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CFR
Atlanta Bread case rises up once more
A State Supreme Court decision is still pending in the original Atlanta Bread case, as a slow-moving companion case heads toward trial.
(Previous Article: Franchise Times, CFR, August 2008, Their Day in Court)
As the franchise community eagerly awaits the Georgia Supreme Court decision on whether Atlanta Bread Company’s non-compete covenants are unenforceable, a related lawsuit by the same franchisee will soon be set for trial.
In February 2006, Sean Lupton-Smith filed his first complaint after seeking a temporary restraining order to prevent Atlanta Bread from terminating his five units. The company had accused him of operating a competing business when he opened a PJ’s Coffee & Lounge.
After Atlanta Bread took Lupton-Smith’s five stores back in June 2006, he filed his second lawsuit through attorney R. Randy Edwards, Cochran & Edwards, this time also targeting owners Jerry and Basil Couvaras. In the complaint, Edwards accuses the Couvaras brothers of transferring funds to affiliates of Atlanta Bread International Inc. (ABCI) to shield themselves from liability in an effort to defraud his franchisee client.
According to Edwards, while they were litigating with ABCI over the wrongful termination, they learned that ABCI had transferred the rights to operate Lupton-Smith’s stores to Europan Inc., which is owned by Springtime House Inc., the same company that owns ABCI.
“Europan paid nothing whatsoever for the valuable intangible assets it acquired from ABCI,” Edwards explained. “Thus, while we are litigating over the rights to millions of dollars in profits from the operation of these five stores, the defendant in a pending case transferred those rights to a related entity for free.” Edwards said that is why they sued the parties involved in that transfer, and those who stand to profit, under Georgia’s version of the Uniform Fraudulent Transfers Act.
In a February 2006 affidavit by Basil Couvaras, ABCI chief operating officer, he showed his calculation of what the five stores would generate in profits over the next year. Based on the 2005 after-tax gross revenue figures, they were expected to generate a cumulative of $1,872,947.
Before filing his latest complaint, Edwards told the company’s outside counsel of his findings after reviewing deposition testimony and other information related to the litigation. He said it appeared Atlanta Bread, its affiliates and officers had disregarded their “corporate form,” meaning it was operating as a controlled front or alter ego. Because the corporation was allegedly commingling funds and making fraudulent transfers, Edwards asserted the Lupton-Smith plaintiffs could be hindered or defrauded when they become judgment creditors of parent ABCI.
The second lawsuit went forward after Atlanta Bread refused to guarantee any debt it might have.
Superior Court Judge Dorothy A. Robinson denied Atlanta Bread’s motion to dismiss the case. She asserted that the issue is not whether the franchisee plaintiffs may ultimately prevail on the “piercing the corporate veil” theory, but whether the allegations are sufficient to allow them to conduct discovery to prove their allegations. Atlanta Bread defendants had not shown that the plaintiffs could not introduce evidence to warrant relief.
She also said in her ruling that the assets subject to the franchisee’s claim were transferred to Europan with the intent to hinder, delay or defraud in collecting from ABCI. On the third and fourth counts of injunctive relief and appointment of receiver, the court ruled the franchisee plaintiffs made sufficient allegations that, if proven, would entitle them to relief. They had alleged that the Couvaras brothers had been convicted of a felonious crime involving deception and it created a risk that ABCI defendants will attempt to interfere with franchisee plaintiffs’ rights.
 Janet Sparks is the former publisher of Continental Franchise Review, an industry newsletter that covered the franchise community for more than 30 years before being acquired by Franchise Times Corporation. Janet can be reached at 303-799-7398 or at jsparks@franchisetimes.com |
Robinson also denied the fifth count, on constructive trust, a form of implied trust. The judge explained the franchisee’s allegation that ABCI fraudulently transferred assets to Europan and is now required to hold the proceeds in “constructive trust” for the benefit of the franchisee plaintiffs, and that the ABCI defendants had been put on notice of the claim and had a general indication of the type of litigation involved. “If proven, Plaintiffs would be entitled to seek the imposition of a constructive trust,” the judge said in denying the count. Because count six, punitive damages, requires the plaintiff’s second count for fraudulent conveyance to go forward, the judge ruled that count six also be denied.
In her dismissal, Robinson explained that the plaintiffs’ allegation that the individual defendants—the Couvaras brothers, Springtime House Inc. and Summertime House Inc.—disregarded the corporate “fiction,” have acted as the alter ego of one another and should be treated as one, meet the requirements of the statutes, alleging “fraud with sufficient particularity to withstand defendant’s motion to dismiss.”
In Atlanta Bread’s opposition brief to Edward’s motion for sanctions, Timothy H. Kratz, McGuire Woods, argued that they had spent an extraordinary amount of time over the past two years explaining that the transfer of funds was made in the ordinary course of business. He also said they had warned Edwards that the potential suit was frivolous, but they filed it anyway. Regarding the first lawsuit, Kratz said the plaintiffs at best were, and remain, hypothetical creditors, and that they had tried to get the second case dismissed or stayed pending the outcome of the first lawsuit. And regarding Lupton-Smith’s claim that the value of his first lawsuit was in excess of $20 million, Kratz said the amount given could be proven to be substantially less, that the case was far from being over.
In November, Judge Robinson dismissed Edward’s motion for sanctions, ordering the parties to pay their own costs and attorney fees. She also set rules on future discovery.
It’s uncertain when the trial will begin. “This case is ready for trial,” Edwards said. “After more than three years of litigation, we are anxious to get either or both of these cases in front of a jury.”
Attorneys representing Atlanta Bread and the Couvaras brothers did not respond calls seeking comment.
