Deep Ellum Founder John Reardon Discusses Lawsuit Against CANarchy, Fireman Capital

Deep Ellum Brewing Company founder John Reardon has filed a lawsuit against the CANarchy Holding Corporation — and its private equity firm Fireman Capital Partners — alleging that the craft brewery rollup has failed to make several payments related to the 2018 acquisition of the Dallas craft brewery.

The civil lawsuit was filed in the Court of Chancery in Delaware on July 16, and the filing is heavily redacted to remove several details, including financial terms of the transaction. Defendants listed include the CANarchy Holdco Corp., DEBC Holdco Corp., CANarchy Holding Co. LLC, Oskar Blues Brewery Holding Co. LLC, CANarchy Craft Brewery Collective LLC, Deep Ellum Brewing Company LLC, and Fireman Capitals Partners LLC.

“Defendants received the full benefit of their bargain, acquiring 100% of the membership units of the Deep Ellum Brewing and placing those membership units in a new company, which continues to sell award-winning craft beer under the Deep Ellum Brewery name,” the lawsuit said. “Mr. Reardon and his fellow sellers, however, did not receive the benefit of their bargain in two distinct ways that effectively eliminated the majority of the consideration that Defendants were obligated to provide following the sale.”

According to the lawsuit, CANarchy failed to pay Reardon, who is listed as the sellers’ representative, on numerous occasions, including a scheduled earn-out payment based on the future beer sales. In addition to Reardon, the other sellers listed in the complaint include Brian Hodges, Steven Moiles and SCB (Storied Craft Breweries) Deep Ellum, who agreed to sell their interests in the craft brewery to DEBC Holdco Corp., which is now known as CANarchy Holdco Corp.

CANarchy, the lawsuit alleges, failed to pay Reardon an undisclosed sum on June 8, 2020, which was supposed to be guaranteed as part of a deferred payment guaranty agreement. Three days later, Reardon notified CANarchy that it was in default and the company had until June 20, 2020, to make the payment.

“But the CANarchy entities have flatly refused to pay,” the lawsuit claims.

Speaking with Brewbound, Reardon said his relationship with CANarchy started going south from Day One.

“It was all smoke and mirrors,” he said. “Everything about it. I mean the whole sales pitch from [Fireman Capital partner] Dan [Fireman], to the acquisition, to how things would happen after the fact, just nothing went as planned. I mean, I was promised so much, like capacity, capital for expansion, expansion into other states, the fact that I’d still be in control, upward mobility for employees. I mean, you name it. Nothing has rang true.

“It’s like they want to retrade this deal after the fact,” he continued. “We’ve received roughly half of our payments, not even including the additional possibility of barrel bonus.”

Asked about this status with CANarchy and the brewery that he founded, Reardon said he “technically” remains an employee of the company. However, he said the company has essentially cut him off from all communication.

“I don’t have much of an opinion,” he said. “Fact is, they could care less if I were to give it or not. Deep Ellum, they’ve cut the employee base by 50% or 60%. It’s just not the company that I created. The culture has been disassembled brick by brick. The fire’s gone, man. That’s just the way that it feels.”

In a statement, CANarchy CEO Anthony Short told Brewbound the lawsuit is “a dispute with a minority shareholder regarding the terms of a debt instrument.”

“We are working with the shareholder to address their concerns and resolve the issue,” he added. “Importantly, it is business as usual and our operations are unaffected. We will continue to work closely with our valued wholesaler, retailer and supplier partners as we always have to provide great products to consumers.”

Reardon acknowledged those discussions were ongoing late last week, but he said those “seemed to completely go off the rails.”

“I’m still hopeful that we can work this out,” he said. “Obviously it’s never going to be the deal that I was promised. It’s never going to be the compensation package that was promised. But if I can take it on the chin here and move on and really just close the door on this chapter.”

In fact, Reardon said he’s offered to buy back Deep Ellum as a resolution, but he’s been rebuffed thus far.

According to the lawsuit, Reardon’s issues with CANarchy started less than a year after the sale of the brewery, starting with a missed payment on June 8, 2019. Shortly thereafter, CANarchy negotiated a forbearance agreement — an agreement to delay foreclosure — with the sellers.

Reardon had begun negotiations to sell Deep Ellum to CANarchy with Fireman Capital managing partner Dan Fireman in 2017. Those negotiations followed a 2016 sale of what was supposed to be a majority stake in the business to Storied Craft Breweries (SCB), an upstart growth capital group led by beer industry veterans Steve Berg and Adam Lambert.

Under the initial deal with SCB, Deep Ellum had agreed to sell a 56% stake in exchange for $8 million in growth capital and additional liquidity. According to Reardon, SCB only purchased about a quarter of the company and supplied $1 million in growth capital. As a result, Reardon ended up with 72 percent of the company and the opportunity to seek out new investment partners. Enter Fireman Capital and CANarchy.

The CANarchy platform, previously known as Oskar Blues Holding Company, was launched in March 2015 when Oskar Blues and Fireman Capital first teamed up to acquire Michigan’s Perrin Brewing in March 2015. The craft brewery rollup includes Florida’s Cigar City Brewing. the Utah Brewers Cooperative (Squatters and Wasatch) and Los Angeles’ Three Weavers, which was acquired about a month after Deep Ellum.

Reardon said the deal was negotiated over nine months with Dan Fireman, and he admittedly backed out of the deal several times. Each time he backed away, he said Fireman would call and reassure him that the company would make good on its promises.

“That is the only reason I did this deal was on the guarantee and on the promise of Dan Fireman,” Reardon said. “And it was a lie.”

Reardon’s lawsuit claims that CANarchy began breaching its deal less than a year after closing.

Per terms of a guaranty agreement, once CANarchy missed its payment then private equity firm Fireman Capital Partners, in its role as an additional guarantor of the note, was responsible for making the payment. Reardon notified Dan Fireman and Fireman Capital partner Chris Akelman that he would file a lawsuit for failure to pay if the company didn’t meet its obligations, the lawsuit says. But the firm “also refused to pay.”

Instead, Fireman and Akelman asked for a forbearance agreement, which was agreed upon on September 18, 2019.

As part of that agreement, CANarchy agreed to pay Reardon an undisclosed sum and the parties agreed to modify the amortization table, and a late payment was made.

However, the lawsuit claims CANarchy later breached the forbearance agreement and defaulted on their contractual obligations. Reardon was also not paid a scheduled earnout payment on April 15, 2020.

Among the other issues cited in the lawsuit is an alleged attempt by CANarchy to stop Deep Ellum from reaching sales volume levels necessary for Reardon and the other sellers to achieve earnout payments. The lawsuit alleges that promised distribution expansion of the Deep Ellum brand into other states never materialized. The brewery also never received capital infusions for equipment to increase production or marketing dollars to increase awareness of the brand.

The lawsuit alleges CANarchy “intentionally created their own savings on the back end of their acquisition by trimming promised and necessary marketing capital on the front end.” The lawsuit says Deep Ellum’s marketing and sales efforts were “disrupted” by taking the breweries’ sales director from exclusively working for Deep Ellum to working on all CANarchy brands throughout the southwestern region. However, Deep Ellum’s distribution was never extended into that region.

In March 2019, CANarchy did add distribution of Deep Ellum products to Oklahoma. Reardon said Oklahoma was the only state that CANarchy added distribution to and the company didn’t provide any marketing support behind the launch.

“I think these brands were purchased to solidify the national distribution of Oskar Blues and Cigar City,” Reardon said. “That’s not what was sold to me. That’s not the dream that I bought into. I even rolled equity, which that equity, from my perspective today, was worthless the day that I did my deal. It’s just been unfortunate across the board.”

The lack of investment behind production also led to out of stock issues and lost sales on “numerous occasions” leaving the brewery unable to meet vendor orders due to insufficient supply.

“The inability to satisfy orders affects the immediate sale in question, and has the additional long term impact of forcing distributors, vendors, and consumers to select competitive brands, resulting in additional lost sales,” the lawsuit says. “By preventing Deep Ellum Brewing from selling beer to vendors, CANarchy Collective, CANarchy Corp., and CANarchy LLC necessarily impeded the sales necessary to hit the milestones for the earnout payments.”

Additionally, Reardon, who was promised a role as Deep Ellum’s CEO moving forward, was cut off from the brewery’s sales and marketing efforts following the execution of the purchase agreement and after the forbearance agreement, the lawsuit says.

The lawsuit alleges that CANarchy’s alleged contractual breaches have caused Reardon and the other sellers “actual damages, exclusive of interest, fees and costs.”

In 2019, Deep Ellum’s volume increased 5%, to 47,816 barrels, after producing 45,542 barrels in 2018, according to national trade group the Brewers Association.

Reardon is seeking a judgment requiring CANarchy to pay its obligations under the purchase agreement and subsequent agreements, as well as monetary damages, interest and attorneys’ fees.

Now, the wait is on for CANarchy and Fireman Capital to file a response to the lawsuit. In the meantime, Reardon said he will turn his attention to his Deep Ellum Distillery, which was not part of the transaction with CANarchy.

The Deep Ellum Distillery produces vodka and will soon add whiskey to its portfolio. Reardon said he will also begin brewing beer under the “Leadbelly” brand, as he’s reached an agreement with the estate of folk and jazz musician Huddie “Leadbelly” Ledbetter.

“I’ll just run the same playbook that I ran many years ago,” he said, adding that he’s also acquired the old Deep Ellum brewhouse. He also plans to hire some former Deep Ellum brewers to brew an IPA and a blonde ale.

Reardon told Brewbound he was able to negotiate a carve out with CANarchy to produce a small amount of beer to sell to wholesalers within his non-compete, which expires in about 2.5 years.

“Hopefully we can recreate a little bit of magic,” he said. “I’m not naive enough to think that I can do it again. But I can have fun this time around.”

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