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FILED: NEW YORK COUNTY CLERK 10/23/2017 05:29 PM INDEX NO.

656245/2017
NYSCEF DOC. NO. 14 RECEIVED NYSCEF: 10/23/2017

AMERICAN ARBITRATION ASSOCIATION

URI SCHEFT,

Claimant,

v.
AMENDED DEMAND FOR
PELEG INVESTMENT MANAGEMENT ARBITRATION
LLP and BREAD LLC,

Respondents.

Claimant Uri Scheft, as and for his arbitration demand against respondents Peleg

Investment Management LLP (PIM) and Bread LLC, alleges as follows:

Nature of the Action

1. This matter arises from an attempt by Gadi Peleg to seize control of Breads

Bakery from its founder, co-owner, and Executive Chef Uri Scheft.

2. Peleg (acting through Respondent PIM) has continually demonstrated his

disregard for the parties express written agreements and his contempt for the Breads Bakery

mission to develop and market the highest quality baked goods. He has persistently acted to erase

the true history of Breads Bakery, divert company resources to other businesses he owns

(including Nur Restaurant, Rock Pizza Scissors, and Mr. Bing), and deprive Scheft of his share

of bakery profits. Most concerning of all, Peleg is causing Breads Bakery to sell an ever-growing

number of unauthorized products that do not meet Schefts standards for quality and authenticity

and has willfully breached the quality-control provisions that Scheft insisted be written into the

companys operating agreement.

3. This conduct damages the Breads Bakery brand and flies in the face of Schefts

contractual rights, as set forth in the parties written agreement. PIM and Peleg are also hiding
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the extent of this misconduct by concealing financial and other documents that Scheft has an

equal right to access.

4. After lengthy and extensive efforts to achieve an amicable resolution of the issues

created by PIM and Pelegs greed, dishonesty, and intransigence, Scheft brings this arbitration to

compel compliance with the parties agreement and to ensure Breads Bakery returns to selling

the quality, premium products that its customers have come to appreciate and expect.

5. Further, in order to protect the reputation and goodwill of the bakery as well as

Schefts contractual rights, Scheft also seeks an interim award providing for (1) unfettered access

to company books and records, (2) the creation and provision of audited financial reports for

each year of Breads Bakerys operation, and (3) a prohibition on the marketing and sale of

unapproved products.

Identities of the Parties

6. Uri Scheft is an Israeli citizen residing in Israel.

7. Peleg Investment Management, LLC is a Delaware LLC with its principal place

of business in New York City. On information and belief, its principals are Eliezar Peleg and

Gadi Peleg.

8. Bread LLC is a Delaware LLC.

Factual Background

9. Scheft is an internationally prominent baker and pastry chef. He founded

Lehamim Bakery in Israel more than 15 years ago. He is the author of two successful cookbooks

on Israeli baking, and is the inventor of a chocolate babka recipe widely recognized as the best in

the world.

10. Lehamim Bakery has been extremely successful. Its annual sales are

approximately $14 million.

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11. Beginning in 2009, Gadi Pelegs father Eliezar Peleg approached Scheft to

discuss the possibility of financing a branch of Lehamim Bakery in New York. Scheft and

Eliezar Peleg negotiated the terms of this venture over the next two years. Eventually, it was

agreed that the younger Mr. Peleg would manage the business side of the New York operation.

12. Pursuant to a Hebrew-language written agreement executed on April 14, 2011

(2011 Agreement), Pelegs company, PIM, and Scheft became equal co-owners in a New York

branch, with PIM providing the financing and Scheft contributing know-how and a limited

license to use the intellectual property belonging to Scheft and Lehamim.

13. A true and correct copy of the 2011 Agreement is attached hereto as Exhibit A.

14. A true and correct copy of a translation of the 2011 Agreement into English is

attached hereto as Exhibit B.

15. Scheft moved to New York in 2012 to launch the new enterprise. For three years,

he worked tirelessly to help establish the bakery in New York. Scheft drew no salary duing this

period. The company provided him with an apartment in New York City, but he lived otherwise

at his own expense.

16. Rather than choose a new name for the New York branch, the parties simply used

the English translation of Lehamim Bakery: Breads Bakery.

17. In branding Breads Bakery, the parties duplicated the branding used for Lehamim

Bakery in Israel. This included using the same logo, fonts, slogan, and shop design. By way of

example, the Breads Bakery and Lehamim Bakery logos are shown here side-by-side:

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18. The parties collaboration was initially successful. New Yorkers loved Schefts

chocolate babka, and the New York food press eagerly embraced Breads Bakery as the

preeminent source for innovative Israeli baked goods in the city.

19. Financial success followed. Breads Bakery generated over ten million dollars in

revenue last year; the bakery now has three locations in New York City and has been profitable

since 2014.

20. Unfortunately, Peleg developed a desire to appropriate the success of the Breads

Bakery brand for his own exclusive benefitboth personal and financial.

21. Beginning in 2013, Peleg (acting through PIM) began taking steps to wrest

control of Breads Bakery from Scheft. This conduct began slowly but continued over the months

and years that followed. It included forcing out the companys CEO, whom Peleg perceived as

being aligned with Scheft. Pelegs efforts on this front also extended to obstructing salary

payments to Schefts partner, who was a senior pastry chef responsible for recipe development

and for training New York staff in Lechamim Bakery recipes and techniques. Peleg also

attempted to hire another pastry chef away from Lehamim, and locked Scheft out of access to

bank accounts, financial records, and social media accounts.

22. Peleg (again acting through PIM) attempted to erase Schefts name from the

Breads Bakery brand. Notwithstanding the publics close association between Scheft, Lehamim

Bakery, and Breads Bakery, PIM has essentially purged Schefts name from the Breads Bakery

website and publicity materials. Indeed, on information and belief, Peleg went so far as to falsely

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attribute the creation of Schefts renowned chocolate and Nutella babka to chef Edan Leshnick, a

false attribution that was reported by the widely-read New York food blog Eater.com.

23. Peleg (acting through PIM) further sought to entrench himself in the Breads

Bakery business by causing counsel for Breads Bakery to form various subsidiaries to Breads

LLC in which only Pelegand not Scheftwas named as a manager.

24. Peleg even denied Scheft access to his own recipes. On two separate occasions,

Scheft asked the companys CEO to provide him with recipes stored on the Breads Bakery

Dropbox, only to be told that Peleg had forbidden the CEO to provide them to Scheft.

25. Peleg himself also became personally abusive, threatening harm to Schefts

family and reputation.

2015 Mediation and Term Sheet

26. In September 2015, Peleg and Scheft attempted to resolve their differences

through mediation.

27. At the end of the mediation, PIM and Scheft signed a binding term sheet (the

2015 Term Sheet). Although the 2015 Term Sheet itself was binding, certain of its provisions

were expressly made contingent on the negotiation and execution of a more formal LLC

agreement. A true and correct copy of the 2015 Term Sheet is attached hereto as Exhibit C.

28. The 2015 Term Sheet contemplated a more specific allocation of responsibility

between Scheft and PIM, giving Scheft the title of Executive Chef and primary authority to

supervise recipe development and quality control.

29. Because Scheft was especially concerned about product quality, he insisted on

including language in the 2015 Term Sheet giving him control over the products sold and their

production.

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30. Specifically, the 2015 Term Sheet provides that: Scheft will be responsible for

the menu items, that [t]he recipes, methods and ingredients for products approved by Scheft

must be followed in all material respects without modifications, that Scheft would have the

right to name and replace Breads production manager, and that Scheft would be expected (and

entitled) to perform regular quality control inspections. (2015 Term Sheet 4.)

31. The 2015 Term Sheet provides for only very limited exceptions to Schefts right

of prior approval, as follows:

Breads will be permitted, from time to time, to produce a limited number of new
products not approved by Scheft in advance (such as daily specials, weekly
specials, and seasonal temporary offerings), provided that [at] any given time, the
number of such new products being sold in any Breads location will not exceed
5% of the total products being displayed for sale.

(2015 Term Sheet 4.)


32. The 2015 Term Sheet also requires PIM to cause Breads Bakery to make

quarterly advance distributions to each partner (Advances).

33. The Advances are to be paid within 45 days of the end of each quarter, with a ten-

day grace period.

34. Through the end of 2017, the Advances are to be in the amount of 1.5% of

revenue (net of sales tax) to each partner.

35. Beginning in 2018, the Advances are to be in the amount of 3% of revenue (net of

sales tax) to each partner.

36. The 2015 Term Sheet provides that [p]ayment for the Scheft Advance cannot be

delayed for any reason (other than force majeure events or insufficient payment due to

accounting errors), including if there is a dispute between the parties on any matter. (2015 Term

Sheet 8(f).)

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37. The 2015 Term Sheet also provides for a penalty interest provision, such that any

unpaid Advance accumulates interest at 8% upon notice of non-payment from the unpaid partner

after the lapse of the grace period.

38. The 2015 Term Sheet expressly incorporates provisions of the 2011 Agreement

that provide for Scheft and PIM to have complete and equal access to Breads Bakerys financial

and business records:

Accounting books, letters, paperwork and documents belonging to the Company


or pertaining to its affairs shall be kept in the Companys main place of business,
and each party to this agreement may at any time review them, copy them, by
himself or by a representative, accountant and/or attorney on his/its behalf.

(2011 Agreement 13.3, incorporated by reference at 2015 Term Sheet 1.)


39. To further ensure transparency of financial information, the parties agreed to use

bookkeeping software which may be viewed on the Internet. (2011 Agreement 13.2,

incorporated by reference at 2015 Term Sheet 1.)

40. The parties also agreed that either party would have the right to receive audited

financial statements for each calendar year within 120 days of the end of that year. (2011

Agreement 13.1, incorporated by reference at 2015 Term Sheet 1.)

41. Scheft agreed that he would depart from daily management after the contemplated

definitive LLC agreement was signed. As the 2015 Term Sheet provides, Scheft has agreed to

leave the bakery upon signing [of] the LLC Agreement. (2015 Term Sheet 2 (emphasis

added).)

42. The 2011 Agreement provided that the parties partnership would terminate [i]n

the event of a material breach of that agreement, at the option of the non-breaching party. (2011

Agreement 16.3.)

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43. The 2015 Term Sheet provides, with slightly different language, for termination

in the event of an uncured material and fundamental breach, again at the option of the non-

breaching party. (2015 Term Sheet 14.)

PIM Materially Breaches the 2015 Term Sheet and Refuses to Cure

44. PIM has caused Breads Bakery to sell numerous unauthorized products, far

beyond the limited exception for temporary offerings constituting less than 5% of aggregate

product display, and has refused to halt this conduct or even respond to Schefts protests.

45. In one particularly egregious example, PIM promoted the opening of Breads

Bakerys Lincoln Center location through extensive social media advertising and press

statements about a Concord Cake that was never approved or even disclosed in advance to

Scheft.

46. PIM has caused numerous other unapproved products to fill the shelves at Breads

Bakery, including pan-baked cheese mousse jars, potato bureka sandwiches, white shakshuka,

epi baguettes, chocolate pretzels, and many others. (Because PIM has refused access to most

bakery records, Scheft does not even know exactly how many unapproved products PIM has

caused the bakery to sell.) Scheft has repeatedly objected to the sale of these unapproved

products, including by letter from counsel on July 10, 2017. PIM has failed to make any changes.

47. PIM has also caused Breads Bakery to create and sell new, unapproved products

in support of Pelegs own new restaurant venture, Nur. Specifically, PIM has caused Breads

Bakery to create kubaneh, Jerusalem bagels, and pan-baked challah and to provide them to Nur,

all without Schefts approval and without disclosing pricing or recipes to Scheft.

48. Similarly, PIM has diverted Breads Bakery resources to support Pelegs new

pizza cart enterprise, named Rock Pizza Scissors. PIM has devoted Breads Bakery staff time,

used Breads Bakery production facilities, and used Breads Bakery delivery vehicles to subsidize

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the Rock Pizza Scissors project, again without approval from or even disclosure to Scheft. When

Scheft inquired about this matter, Peleg specifically directed the Breads Bakery CEO not to

discuss the matter with Scheft.

49. PIM has also hired away Breads Bakery staff for another venture of Pelegs, Mr.

Bing.

50. For the first several quarters after the 2015 Agreement was signed, PIM caused

Breads Bakery to pay the Advances due to Scheft, albeit generally at or near the expiration of the

grace period for each such payment. However, beginning with the first quarter of 2017, PIM has

deliberately chosen to withhold the Advances due to Scheft.

51. The Advance for the first quarter of 2017 was due on May 15, 2017. The grace

period for that payment expired on May 25, 2017. On May 28, 2017, Scheft provided notice of

non-payment in order to trigger the penalty interest provision of the 2015 Term Sheet. PIM

ignored this notice and refused to pay the Advance. PIM finally paid a portion of the first quarter

2017 Advance in July 2017, just days before the parties attempted mediation, as an ostensible

concession but without providing any calculation to substantiate the amount paid, and

apparently without paying interest as required under the 2015 Term Sheet.

52. The Advance for the second quarter of 2017 was due on August 14, 2017. Scheft

advised PIM ahead of that date (through counsel) that he expected prompt payment. The due date

and the expiration of the grace period came and went without payment. Scheft demanded

payment again in writing by letter from counsel dated August 30, 2017. PIM has refused to cause

Breads Bakery to make the now-overdue Advance for the second quarter of 2017.

53. PIM has systemically withheld access to Breads Bakerys financial information

from Scheft. For example, in February 2016, just months after the 2015 Term Sheet was signed,

PIM began to deny Scheft access to daily revenue reports. On information and belief, PIM

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directed Breads Bakerys accountant to ignore inquiries from Scheft. In early 2017, PIM directed

Breads Bakerys bookkeeper to cease providing Schefts representative with financial

information of any kind. Scheft has repeatedly demanded access to financial information

throughout 2017, to essentially no avail.

54. Peleg routinely disrupted Schefts quality control visits after the 2015 Agreement

was signed, including by interrupting meetings between Scheft and the bakerys production

manager. This conduct escalated dramatically over time.

55. Scheft attempted to conduct a quality control visit in September 2016, as

specifically provided for in the 2015 Term Sheet. PIM attempted to obstruct this visit, apparently

in furtherance of Pelegs efforts to exclude Scheft from Breads Bakerys management.

56. Peleg also physically obstructed Schefts next quality control visit, in April 2017.

On that occasion, Peleg directed a security guard to refuse Scheft access to the bakery. Peleg

himself also forcibly grabbed Schefts cellular phone, apparently to prevent Scheft from

photographing the unauthorized products on sale. The phone was eventually returned by PIMs

counsel, but only after Scheft was forced to file a report with the New York City Police

Department. Scheft, though counsel, requested a copy of security camera footage of this incident,

but it was never provided.

57. In September and October of 2017, Scheft sought to exercise his contractual right

to inspect Breads Bakery books and records, and to review financials for the company. After

numerous pretextual delays, PIM ultimately permitted Schefts representatives to conduct an

inspection, but improperly circumscribed the scope of this inspection. Indeed, the documents that

Schefts representatives were permitted to review did not even include such basic financial

documents as sales tax returns, payroll tax returns, contracts, and loan documents, despite the

fact that Scheft informed PIM, well in advance of the inspection, that he specifically sought to

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have his representatives review such documents during the inspection. Perhaps most notably,

Schefts representatives were denied access to any documents reflecting the terms upon which

PIM has caused Breads Bakery to deal with other entities owned or controlled by Peleg.

58. These are only a few of PIMs breaches of the 2011 Agreement and the 2015

Term Sheet. PIM also refused to reimburse Scheft for travel to New York for quality control

inspections, despite clear contract language providing for such reimbursement. PIM also

unilaterally directed Breads Bakerys accountant to allocate 100% of the companys tax losses to

himself for 2013 and has refused to respond to Schefts repeated protests of this conduct.

Arbitration Provisions

59. The 2015 Term Sheet contains an arbitration provision that provides as follows:

Except as set forth in Section 14 herein (which requires a final court order and not
subject to the arbitration process set forth below), if the mediation process does
not succeed, each party will have the right to direct the dispute or disputes arising
out of or relating to this agreement or agreements contemplated to be executed as
part of this settlement for resolution by arbitration before the AAA to be
conducted in the state of New York, County of New York, as follows:
a. The arbitrator will be a former New York judge with expertise in commercial
and corporate law.
b. All discovery rules and substantive law of New York will apply to the
arbitration process.
c. The arbitrator will render a reasoned decision in writing.
d. There will be a right by each party to appeal the decision of the arbitrator on the
application of the law on any matter to any arbitrator selected by the parties under
AAA rules who also shall be a former judge with similar experience.
e. If such appeal is not possible under the AAA rules then the arbitration will be
conducted under the same principle but in front of three arbitrators (one appointed
by each party and the third appointed by the AAA who shall be a former judge
with similar experience, unless otherwise agreed to by the parties).
(2015 Term Sheet 16.)
60. The foregoing arbitration provision is subject to a mandatory mediation provision.

(2011 Agreement 18.1 18.3, incorporated by reference into 2015 Term Sheet 16.)

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61. The parties attempted mediation on August 3, 2017. The mediation did not

succeed.

Fee-Shifting Provision

62. The 2015 Term Sheet contains a mandatory fee-shifting provision:

If either party is forced to bring an action or proceeding to enforce its or his rights
under this or the other agreements contemplated as part of this term sheet, upon
the arbitrator confirming such rights, it or he shall be entitled to the legal fees and
other expenses incurred by such party to enforce its rights (which award will be
rendered simultaneously by the arbitrator).

(2015 Term Sheet 16.)

First Cause of Action Breach of 2015 Term Sheet and 2011 Agreement
(Against PIM)

63. As illustrated by foregoing and as shall be further demonstrated upon the hearing

of this matter, PIM has materially breached the 2015 Term Sheet and the 2011 Agreement,

including by causing Breads Bakery to sell unapproved products, by refusing to allow Scheft to

exercise his quality control and related management rights, by depriving Scheft of his right to

access Breads Bakery records, premises, and personnel, by refusing to have Breads Bakery

prepare audited financials, and by causing Breads Bakery not to pay Scheft the Advances due to

him, with interest.

Second Cause of Action Breach of the 2015 Term Sheet and 2011 Agreement
(Against Bread LLC)

64. As illustrated by foregoing and as shall be further demonstrated upon the hearing

of this matter, Bread LLC has materially breached the 2015 Term Sheet and the 2011

Agreement, including by selling unapproved products, by refusing to allow Scheft to exercise his

quality control and related management rights, by depriving Scheft of his right to access Breads

Bakery records, premises, and personnel, by failing to prepare and provide audited financial

statements, and by refusing to pay Scheft the Advances due to him, with interest.

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Third Cause of Action Books and Records


(Against Bread LLC)

65. As illustrated by the foregoing and as shall be further demonstrated upon the

hearing of this matter, Bread LLC has breached New Yorks Limited Liability Company Law

and New York common law by refusing to permit Scheft to inspect the books and records of

Breads Bakery.

Fourth Cause of Action Fees


(Against PIM)

66. As illustrated by the foregoing and as shall be further demonstrated upon the

hearing of this matter, Scheft is entited to an award of his legal fees and other expenses incurred

in commencing and prosecuting this action, pursuant to the fee-shifting provision contained at

Paragraph 16 of the 2015 Term Sheet.

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Demand for Relief

WHEREFORE, claimant Scheft respectfully requests that the Arbitrator enter an award

as follows:

Declaring that Peleg Investment Management LLP and Bread LLC are in material
breach of the 2015 Term Sheet;

Requiring that Peleg Investment Management LLP and Bread LLC comply in all
respects with the 2015 Term Sheet (and with the 2011 Agreement to the extent
incorporated by reference therein);

Requiring Peleg Investment Management LLP and Bread LLC to immediately


prepare and provide audited financial statements for each year of Breads Bakerys
operations; and

Awarding all other relief as shall appear just and reasonable upon the hearing of
this matter;

AND WHEREFORE, claimant Scheft respectfully requests that the Arbitrator enter an

interim award as follows:

Requiring Peleg Investment Management LLP and Bread LLC to immediately


provide Scheft with unfettered access to all Breads Bakery financial and business
records and to commence preparation of audited financial statements for each
year of Bread LLCs operations;

Prohibiting Peleg Investment Management LLP and Bread LLC, effective


immediately, from causing Breads Bakery to sell any products without Schefts
prior approval.

Dated: New York, New York CLARICK GUERON REISBAUM LLP


October 23, 2017

By: /s/ DRAFT PROPOSED FOR FILING


Emily Reisbaum
Isaac B. Zaur
Melissa C. Holsinger
220 Fifth Avenue
New York, NY 10001
Tel.: 212-633-4300
Fax: 646-478-9484
izaur@cgr-law.com

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Attorneys for claimant Uri Scheft

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