Restaurant Partnership and LLC Dispute Attorney

Restaurant partnerships fail in a recognizable pattern. A chef with a concept and no capital pairs with an investor with capital and no operating experience, sometimes with a third partner who found the space or introduced the parties. The entity is formed quickly. The operating agreement is a template or does not exist. Money goes in without documentation of whether it was a capital contribution or a loan. Two years later the restaurant is either failing, in which case the partners fight about who is responsible and who must fund the shortfall, or succeeding, in which case they fight about compensation, control, and expansion.

The Law Offices of Albert Goodwin represents restaurant owners, chef-partners, and investors in ownership disputes in New York City.

What the Fight Is Usually About

• Money in without characterization. An investor wired $300,000 with no note and no amended operating agreement. Was it a loan repayable before distributions, additional equity that diluted the others, or a capital contribution that increased a capital account? Each characterization produces a different result, and in the absence of documents, the answer comes from bank records, tax returns, K-1s, and contemporaneous emails.
• Compensation for the working partner. A chef working eighty hours a week alongside a passive investor with an equal share almost always ends in a dispute about salary, and about whether taking one required consent.
• Cash handling and misappropriation. Restaurants run on cash and comps. Allegations that a partner took cash from the register, paid personal expenses through the business, put family on payroll, or comped friends are common and are resolved by forensic examination of POS data, bank deposits, vendor invoices, and payroll records.
• Deadlock. Two fifty percent owners who cannot agree on whether to renew the lease, take on debt, or replace a manager.
• Freeze-out. A majority owner removing a minority owner from the bank accounts, the payroll, the premises, and the information flow.
• The second location. One partner opens another restaurant, using the concept, the staff, the vendors, and sometimes the name, through an entity the other partner does not own.

The Operating Agreement, or Its Absence

Under New York's Limited Liability Company Law, members are required to adopt a written operating agreement, and where none exists the statutory default rules govern. Those defaults rarely match what the partners intended: management by members in proportion to their share of profits, distributions in proportion to contributions, and a dissolution standard that is difficult to satisfy. Restaurants formed with a downloaded template usually have an agreement that addresses none of the situations that actually arise.

The provisions that decide restaurant disputes are the ones most often omitted: what happens when a partner stops working, whether the operating partner gets a salary and how it is set, what votes require unanimity, how additional capital is called and what happens to a member who cannot fund a call, whether a member may compete or open a second location, how a departing member is bought out and how the price is determined, what happens on death or divorce, and how deadlock is broken. See LLC operating agreements and buy-sell agreements.

Legal Claims Available

• Breach of fiduciary duty. Members and managers owe duties of loyalty and care. Diverting an opportunity, self-dealing with a related vendor, and taking compensation without authority are the classic restaurant fact patterns. See breach of fiduciary duty.
• Accounting. An equitable claim compelling a full accounting of the business, particularly valuable where one partner has controlled the books.
• Books and records inspection. Members have a statutory right to inspect records, and a refusal is itself actionable and often the fastest way to obtain the information needed to evaluate the larger dispute.
• Judicial dissolution. Under LLC Law § 702, dissolution is available where it is not reasonably practicable to carry on the business in conformity with the operating agreement. New York courts apply this standard narrowly, and a failing relationship alone is not enough where the business can still operate. For corporations, the shareholder oppression and deadlock provisions of the Business Corporation Law offer different routes, including the buyout election available to respond to a dissolution petition. See business dissolution and minority shareholder oppression.
• Conversion and unjust enrichment for funds and property taken.
• Usurpation of a corporate opportunity where a partner opened a competing location.
• Provisional remedies. Where assets are being dissipated, a temporary restraining order, a preliminary injunction, or appointment of a receiver may be available, though courts are reluctant to install a receiver over an operating restaurant.

The Practical Problem: The Restaurant Keeps Operating

Unlike most business disputes, a restaurant fight happens while the business runs every night. Payroll must be met. Vendors must be paid. The liquor license requires that ownership disclosures remain accurate, and a change in control that is not reported to the State Liquor Authority creates a licensing problem on top of the dispute. The landlord is watching, and many leases contain provisions triggered by a change in ownership or by litigation among the principals.

This shapes strategy. Litigation that paralyzes the operation destroys the value both sides are fighting over. We usually pursue a parallel track: preserve rights and obtain information through the formal process, while negotiating a separation that lets the business continue. Interim protocols governing who signs checks, who has premises access, and what expenditures require joint approval are often the first thing to negotiate, before the merits are addressed at all.

Valuation and Buyouts

Most of these disputes end with one side buying the other out. Valuing a New York City restaurant is genuinely difficult: earnings are often understated or inconsistent, the leasehold may be the dominant asset, the liquor license has value, goodwill may be personal to a departing chef, and the business may be worth substantially less without the partner who is leaving. Where an agreement specifies a valuation method, it controls. Where it does not, the parties either agree on an appraiser or litigate valuation, which is expensive and unpredictable.

The terms that matter as much as price: whether the buyout is paid over time and what secures it, release of the departing partner from the lease guaranty and any personal guaranties on vendor accounts and loans, mutual releases, non-disparagement, whether the departing partner may open nearby and how soon, and who keeps the name, the recipes, and the social media accounts.

Investor Claims

Passive investors in restaurants often discover that they have fewer rights than they assumed. Where an investment was solicited with projections that had no basis, where the use of funds differed materially from what was represented, or where interests were sold to multiple passive investors without proper documentation, securities law questions arise alongside the ordinary contract and fiduciary claims. Membership interests sold to passive investors can be securities, and the exemption relied on, if any, is worth examining. See securities matters and business fraud.

You can contact us by phone at 212-233-1233 or by email at [email protected].