and dates, then print.

Anyone who pays a lawyer $300 per hour these days is just throwing their money away.

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Bobby,

I'm pretty sure you're fine in all you've decided to do (with the stipulation that you'll package and sell via the laws of distribution in your state). However there are a few items about ownership that I don't think are clear here:

  • Until packaged and sold, the barrels and the contents of the barrels are owned by your DSP and no one else. For instance, if you go bankrupt, the bank and court will seize those barrels and sell them as an asset to recoup losses from the bankruptcy. Why is that?
  • Look at it another way. The product is under your license, under your bond, under your insurance, etc, etc, etc. Even if your customer came to you and said they wanted to TiB to another facility, you can say you've never heard of them and hang up the phone. They have no recourse, of any kind, because they cannot prove ownership of the product to the TTB, they have no records with the TTB, nothing. They can't make claim to the hooch.

Now.....counterpoint in a strange way. JohninWV is 100% correct, about booze being owned by others, but in the final analysis, they can't make claim to it unless they have a DSP or Federal Basic Permit. Without those, they are like every other person in America and limited to owning product that they are able to buy via the 7 approved package sizes (which Bobbyb, sounds like what you're doing) . Their claim to ownership is strictly at the behest of the person/organization who has the booze under their bond.

JohninWV, to continue, if MGP/LDI files Chapter 7 or 11 tomorrow, all of the booze under their bond becomes the property of the bankruptcy unless it has been paid for in full including storage fees for at least 6 months up front. And even then, I believe that the bankruptcy court will only release the value of the barrel at purchase and only then at a heavy discount once the liquidation process is complete.

Hopefully not something we'll have to see, but I suspect that this issue will come up in the next few years and the courts will have to set a precedent...unless someone knows of a precedent already on the books?

Cheers,

John

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  • Look at it another way. The product is under your license, under your bond, under your insurance, etc, etc, etc. Even if your customer came to you and said they wanted to TiB to another facility, you can say you've never heard of them and hang up the phone. They have no recourse, of any kind, because they cannot prove ownership of the product to the TTB, they have no records with the TTB, nothing. They can't make claim to the hooch.

That is completely divorced from the way the real world works. If you accept payment for a barrel of whiskey and you are charging the owner fees for storage, there is a clear record. There are also going to be emails or a basic contract identifying the code number of which barrel is yours, the date you bought it, the credit card transaction or check cleared, etc. Then you ignore the customer when they call? Seriously?

The record of the check clearing through your distillery bank account would be enough in just about any small claims court. The judge would grant a judgement against you and it wouldn't even take a lawyer to accomplish something so basic. Then someone would go online and create a website called "(insert name) distillerysucks.com" and describe everything that went down.

Until packaged and sold, the barrels and the contents of the barrels are owned by your DSP and no one else. For instance, if you go bankrupt, the bank and court will seize those barrels and sell them as an asset to recoup losses from the bankruptcy. Why is that?

The world doesn't function like that either. If the customer has proof that they own the asset (proof of payment, number of barrels, etc) and it is just being stored in your warehouse, then the bankruptcy court would quickly grant a motion to allow the owner to transfer those barrels to another bonded warehouse. Those are not assets owned by your DSP. You are just being paid a storage fee to hold them in bond.

Anyone who does this on any large scale would make these points quite clear in the contract.

If a Self Storage facility declares bankruptcy, all of the stuff inside of the units is not the property of the storage company to be declared as an asset to be sold to satisfy creditors.

if MGP/LDI files Chapter 7 or 11 tomorrow, all of the booze under their bond becomes the property of the bankruptcy unless it has been paid for in full including storage fees for at least 6 months up front. And even then, I believe that the bankruptcy court will only release the value of the barrel at purchase and only then at a heavy discount once the liquidation process is complete.

It wouldn't happen like that at all. The owners of the barrels (Diageo) would file a motion with the bankruptcy court to transfer their barrels to another bonded warehouse. Secured creditors do this on a regular basis in bankruptcy court. It would be granted by the bankruptcy judge without opposition by the bankruptcy trustee because it is so common. It happens all of the time with banks that are secured creditors for property that is in bankruptcy.

I doubt the barrels would even be listed as assets of the company (MGP/LDI) in the bankrupcty filing. It is a silly concept for a storage facility that declares bankruptcy.

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Just a little something to further muddy the water. Teton is right on in his comments. Just so every one remembers, THE FEDERAL GOVERNMENT will own any and all spirits produced as their Lien is first in line with the bank or share holders second. Until all federal taxes are paid. Remember the TTB only wants to get paid the taxes owed on the produced spirits, the rest is up to you. I have been selling pre-paid liquor for over 5 years. Coop

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A future is a contract, not a direct ownership. It is a contract to own. So, until delivered, the item belongs to the DSP. The future states that the purchaser has rights to receive that item when released. I believe most barrel pre-purchase schemes are actually futures. That was how it was done when everyone was buying scotch in Scotland.

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The programs I have seen involved the distillery actually selling the barrel of whiskey or bourbon. It typically includes storage costs for 1 or 2 years. If the owner is not ready to bottle his whiskey or sell it back to the distillery, then there may be additional storage fees to age it longer.

Your barrel is marked with an actual code and even your name on it for identification purposes. You can visit your barrel, sample it to see if it is ready for bottling, etc. The entire process is a full blown experience over a few years for the owner of a single barrel.

On a larger scale, when LDI was sold to MGP Ingredients back in 2011, one of the articles mentioned that LDI does not own most of the barrels that are in storage in Indiana. They are mostly owned by other brands and just being aged at LDI.

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The latter case would probably be warehousing, technically. I am still not sure that you can do that for someone who is unlicensed. Time to check the CFR, but it sounds like something they would prevent. Otherwise a mob boss could own the entire contents of a rickhouse.

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Let me see, you have been a member for 6 days, we have no information on you? Where do you live? What is the name of your distillery? Do you have a DSP permit? We need to know these things to recommend a lawyer. Why recommend one from California if you are in NY? Coop

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Coop,

I appreciate your points- well taken. While I haven't posted before, I've lurked here for quite some time. I prefer to remain anonymous for personal reasons I'd rather not go into- lets just say a job change is imminent and includes this project. I will say I do currently work at a DSP. I didn't think this information was relevant because my concern isn't on the state level, it has more to do with fear of violating federal laws- I have a pretty good handle on our state laws. The problem is there are very few attorneys that have knowledge of securities and ALC beverages.

So, you said you've been selling prepaid for 5 years, do you use some sort of contract with your customers? Is it a "lawyer approved" contract?

Thanks,

Rob

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Coop,

I appreciate your points- well taken. While I haven't posted before, I've lurked here for quite some time. I prefer to remain anonymous for personal reasons I'd rather not go into- lets just say a job change is imminent and includes this project. I will say I do currently work at a DSP. I didn't think this information was relevant because my concern isn't on the state level, it has more to do with fear of violating federal laws- I have a pretty good handle on our state laws. The problem is there are very few attorneys that have knowledge of securities and ALC beverages.

So, you said you've been selling prepaid for 5 years, do you use some sort of contract with your customers? Is it a "lawyer approved" contract?

Thanks,

Rob

The state also matters, very often it is their implementation of the tier and no-tie laws that partially govern the TTB requirements relevant to things like direct sales to retail, including in barrel. So you need to get a lawyer for your state.

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Both state and Federal are involved. Without knowing what state you are in any of us here might be giving you bad advise. I understand a change in you life is immanent but not a good reason for bad advice. I agree with Teton about lawyers only because unless you live is say Kentucky, you will not find a liquor lawyer. I sold my distillery well over a year ago so it does not matter to me where you are. My next one will be in Western Australia. Coop

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  • 1 month later...

Heated topic, but love the conversation. (sorry for the bump)

I just want to clarify that pre-sell / futures / whatever other semantic used is different than barrel sells correct? As in, if a liquor store wants to purchase the entire contents of a barrel then the DSP holder would process it per usual and simply ensure that they got their specific liquid, correct?

thanks,

NAB

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