Here’s The Balcones Lawsuit Court Documents

balcones

Last week the Waco Tribune-Herald broke the news that a management dispute has erupted at Balcones, with the board of directors suspending the brand’s creator, Chip Tate, over allegations that he had declined to attend board meetings, threatened the company’s CEO and had generally refused to cooperate with the company’s directors.

The news has prompted strong opinions from whiskey enthusiasts. Some, like Joshua Feldman at the Coopered Tot, have sided with Chip Tate, writing that “he is the heart and soul of not just Balcones but everything that is right about Craft distilling… I know Chip bent over backwards to arrange a deal where it was clear, up front, that things would be done HIS way. The investors need to get out of the way and let him lead.”

Others, like Simon Seaton at So Many Whiskies, have foisted blame on Tate himself for selling off the controlling interest in the company he started. “Chip asked them in,” Seaton writes. “He wanted their money. He sold a majority share of the company to them… If you want to stay in control of your business, the best advice I can give is don’t sell it.”

The problem facing those of us eager to know what the dispute means for Balcones is that a gag order prohibits Tate from telling his side of the dispute to the media. Attorneys on both sides of the dispute declined to comment on the civil lawsuit.

I’ve gone through the documents and I’d like to highlight a few items that I think can deepen our still limited knowledge about the case.

That the conflict broke out over a division between the business side, represented by the board, and the artistic side, represented by Tate, is clear. But from my reading of the court documents, that tension provides the background to the conflict. Whatever actually happened between Tate and the board over the last few months appears to relate to a more recent round of funding for distillery expansion from an outside group of investors alluded to several times in the documents.

The contours of the conflict over the funding aren’t clear, but to judge by Tate’s alleged actions, it appears he felt his authority at the distillery was being undermined and the board says he wasn’t cooperating with the effort to raise outside capital. By Aug. 8, the board resolved to suspend Tate, saying that his actions threatened to undermine the deal. The suspension for 90 days and with pay prohibited Tate from speaking to anyone in the company or third parties about company matters, keeping him quiet until the board could finish the investment deal in September. (It’s not clear if the deal went through, since the Tribune-Herald article exposed the problems at Balcones to the public before the Sept. 10 date mentioned in the filing.)

While never described in detail, the tension over the investment deal is most clearly articulated in the court filing. “Balcones is currently in the process of obtaining additional capital for use in expanding its distillery,” the filing says. “The investment of new capital is tentatively set to be finalized on September 10, 2014, but the disruption of Balcones’ business resulting from Tate’s conduct puts this in jeopardy. If investors back out because of the disruption, Balcones will have missed an opportunity to expand its facility and business at a time when market conditions support such action, investors are available, and there is high demand for its product.”

The filing also says, “Balcones is currently in the process of expanding, which includes building and moving into a new distillery facility. In order to accomplish this process, Balcones must raise capital from outside sources. Disruptions in its operations and conflicts between its management and employees could jeopardize the timing of the expansion and it’s funding [sic]. Due to and in light of Mr. Tate’s actions, Balcones’ Board resolved to suspend Tate.”

It was after the Aug. 8 suspension that all the more colorful actions reported by the Tribune-Herald allegedly occurred, including the alleged threat to shoot the CEO and burn the distillery to the ground rather than see it “be run by anyone other than himself,” in the words of the plaintiffs.

The Aug. 8 letter informing Tate of his suspension lists a litany of allegations, but emphasizes his alleged refusal to work with the board on its efforts to raise funds from outside investors.

The letter’s second paragraph says: “At the Board meeting on Tuesday, July 29, we received the final report from ICC and, on Tuesday, August 5, we convened another meeting to discuss the capital infusion necessary for the expansion of the business. I was surprised and disappointed that you chose yet again to no-show both of those meetings… And, I cannot begin to explain what you are trying to accomplish by refusing to participate in meeting after meeting. However, one thing is certain — it is impossible for the investors to preserve their investment, let alone for the Board to provide the necessary guidance to run the Company, under these conditions.”

It’s not clear what “ICC” refers to, though there are a couple of capital management firms with those initials. (UPDATE: ICC is actually a St. Louis-based engineering firm contracted to design and build the new Balcones distillery, according to a public statement issued by board member Michael Rockafellow.)

Later in the letter, the board offers to soften Tate’s suspension if he engages with the investors. The letter reads:

“During the aforementioned suspension, you may provide oral or written input regarding the capital project when asked to do so by any member of the Board of Managers or by Alex at ICC. Your assistance in responding to inquiries about and providing ideas concerning the capital project will have a bearing on the length of the suspension.”

While the board appears to have attempted to coax Tate back to its side, the documents make it seem as though he thought the relationship remained frayed. Tate’s original suspension was only for 90 days, and with pay. The letter contains a few other carrots aimed at encouraging him to participate more with the board, making it seem that — at least prior to the alleged gunshot and burning down the building comments — the board intended to keep working with Tate.

But it also appears that Tate felt the board was pushing him out. That’s speculation, but it’s hard to explain his alleged behavior in any other way. Take these excerpts, for instance:

From the court filing: “Tate has stated that the company will fail in his absence or will move to a new, out-of-state location, causing employees to be concerned over their continued employment.”

Again from the filing: “Also in connection with the parties’ disputes, Tate has made statements pointing out how the distillery is full of combustible items and how easy it would be for the distillery to be destroyed by a fire and that it would be better for it to be destroyed than for anyone other than continued without him. [sic]”

From the Aug. 8 letter: “…your recent behavior around the facility (and sometimes directed specifically at our employees) has caused confusion with employees and harm to the Company. For example, telling persons that the business may fail to progress without you and suggesting that the business will leave its Waco home and relocate operations outside of Texas are illustrative of behavior that causes us great concern.”

It would require Tate’s take to make a fair assessment of these comments attributed to him. Having said that, if the comments are accurate, it appears that Tate thought the board was pondering what the company’s future might look like without him, which would have understandably angered him, given that he is the creative mind behind the brand.

Whatever the two parties might have thought, the board also makes it clear that it was pondering a management shuffle and that Tate may not like it.

“Over the course of the next 90 days, the Board will evaluate the assignment of various roles, titles and tasks as is necessary for the operation of the Company,” the letter reads. “You are directed not to speculate about this process with any other person.”

Despite the tension, in the last line of the letter, the board seems to acknowledge that its future is pegged to Tate’s: “While you have stated to me and to others that you will not work with us, we have determined that it is in the best long-term interest of the Company and for you that we proceed as the Board has now decided.”

We’ll see what happens. There’s a hearing scheduled for Sept. 18. I’m hoping that the Waco Tribune-Herald sends a reporter.

I’m attaching the documents filed with the court below. They’re all public documents obtained from the McLennan County District Clerk.

UPDATE: Chip Tate has filed a response to the allegations.

Image by Nick Piesco @ Flickr.

Whisky File