Balcones’ Tate Denies Accusations, Claims Investors Plan Hostile Takeover

September 16, 2014 – Chip Tate, the embattled founder and master distiller at Balcones Distillery in Waco, Texas, has formally denied accusations by the distillery’s majority investors in a court filing earlier this month. A court hearing set for Thursday  in Waco has now been postponed until October 7 on the distillery’s request for a restraining order to continue Tate’s suspension last month for what the investors described as “actions detrimental to Balcones.” The private equity firm PE Investors II, LLC took on a stake in Balcones last year to help fund the development of a new $10 million distillery in downtown Waco and an expansion of the current Balcones distillery founded by Tate in 2008. The move was prompted by the success of Tate’s whiskies in competitions and the need to expand capacity to meet demand.

Since that filing, Tate has switched lawyers, and is now represented by David Clouston from the Dallas-based law firm of  Sessions, Fishman, Nathan & Israel. Clouston filed a response to the distillery’s original allegations September 12 denying claims that Tate threatened the life of Balcones board chairman Greg Allen and threatened to burn down the distillery, and accusing Allen and his partners of mounting a hostile takeover to “to purloin the plump ripe peach that is Balcones from the founder Chip, who built it with his own two hands from scratch.”

The filing claims that Tate was not “suspended” as Balcones charges, but terminated after discussions between Allen and Tate over buying each other out broke down. From the filing:

“After an extended, multiple-week dialogue between Chip and PE about buying each other out of Balcones, Greg Allen of PE, barged, unannounced and without warning, into a meeting (literally throwing open the door and stopping the meeting) Chip was having with a corn supplier at Balcones on August 5, 2014. As Chip tried to diffuse the situation created by Allen, it was revealed to Chip that two sheriff’s deputies were waiting outside with instructions to remove Chip from the Balcones premises. Chip, contrary to the alleged threats stated in the Petition, assured the employees that their positions were not in jeopardy and that this was merely an issue to be worked out between owners, gathered some of his personal belongings and left the distillery with the understanding that he and Allen would continue to work towards finding a resolution to buy one or the other out. Chip had no firearms on his person, nor did he threaten Allen—as alleged in the inflammatory and false Petition. Despite being ambushed and threatened with removal by two armed deputies who were hired and told they were there to assist in the termination of an unruly employee, Chip calmly attempted to work towards a business solution with Allen, reassured the employees as to their jobs, and peacefully left the facility. He certainly never threatened, as once again falsely alleged in the Petition, to set fire to the very equipment that he had spent the majority of the previous six years helping to build, re-build, operate and maintain with his own hands. In fact, the evidence will establish that Chip was the de facto safety officer of Balcones and a compulsive “safety Sam” who constantly strove to ensure the safety of Balcones employees.”

The filing also accuses Balcones directors of illegally attempting to dilute Tate’s ownership stake from 27% to less than 10% by issuing $15 million in debt that could be converted into Balcones shares at $70 per unit, along with violating Tate’s rights under the company’s bylaws and his management agreement. According to the filing, the company’s bylaws state that Tate must be present at any meeting of directors for a quorum for binding decisions to be made and that he was not present at any meeting where his suspension or the need for additional capital was discussed. In its original filing, the Balcones directors claimed Tate had not been present for several board meetings and had hurt the company’s ability to raise outside capital.

In the filing, Clouston accused Allen and the Balcones directors of mounting a smear campaign to silence Tate based on false allegations, suggesting that “somewhere, Vladimir Putin is smiling.” The temporary restraining order issued against Tate August 22 bans him from discussing Balcones with employees, industry contacts, and the media, along with banning him from the distillery premises.

In an email to WhiskyCast’s Mark Gillespie, Clouston said “I believe Chip Tate to be a man of integrity, as well as passion for his craft.” Clouston has just taken over representing Tate, who had previously been represented by Waco attorney Peter Rusek.

The attorney for Balcones, Jeffrey Armstrong of Naman, Howell, Smith, & Lee, declined to comment on the charges raised in Tate’s filing today. He provided a statement from the company’s directors on the $15 million in funding to finance construction of the new distillery, which is expected to begin in early 2015.

“Jared Himstedt, Distillery Manager, who’s been responsible for production since day one, is still producing and releasing the same whisky our customers have come to love. This week Balcones closed on a $15 million deal to fund the construction and provide operating capital for an expanded distillery. The Company offered all of the current owners the opportunity to participate in the investment on a pro rata basis. This important funding commitment comes entirely from the owners who elected to participate.”

The statement accounts for 73% of the Balcones ownership structure, with PE Investors II, LLC and Michael Rockafellow holding the combined stake. Rockafellow first bought into Balcones in 2010 with Steven Germer, acquiring a 67% stake at the time. While not specified in the statement, it is believed that Germer sold his shares in Balcones to PE Investors II. The outstanding shares are believed to be the 27% held by Tate, whom the company referred to in its statement only as “one of its management team members.”

The temporary restraining order prohibits Chip Tate from speaking with the media, but he posted this tweet on his personal Twitter feed Tuesday night after our story was published with the Balcones statement:

Tate deleted the post shortly after posting it.

This story will be updated as more details become available.

Links: Balcones Distilling

Editor’s note: This story was updated to include a delay in the court hearing until October 7. The September 16 statement from the company is available as a PDF file here. A PDF version of Tate’s filing is available here. Court filings in civil cases represent only one side’s story, and civil courts allow each side several days to respond to filings made by other parties in the case.