Most folks associate beer with pleasure. Many craft brewers will tell you they went into business for that reason: to make themselves and others happy (and, oh yeah, make money). But an investor in a Bushwick, Brooklyn beer brewing company and taproom startup entity was anything but happy after his co-members began taking steps to dilute his membership interest in the limited liability company, resulting in fast and furious litigation and immediate injunction motion to halt the transaction.
According to his complaint, Peter Lengyel-Fushimi (“Peter”) was a molecular biologist by training who decided to pursue his passion for craft beer making and “dedicate his life to beer.” Peter “committed himself to his new goal of opening a brewery,” took a series of apprenticeships in local breweries to learn the trade, and ultimately partnered with Anthony Bellis (“Bellis”) and Zachary Kinney (“Zachary”) to form Kings County Brewers Collective, LLC (the “Brewery”).
in 2014, Peter, Anthony, and Zachary entered into an Operating and Subscription Agreement, according to which each became a manager and 25.33% “Class A” membership interest holder, collectively owning 76% of the Brewery. The remaining 24% membership interests were sold to investors and denominated “Class B” and “Class C” interests, the Class B member having limited voting rights on mergers and acquisitions, the Class C members no voting rights, only an economic interest. Peter held the title of Head of Beer Production / Operating Manager; Anthony of Treasurer; and Zachary of Secretary.
Important for his later injunction application, a standard merger and no-oral-modification provision in Section 10.1 of the Operating Agreement provided, “This agreement constitutes the whole and entire agreement of the parties with respect to the subject matter of this agreement, and it shall not be modified or amended in any respect except by a written instrument executed by all of the Members. This agreement replaces and supersedes all prior written and oral agreements by and among the Members.”
In 2016, the Brewery opened for business. The next year, according to the complaint, New York magazine nominated it one of the five “absolutely best brewery taprooms” in New York City. By 2020, the Brewery generated close to $4 million in revenue, employed over 20 workers, and remained successful even through the pandemic.
Behind the scenes though, beer wasn’t the only thing brewing. “[P]ersonality and philosophical differences plagued relations between the three Class A members,” disputes often arising over the approach to expanding the business, creating an “unpleasant working environment for the three partners, who were no longer on friendly terms.”
By the end of 2020, the Class A members were at “loggerheads” and “began discussing ways of engineering a business divorce,” including a potential sale of the business, opening a new location, a paid departure of Peter from the Brewery to start a new brewing company, or Peter selling a portion of his interest to the Class B member. In 2021, according to the complaint, Anthony and Zachary began to take steps to expel or dilute Peter’s interest, culminating in an announcement that they planned to amend the Operating Agreement to convert his Class A membership interest into a new “Class D” interest with no management rights, terminate him as officer of the Brewery, remove him from management, and cease all compensation to him. Anthony and Zachary circulated proposed amendments to the operating agreement (read here and here) that they claimed to be empowered to adopt by mere majority vote, not unanimity, of the Class A members.
Ostensibly forced out of the business he helped found, Peter sued Anthony and Zachary in Brooklyn Supreme Court alleging claims five claims: (i) a declaratory judgment that Section 10.1 of the Operating Agreement prohibited amendment without unanimity of the Class A members, (ii) breach of the Operating Agreement, (iii) breach of the implied covenant of good faith and fair dealing, (iv) violation of Section 409 of the Limited Liability Company Law requiring LLC mangers to act “in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances,” and (v) breach of fiduciary duty.
The same day he sued, Peter moved by Order to Show Cause to enjoin his co-members from “removing or attempting to remove [him] as a Class A member” and from “removing or attempting to remove or terminate [him] as an officer” of the Brewery. In his memorandum of law, Peter argued that he would be irreparably harmed by involuntary termination of his management and control rights, and that Section 10.1 of the Operating Agreement barred his co-members from doing so without his consent.
Anthony and Zachary each filed an affidavit in opposition (read here and here) and made a cross-motion to dismiss the complaint, taking the position that the Operating Agreement could be amended by simple majority vote. In the words of Anthony, “It the belief of [the Brewery] that no approvals or signatures beyond a majority of the Class ‘A’ are required under any version of the operating agreement, and since [Zachary] and I make up 50.66% . . . of the Class ‘A’ equity, any action taken is appropriate when approved by both of us.”
In a pair of Decisions and Orders available here and here, Kings County Commercial Division Justice Leon Ruchelsman