Restaurant Law Blog

Monday, December 17, 2012

Famous Pizza Battles Continue

Perhaps not content with Grimaldi’s Pizza getting all the attention in New York’s “pizza news,” Peter Castellotti Jr. of John’s Pizzeria, has filed a lawsuit seeking a full accounting and $25 million dollars in damages against his sister Lisa Free with respect to their Times Square location. According to the court filing, Peter was disinherited by his mother which resulted in the business being left to his sister. Despite this, she always treated him as an equal partner, but according to John, has been cutting him out of profits and failing to pay appropriate sales tax amounts, as well as violating the SLA’s rules by purchasing wine from retailers with cash.

I expect that Peter will face an uphill battle without a written operating agreement and only oral promises that he was actually part of the business, but this is in no way unique to Peter. Consistently, clients come to me without operating agreements and without having ever considered the possibility that problems may arise between the partners.

The purpose of an operating agreement is solely to ensure that all Members have clearly identified rights and obligations within the business, and to provide a clear framework on how misunderstandings, disputes, financial issues and general management issues will be resolved.

A sampling of some important questions that should be considered by all Members include:

  • How much money is everyone investing?
  • What percentage ownership interest is being given to each Member?
  • Is any Member being given an ownership interest for his “work” – “sweat equity”?
  • Who is going to manage the business, and if it is more than one person, who makes the decision on disputed issues?
  • What if there are only two of you, and you each own 50% of the business? Then who makes the call?
  • Can you be forced to contribute extra money if the business needs it to grow or sustain itself?
  • Can your ownership interest be reduced or terminated?
  • Can you assign your ownership interest to anyone?
  • If you die, will your wife/husband/child be able to inherit your interest in the business?


Answer these questions, and then put the answers in writing.

 


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