I’ve lost track of how many lawsuits I’ve seen between co-owners of New York City restaurants. It’s not surprising given the high percentage of restaurant failures in an intensely competitive market with high rents, high labor costs, and high everything else.
Another significant factor is the heavy initial investment required for start-up restaurants in the city. Aspiring restaurant entrepreneurs long on ideas and talent but short on cash and credit often will bring in friends and family as silent partners to provide the capital required to lease, build, equip, get regulatory approval, open, and carry the restaurant until it reaches profitability. The allure of owning a share of a restaurant managed by a friend or family member, especially for those with no experience in the industry, can dull awareness of the high risks involved. It also can mask the need for independent counsel to vet organizational agreements and the ongoing need to closely monitor restaurant finances.
I can only guess those factors were at play in Berman v Jankelowitz, 2019 NY Slip Op 32439(U) [Sup Ct NY County Aug. 15, 2019], a lawsuit brought by inactive, minority members of several LLCs formed to create and operate a pair of bistro-style restaurants known as Jack’s Wife Freda, located in Manhattan’s Soho and West Village neighborhoods. The lawsuit accused the managing majority members of “theft and waste of corporate assets, including valuable trademarks.”
In a decision early this year, the court ruled in defendants’ favor, upholding their separate ownership of the restaurants’ trademarked name and other intellectual property and their right to license it for use at a third location without plaintiffs’ participation. In that instance, the plaintiffs argued unsuccessfully that the critical language in the operating agreements’ purpose clause was ambiguous.
In its most recent decision, however, it was the defendants who unsuccessfully raised an ambiguity argument when the court adopted the plaintiffs’ construction of provisions in the LLC agreements requiring the defendant managing members to provide audited financial statements. Continue Reading Court Takes Ambiguity Off the Menu of Restaurant’s LLC Agreement