Barrel Factory Owners, Lakeward Spirits, Mainsping LLC and the Bystran Family Found in Breach of Contract Distilling Agreement. “Lacked the experience and financial resources to manufacture and sell” alcoholic spirits: Arbitrator Ruling
(Buffalo, New York – October 9, 2020) In a ruling handed down by an arbitrator this week, Lakeward Spirits (aka Main Spring LLC) and its owner-operators, Stephen Bystran, his wife Andrea Bystran and son Adam Bystran were found in breach of a contract relating to a contract distilling agreement with a third party. The Bystrans entered into an agreement in 2019 to allow the third party to utilize their under-performing distillery facility, Lakeward Spirits and its parent company, Main Spring LLC to produce and sell a private-label spirit, a common practice in the craft distillery business.
The decision confirms that the Bystran family not only breached their contract, but kept all proceeds from the sale of the products and refused to hand-over remaining inventory even though the third party paid for 100% of the costs of manufacturing. Court testimony and Erie County records also shows that the Bystrans were experiencing severe financial distress and were forced to sell their home in Orchard Park and move into the distillery at the Barrel Factory building.
The ruling cites that the Bystrans “breached their contract with Claimant…lacked the experience and financial resources to manufacture and sell” alcoholic spirits.
Steve Bystran entered several counter-claims in the lawsuit, all of the Bystran counter-claims were denied by the arbitrator as frivolous and lacking any evidence.
According to testimony by Steve Bystran, Lakeward Spirits, its parent company Mainspring LLC and the Bystrans are the subject of a New York State Liquor Authority investigation.
“We were saddened to learn of the Bystran Family’s financial problems and we offered to provide financial support”, said a spokesperson for the claimant. “Inexplicably, Steve Bystran vehemently denied any financial hardship, refused our assistance and instead retained all proceeds and products. This is the definition of a con artist. We had no choice but to litigate.”
According to court filings and sworn testimony, Steve Bystran and Adam Bystran entered the distillery business around 2016, renovating the Barrel Factory in Buffalo’s old First Ward District at a cost of $3.4 Million. The Barrel Factory is a 40,000 square-foot, mixed-use facility that houses Lakeward Spirits Distillery (owned and operated by the Bystran Family), a 100-seat catering and banquet facility (also owned and operated by the Bystrans) and several commercial and residential tenants.
Records and testimony show Steve Bystran and another investor, Bruce Mack (a Buffalo builder and architect of the Barrel Factory renovation) each invested approximately $0.6 million in the enterprise and financed the balance of the project with approximately $2.2 Million in bank loans. M&T Bank is one of the lenders for the Barrel Factory renovation according to testimony by Steve Bystran.
Steve Bystran borrowed approximately $600,000 of his 401k retirement savings as a source of his investment in the Barrel Factory according to records from the proceeding and testimony by Bystran.
According to a former Lakeward Spirits sales manager and employee of the Bystran’s who testified at the arbitration hearing, “Steve Bystran and Adam Bystran spent an obscene amount of money on the distillery operations with no expertise in distilling and apparently no way to support the operation financially. Shortly after I was hired, Steve Bystran informed me that the company was near insolvent and that there were no financial resources to market his products or support the business.” The arbitrator ruling on the case agreed with the employee’s characterization as evidenced by his decision that the Bystrans “lacked the experience and financial resources” to operate a distillery.
In a phone interview with Bystran’s partner at the Barrel Factory, Bruce Mack said, “I begged him [Steve Bystran] not to invest all that money in the distillery, it was irresponsible and I told him it would never be sustainable.” In order for that investment to be profitable, Bystran would have to out-perform the market by several hundred percent. “And he has his son Adam operating the distillery…the kid is 35 years old and runs around the place playing Dungeons and Dragons with his friends…he’s not a serious adult, he knows nothing about the business”, added Mack.
The former Lakeward Spirits sales manager, speaking on condition of anonymity alleges that the Bystran’s consistently misrepresented their financial situation at the time they entered into the contract distilling agreement with the third party.
“Lakeward Spirits was operating near zero capacity due to a lack of demand for its own products. Contrary to Stephen Bystran’s representations, sales of Lakeward products had also declined to near zero. The son, Adam Bystran who ran distillery operations was like a spoiled kid who ran around playing games at the distillery while the business was failing. At the same time, there was such an air of arrogance and condescension among the Bystran family towards employees, vendors and their customers. You would think these people would be a bit humbled by their circumstances.”
Saddled with $2.8 million in debt, arbitration records and financial reports show that the Bystran’s business had been a near complete failure as sales of its products had all but ceased in 2019, prior to the COVID pandemic.
“Shortly after I took over as sales director for Lakeward Spirits, I was informed by Stephen Bystran and Adam Bystran (Head Distiller at Lakeward) that they had mishandled the distillation of their Evergreen Gin production, but decided to release it for sale anyway, I was stunned”, said the former employee who spoke on condition of anonymity.
“Retailers informed me that the Bystrans attempted to coerce them into helping unload their poorly distilled Gin to their customers. Clearly the retailers brushed-off the threats, Lakeward has approximately 80% of all their inventory still sitting in their warehouse from 2016-2017. It was a disaster, nobody wanted to work with these guys. I could not sell any of their products. Confronted with the negative sentiment towards their company, Steve and Adam Bystran were defiant and became belligerent.”
A company spokesperson representing the plaintiff in the case says, “with each passing day, we uncovered information about incompetence, financial misrepresentations and questionable business practices that the Bystrans knew about but failed to disclose. In the legal proceedings it was our position that we were knowingly swindled by Steve Bystran and Adam Bystran. When the yields for our products began to drop precipitously, without explanation, we began to suspect (and we argued in the arbitration) that the Bystrans were diverting our product into their catering operations. These guys were desperate and we argued that they entered this agreement with the intent of unlawfully and unfairly taking all the proceeds to support their failing business. We could not prove the diversion, but there was either gross incompetence of malfeasance, take your pick.”
The Bystrans also operate a catering and banquet facility at the Barrel Factory. In 2017-2018, the Bystrans allegedly entered into an agreement with a Buffalo-based catering company for the company to be the exclusive caterer to the Barrel Factory events. According to the owner of the catering company who also spoke on condition of anonymity, the Bystran Family granted him the exclusive catering rights at the Barrel Factory in exchange for the catering company investing $125,000 in a commercial kitchen on the Barrel Factory premises. The catering owner alleges that Bystran reneged on the agreement and pushed him out after the kitchen renovation was completed. ForexTV could not independently verify the existence of a contract between the two parties.
However, according to sources, Bystran disclosed to employees that the catering company had indeed provided the capital for the kitchen renovation in exchange for the exclusive agreement. Bystran also acknowledges an agreement between the parties but says that he could make more money using alternative caterers and would pressure the caterer to amend the agreement by accusing him of non-performance and directing catering services to other, more profitable providers.
In a phone interview with the catering operator who contracted with Bystran he explained, “this is an ugly situation with the Bystrans and I am inclined to just walk away from this mess. I will eat the loss and put as much distance between myself and the Bystran family as I can.”
ForexTV obtained a memo requested by Steve Bystran and drafted by a Lakeward Spirits business advisor, Thomas Colson, a Buffalo, NY Attorney about the state of the Bystran’s financial situation at the Barrel Factory and Lakeward Spirits. In the memo Mr. Colson also acknowledges the severe state of financial distress and speaks about the importance for Bystran to unwind his current contracts with vendors, supporting the caterer’s claim that Bystran had financial motive to break his contract.
The following is a redacted copy of that memo dated September 9, 2019:
I enjoyed our time together on Thursday. The background information you provided was extremely helpful to me in considering your options. Let’s meet and discuss this face-to-face. In the meantime, though, here’s what I see.
Initial Vision: You would build one of Western New York’s largest distilleries and generate most of your revenue from Lakeward branded products which would be sold through retailers/distributors. The tasting room would serve as a modest pipeline of individual bottle sales. The event center was an afterthought (a way to gain some financial value from your space). This vision was based upon early market research showing a huge need for product (“everything you make will sell…the problem is not sales, it’s distilling capacity”). By the time you reached the marketplace, that had flipped.
Now, virtually 100% of your revenues come from the Event Center and rents from Barrel Factory tenants. Simply, where you are now is not where you envisioned you would be.
Investment in the Barrel Factory: You spent $3.4 Million to buy and build out the Barrel Factory. You have a bank note of $2.2 Million and a loan from you and Bruce for $1.2 Million. With your current tenants (including the distillery), you are breaking even on the note to the bank, but not paying yourselves back.
Tenants: In addition to the tasting room and distillery, you have a brewery, a Kayak rental business, your daughters’ Kombucha business, a café, apartment tenants, and a bar.
Tasting Room and Event Center: You are breaking-even from event bookings ($5,000/wedding plus alcohol). You’ve been outsourcing event catering and will continue to do so until June of 2020. A new deal with a new caterer could yield additional revenues.
Value of the Barrel Factory Building/Real Estate: While the building/real estate might be underwater today (perhaps valued at less than $3.4 Million), the area is going through gentrification. Within ten years, the value of the building/real estate will likely be significantly higher.
Lakeward Alcohol Products: As of today, Lakeward has two gins, one vodka, and two rum products (soon to be three). Each product has its own brand. Sales to date have been extremely modest. Part of the Lakeward vision is to produce a whiskey product.
Intellectual Property: Lakeward does not have any intellectual property. You are in discussions with a research professional who has developed a rapid aging technology. This technology has not been tested and Lakeward does not own it. Neither Lakeward nor the inventor have the financial resources to file for patent protection or complete the necessary experimentation to bring the technology to life.
Financial situation of Steve: You are struggling with no income and a $.6 Million personal loan from your 401K that is not being repaid. Worse yet, your struggling businesses are directly supporting you, your wife, Adam, Adam’s wife, and Adam’s child. Your struggling businesses are indirectly supporting your two daughters. And, your brother is living in one of the apartments. A bankruptcy would impact your entire family.
Distillery: This is a non-performing asset/liability. It seems to me that the Lakeward distillery business is probably not even worth what you owe on the equipment…today. One of my roles in my current operation is to investigate businesses for investment or acquisition by my parent company. In speaking with them about your situation (in a sanitized way) over the weekend, our view is that there is no investable opportunity at this time. Your distillery can make money in two ways; producing a Lakeward branded product or being the back office for the brands of others (like [redacted], that have national brand potential). As a back office it’s not an interesting investment opportunity because it’s expensive to scale which means the multiples would be extremely low (and, of course, as of today, there is nothing to multiply anyway).
With a brand, the multiples are definitely there, but you do not have a brand, or the financial wherewithal to build a brand. In other words, in terms of the brand play, you don’t have anything to bring to the table.
As a side comment, I would consider eliminating all of the Lakeward brands except one. I have no opinion on which brand you should keep. But, in researching alcohol brands during the past six months, I have discovered that the price of establishing even one brand is typically too high for new companies to get off the ground. Building several at once is just short of impossible.
Barrell Factory [sic]: While it is not as exciting as building an alcohol brand, this business has a substantially higher chance for success.
- Event Center: You are currently making $5,000/evening and booking events with little or no effort. With effort, you could book at least 50 events per year.
- Catering: You are currently giving away the catering. This could be a money maker either as a referral center (get a commission from caterers for each event) or as a Barrell House[sic] business (take over the catering).
- Tenants: I assume you have good tenants with the beer brewer and apartments. You are not getting rents from the distillery (I’m assuming this since you are not selling any products). Are your other tenants paying you the market rate? Could you get more if you put more effort into getting the right tenants?
- How long can you survive on no income? This might end in bankruptcy.
- How rapidly can [redacted] find a new distiller if you go bankrupt?
My Free Advice
- Sell the distillery equipment and have the buyer lease the space. You do not have the financial staying-power to build an alcohol brand. If you sell the equipment you could pay off your note, get Adam a job (with the buyer…particularly if that buyer is [redacted]), and start building cashflow from the rents.
- Circle the wagons around your Event Center business, the catering business, the tasting room business (if you’re doing catering in-house, perhaps you can sell food in the tasting room), and getting the most money out of your rental spaces. By doing this, you will substantially increase your longevity in that building while it’s value naturally increases over the next ten years. This building could provide you with a fantastic retirement…if you can financially hang in there until it’s worth more than your note and personal investment.
Calls to Steve Bystran, Adam Bystran and Andrea Bystran requesting comments were not returned.
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