Recently, Ohio’s Sixth District Appellate Court reviewed a judgment that divided the pizza pie between two disgruntled pizza makers.
Christopher Germano and John Beaujean (nephew and uncle, respectively) formed a Limited Liability Company to operate a Vito’s Pizza franchise in Perrysburg, Ohio. Beaujean, who also owned a restaurant supply company, approached Germano with the idea, asking him to invest $280,000 for his half of the LLC while Beaujean would earn his half through sweat equity by running the restaurant. They would own the business equally and share in the profits.
However, Beaujean began to pay himself a management fee. He also paid his restaurant supply company a bookkeeping fee and he transferred funds from the LLC into a different account to which Germano had no access. Germano sued alleging breach of fiduciary duty and failing to maintain the duties of good faith and fair dealing. Beaujean countersued, raising several claims surrounding perjury, falsification and his own claim of breach of fiduciary duty.
At trial, Beaujean’s counterclaims were dismissed and judgment was entered in favor of Germano. Beaujean was ordered to return the $97,000 management fees to the company. Additionally, he was ordered to return bookkeeping fees above and beyond a fair market value of $15 per hour. Lastly, Beaujean was ordered to provide all records for complete accounting. Germano’s request for punitive damages and attorney’s fees was denied.
The key element of this case is the fact that the court found merit in Germano’s claims based on a contract theory, rather than a tort theory pertaining to fiduciary duty. There was no written agreement between the two men, nor was there an operating agreement that had been put in place subsequent to the registration of the LLC. As a result, the business operated by an oral agreement between the two men.
Oral agreements, as one can easily imagine, are difficult to prove because it is too easy for one side or the other to deny what was purportedly agreed upon. It is generally easier to ask the court to find that there was a fiduciary duty that existed between the LLC’s members than a breach of that duty. Germano got lucky; he is the exception to the rule.
In instances like this, businesses must commit their agreements to writing. This is particularly true if it is two friends who are going into business on a handshake. Operating agreements and written agreements between parties are not necessary to start a business, but they are necessary for the clean termination of a business. Failure to set down expectations at the get-go results in unbelievable problems at the end.