Breads Bakery Battle
Breads Bakery Battle
Breads Bakery Battle
656245/2017
NYSCEF DOC. NO. 14 RECEIVED NYSCEF: 10/23/2017
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
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.
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
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
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.
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.
Factual Background
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
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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.
(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
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
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
16. Rather than choose a new name for the New York branch, the parties simply used
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
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
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
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
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
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
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.
33. The Advances are to be paid within 45 days of the end of each quarter, with a ten-
34. Through the end of 2017, the Advances are to be in the amount of 1.5% of
35. Beginning in 2018, the Advances are to be in the amount of 3% of revenue (net of
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
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
bookkeeping software which may be viewed on the Internet. (2011 Agreement 13.2,
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
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-
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
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
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
information of any kind. Scheft has repeatedly demanded access to financial information
54. Peleg routinely disrupted Schefts quality control visits after the 2015 Agreement
was signed, including by interrupting meetings between Scheft and the bakerys production
specifically provided for in the 2015 Term Sheet. PIM attempted to obstruct this visit, apparently
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,
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
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
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).
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
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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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.
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
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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);
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
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