From Wine to Vinegar : When Winery Dispute Escalates Into Who Owes What to Whom, High Society Feels the Strain

Champagne maker John Culbertson is no stranger to the pitfalls of his fickle business. Like that time in 1983 when the refrigeration units at his Fallbrook winery failed, causing hundreds of bottles to explode.

More than two-thirds of that 1983 bottling flowed into an avocado grove, leading Culbertson to remark: “You’ve got to have deep pockets in this business.”

Culbertson thought he had found such pockets four years later when he and his wife, Martha, brought John and Sally Thornton into the business as silent partners. Finally, the Culbertsons could relocate their home-grown champagne winery to a resplendent new setting in Temecula’s wine country, while continuing to produce still, non-sparkling wines at their Fallbrook estate.

By 1991, the Thorntons--multimillionaires, philanthropists, social centerpieces--had invested more than $15 million in cash, loans and guarantees in the winery, enough to claim 75% stock ownership of the struggling business, their court papers show.

Still, according to legal documents, the winery was losing money, like so much champagne pouring into an avocado grove.

Last February, the Thorntons’ legal papers state, the winery’s controller told them he had located a leak in the winery coffers: the Culbertsons.

The Culbertsons, the Thorntons alleged they learned, had taken $2 million from the winery--sometimes nickel-and-diming the corporation, sometimes writing themselves wholesale checks to bail them out of financial jams.

With that disclosure, the warmth of the Culbertson-Thornton union, built on shared social circles and moneymaking dreams, chilled quicker than a bottle of cuvee rouge on ice.

The Thorntons fired the Culbertsons in March, evicting them from the winery that bore their family name.

The Culbertsons responded with equal hostility. Last June 10, they sued to reclaim the winery. They , not the Thorntons, were the victims, the Culbertsons claimed.

“Through a series of fraudulent transactions as well as coercive tactics, John M. Thornton has improperly seized control of the Culbertson Winery Corp.,” the Culbertson lawsuit alleged.

The Thorntons “were obviously monitoring the Culbertsons’ financial situation so that John M. Thornton would know when the Culbertsons were most vulnerable to his financial strong-arm tactics,” the Culbertson suit reads.

And if that weren’t enough, the Culbertsons complained, the Thorntons now wanted a lien on the Culbertsons’ 27-acre estate in Fallbrook, the winery’s birthplace.

The Thorntons “obviously were not satisfied in taking away our family business; now they want our family home as well,” John Culbertson said.

The Thorntons responded with their own lawsuit a month later, alleging that the Culbertsons had fraudulently induced them to invest in a losing operation.

The Culbertsons, the Thorntons charged, had systematically looted the winery to pay the mortgage on their Fallbrook ranch. Thus, the lien.

Today, 11 months and seven volumes of legal papers after a bloodletting board meeting, the two couples have been ordered to work it out with a mediator.

It’s time to simmer down, Superior Court Judge Robert J. O’Neill said last month.

So for now, neither side talks publicly about the lawsuits that have torn their lives asunder. Attorney’s orders and all that.

“This is a horribly complicated, complex thing,” says John Thornton. “I feel very strongly about it, but that doesn’t enable me to talk about it.”

Says John Culbertson, who also declined further comment: “The feelings are high on both sides . . . but we want to get this behind us.”

There is a lot to get past.

The Culbertsons blamed the Thorntons for any financial trouble at the winery. John Thornton, widely regarded as a savvy venture capitalist, decided that the winery should expand its production and marketing efforts, “although the Culbertsons warned him that to do so would require huge expenditures of funds, result in large debt service, and would not show a profit in return for several years,” the Culbertson lawsuit alleged.

In the meantime, the Culbertsons alleged, the Thorntons cleverly worked to control the business by manipulating corporate laws; converting non-voting shares of stock to common, voting shares, and then taking still more stock--ultimately 75%--in exchange for their investment.

All the while, the Thorntons charged “usurious interest rates” on loans to the winery and claimed the majority of the business losses for their own tax benefit, the Culbertsons claimed.

The Culbertsons said they believed that an irrevocable proxy allowed them to share 50-50 control with the Thorntons over membership on the four-member board of directors.

How, then, could the Thorntons vote the Culbertsons off the board?

Simple, the Thorntons responded in legal papers. That proxy agreement had a caveat: The proxy was void if the Thorntons weren’t repaid. And the Culbertsons abused their powers as officers by taking winery funds, the Thorntons’ contended. So the Thorntons unilaterally withdrew proxy votes that had been the Culbertsons’.

John Culbertson was outraged.

“It was never explained to me, orally or in writing” that the Thorntons could revoke the proxy, Culbertson said in an affidavit. “Moreover, it was not explained to me that there was any possibility of losing control.”

The court files contain a letter from the winery’s legal counsel to the Culbertsons explaining how they controlled 1,100 voting shares of Thornton stock in the winery.

“This will effectively assure that you will always be able to control two seats on the four-member board,” the letter from attorney David Dick reads.

Culbertson said in his lawsuit that he came to understand how he had gotten himself into the jam. Another attorney with the law firm that represented the winery, Gray, Cary, Ames & Frye--the very law firm giving advice to Culbertson on the proxy matter--was corporate counsel for another Thornton company. That lawyer, John Byrne, became president of the Culbertson Winery when founder Culbertson was ousted. This was a classic case of conflict of interest by an attorney, Culbertson alleged in court, because he was receiving legal advice from a law firm even though one of its attorneys was a Thornton man.

The Thorntons responded with their own allegations:

* When a $4.3-million loan to construct the new Temecula winery was secured, John Culbertson cut himself a $633,000 check from the proceeds to help pay his Fallbrook home mortgage.

* In December, 1990, John Culbertson ordered a $40,000 check “under the guise of reimbursement for travel expenses” when there either was no such travel or it had already been reimbursed. That same day, Culbertson wrote himself a $56,000 check toward his Fallbrook mortgage, which by then was in default.

* In 1988, the Culbertsons ordered the Temecula winery to buy $103,000 worth of still wine the Culbertsons had produced in Fallbrook, even though “the winery had no reason” to buy it.

* The Culbertsons charged the corporation $6,000 a month to store champagne at their Fallbrook estate even though the Temecula winery, once constructed, could store its own stock of sparkling wines. At the same time, the Culbertsons stored their Fallbrook-produced wines at a San Marcos beverage company--and sent the bill to the Culbertson Winery Corp.

Thornton alleged that John Culbertson’s conduct “constitutes such fraudulent and dishonest acts and such gross abuse of authority and discretion . . . that he must be removed as a director, pursuant to the California Corporations Code . . . and permanently barred from reelection.”

The Culbertsons say that the allegations are not only false, but that John Thornton was--or should have been--intimately familiar with the winery’s cash flow because he hired the accounting firm to monitor the corporate books for him.

And speaking of who owes whom what, the Culbertsons said: “There are several items that (we) would like returned as well: 1. Baldwin Piano, 2. Kitchen Aid Heavy Duty Mixer, 3. Postal scale; and 4. white desk--last seen on the third floor.”

While the arguments volley back and forth, the Thorntons are trying to keep the Culbertson Winery moving forward. A press release last November read that “after six months of intense work by a turnaround team, Culbertson Winery Corp. has improved operations, restructured its debt and launched a long-range plan for future growth.”

The Thorntons said they now own 99% of the winery, with $20 million at risk.

New winery brochures make no mention of the Culbertsons, and employees there today simply dismiss inquiries about them as “1% owners who no longer are actively involved.”

The Culbertson-Thornton divorce has also taken its toll on high society. San Diego’s top hostesses are shuffling place cards like diplomats setting up seating for Arab-Israeli peace talks.

“We’ve never seen anything quite like this before,” said one.

For small parties, what’s a hostess to do? If one comes, the other won’t?

“You got it,” said Virginia Monday, a social organizer.

“It’s been a terrible strain on both of them. They don’t want to be in the same room--and I don’t blame them.”

Large functions still draw both, but “those of us who are involved in planning functions are very aware of the seating, if both of them are on the guest list,” said socialite Dixie Unruh.

For a major fund-raising event next month for the San Diego Museum of Art, the Thorntons refused to be included on the list of honorary chairpersons when they learned that the Culbertsons were already on it, insiders say.

“There are even husbands against wives in this thing,” said one man. “I think it’s because the women tend to listen to the Culbertson side of the story, and very few people have heard the Thornton side. The Thorntons aren’t exactly the kind of people you walk up to and ask, ‘So, what’s your side of the story?’ ”

One woman--who, like many people contacted by The Times, declined to be identified--said sympathies run more with the Culbertsons: “They appear more to be the kind of people-next-door who are genuinely bighearted, and they’re losing their name, the name they worked for, the Culbertson Winery.”

The two men’s business associates and friends draw their own conclusions.

“The notion that Thornton had devious intent to take over the winery by sinking $15 million or more into it is absurd,” said one. “He could have started his own winery for less money than that.

“But he was entitled to get tough, after sinking all that money into the winery, and I think the Culbertsons were naive.”

Said another familiar with Thornton’s management style: “He believes in ultimate control. He is San Diego’s J.R. Ewing.”

Bill Otterson, who brought John Culbertson and John Thornton together in 1986 through his de facto role in San Diego business circles as a matchmaker between entrepreneurs and venture capitalists, is willing to help reunite the couples.

“Both sides are being hurt by this. Thornton is being hurt socially, and Culbertson is being hurt because he’s running up incredible legal bills,” Otterson said.

“I told John Culbertson, ‘If you lose, you’ll lose everything--your house, everything.’ And I told John Thornton, ‘If you win, you still lose, because you get the label of bully.’ ”