In a section of a Napa Valley warehouse, more than half a million bottles of wine rest on pallets stacked 30 feet high. Every bottle was purchased by customers of Underground Cellar, a San Francisco-based internet retailer boasting 24,000 clients. Among a variety of perks, the bedrock promise of Underground Cellar was that it would store wine for free under ideal conditions until customers asked for delivery.
But last April, one of Underground Cellar’s lenders called in an $8 million loan, pushing the firm into Chapter 7 bankruptcy. All that stored wine, instead of belonging to the firm’s customers (who had already paid for it), abruptly shifted to the control of a court-appointed trustee.
That set up an ugly legal fight.
Like Winning a Golden Ticket
Underground Cellar was founded by Jeff Shaw, 38, with a tempting promise—buy wines at good prices and you might also get better wine than you paid for. Phoeno, the company’s subsidiary that is licensed to deal in alcohol, acquired wines in bulk purchases from wineries, distributors and auctions. It then packaged the wines by themes, ranging from West Coast reds and whites to Riojas.
The firm attracted customers with an adventurous, even gambling, spirit. They might not always get the wines they ordered, but when that happened, they were upgraded to wines worth more than what they paid—possibly much more.
“If you bought a box of $35 Napa Cabernets, you had maybe a .01 percent chance of getting a bottle of Screaming Eagle,” said Rachel Dannemeyer, a beverage consultant whose 40 cases are stranded in the warehouse. She compared that ever-so-slender possibility to “finding the golden [ticket] in the Willy Wonka chocolate pack.”
Many customers, including Dannemeyer, were drawn to Underground Cellar during the pandemic. “Everyone was in lockdown mode,” she said.” You couldn’t comfortably go into a shop or a restaurant or travel. And then this website sent out emails three times a day. With all the negativity out there, it was a fun way to buy wine.”
The Fun in Mystery Wine
The concept of the mystery boxes was hatched, founder Jeff Shaw told Wine Spectator, when he was a 10-year-old growing up in Arizona. “My parents bought me a pack of NBA trading cards,” he said. “I didn’t know which players I got until I tore off the wrapper. And there was a holographic card of the great Charles Barkley. When I started Underground Cellars, I thought, why not apply the same idea to mystery packs of wine?”
One source for those most-coveted wines early on was Texas customer Lance McCollough, who also made a small investment in Underground Cellar as a startup. “I was on eight to 12 allocation lists for the top Napa Cabernets,” McCollough said. “At some point, I said to myself, ‘You have too much freakin’ wine, Lance!’ So I let the company take over most of my allocations, including Harlan, Promontory and Bond. I kept only my Screaming Eagle and Hundred Acre. ”
Shaw was removed as CEO of Underground Cellar by its board in March 2022. Rather than grow the company modestly, he says, the board was looking for a “moonshot, maybe even being the next Snapchat.” A new CEO was brought in from Google, and the $8 million loan was secured from a large financial firm called Triple Point Venture Capital. (Neither Triple Point’s CEO nor its counsel responded to request for comment on this story.)
The company had been doing well during the COVID-19 pandemic, when people were drinking less wine at restaurants and more at home. Gross revenues grew from $14 million in 2021 to $21 million in 2022.
As late as February 2023, just three months before its Chapter 7 filing, in what seemed a sign of confidence in its future, the company purchased seven micro-lots of elite wines at the 26th annual Premiere Napa Valley wine auction. Open only to the trade, the auction offers lots of elite wines as futures. Some of Underground Cellar’s 2023 purchases will not be delivered until next year—into the hands of Triple Point.
Wine Sits in Legal Limbo
Underground Cellar customers have been unable to retrieve a single bottle from the warehouse for the last seven months. That’s when a message first appeared atop the company’s homepage stating that it had “shut down for all future ordering and shipping.”
Finally, just before Thanksgiving, clients were given a limited window to access their wine, but only if they pay a 21 percent surcharge based on their purchase price plus shipping costs—plus 3 percent if they opt to pay by credit card instead of by check.
The loss of the right to their wine did not sit well with many customers. “I want to clearly state that the stored goods are my property,” one of the disgruntled customers told a Delaware bankruptcy court judge at a hearing in October. “My name is on the account when I log in. It is not owned by the debtor; it is owned by the customer.”
“Having paid for something is not the same as owning it,” retorted a lawyer for Triple Point.
Until the stored wine was physically delivered to purchasers, Triple Point argued, it was still owned by the debtor’s estate. As such, the wine was subject to Triple Point’s lien on the assets of the bankrupt firm, including the wine.
In support of that claim, Triple Point referenced a similar 2009 struggle between customers of a bankrupt North Carolina wine retailer and its lien-holding bank. The ruling in that case was that title to the wine in the warehouse remained with the debtor, which was still paying insurance premiums on the wine.
Who Gets the Underground Cellar Wines?
The bankruptcy trustee’s original plan had been to sell Underground Cellar’s assets (negligible except for wine) to Liquid Lotus, a new entity formed by Shaw. The cash portion of Shaw’s offer was $600,000. That sum may have seemed paltry, but the clincher, in the eyes of the trustee, was that Shaw agreed to allow all Underground Cellar customers to recover their wine free of charge—either by picking it up at the warehouse or else by paying shipping costs to have it sent to them.
But then several other potential buyers stepped in, ready to pay more than Liquid Lotus. That meant the trustee was obligated to conduct an auction in order to reap the “highest and best” price on behalf of the firm’s creditors. Triple Point filed a winning bid of almost $5 million. Only $500,000 of that bid was cash—the rest is a “credit bid” of $4.5 million, a portion of the unpaid loan owed by the debtor.
Triple Point claimed that, as lien holder, the wine belonged to it. But presiding judge Karen Owen didn’t buy that. Before approving the sale, she wanted a plan in place that would allow customers to retrieve their wine from the warehouse at a reasonable cost.
That set off a dispute between Triple Point and the newly formed Ad Hoc Group of Wine Customers, whose more than 40 members had each paid between $1,000 and $65,000 for their wines, which they say are being held hostage. Initially, Triple Point floated a plan requiring customers to pay a hefty 30 percent surcharge over their wine’s MSRP (manufacturer’s suggested retail price), plus shipping costs, before releasing the wine. That was a “no go,” said Bernard Kornberg, a lawyer for Ad Hoc Group. “A lot of my clients had paid less than MSRP. They would be buying their wine all over again.”
In the testy battle that followed, Triple Point agreed to reduce its surcharge to 21 percent of the actual price paid by customers for their wine. Triple Point also agreed to allow customers whose paid-for wine could not be found in the warehouse (estimated to be 20 percent of orders) to receive alternate bottles so long as they paid the 21 percent surcharge.
The settlement with the Ad Hoc Group, Triple Point asserts, is costing it millions of dollars (compared to what it would have reaped if its first offer had been accepted). “Mr. Kornberg beat us up pretty good,” one of its lawyers told the judge.
Amid the struggle over ownership of the wine, rent on the warehouse was accruing at the rate of $105,000 per month with no funds to pay it. From the bench, Owen compared the plight of the debtor’s estate to a “melting ice cube.”
All requests to buy back customer wine must be received by email or postmarked by Dec. 8. After that, the wine will belong to Triple Point.
Sour Wine
Underground Cellars may be gone, but its records of customer purchases live on. They allow Last Call Capital, a fulfillment service hired by Triple Point, to determine who owns which wines in the warehouse and what they paid.
But on social media groups, some customers say that there are discrepancies not in their favor. “Last Call told me that I’d paid $783 per bottle of Shafer Hillside Select Stags Leap Cabernet Sauvignon,” a customer who asked not to be named told Wine Spectator. “There’s no way I’d ever paid that much for a bottle of wine. Yet they wanted me to pay 21 percent on top of that to get back my wine, plus shipping and a 3 percent credit card charge.”
Many customers complain about stiff shipping fees, often far exceeding the value of their wines. The fees are for cases only, so that getting a single bottle sent home costs the same as twelve bottles. As a result, some customers are choosing to select only their most expensive bottles for shipment, leaving the rest to Triple Point, or walking away altogether.
Had Jeff Shaw won back the company he created, he says his ultimate goal was to “rebuild the brand and its community of wine buyers.” Instead, he is now just another customer with wine stranded in the warehouse—“about 50 cases, mostly Napa Valley Cabernet.” Will he pay 21 percent of their value plus fees to retrieve them?
Shaw thought a moment before responding, “I don’t know if I’ll even bother to do that.”
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