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‘What Happened to Cash’ Is Question From Gigi’s ‘Zees Attorney


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Gina Butler is the founder of Gigi’s Cupcakes who sold 100 percent of her stake to FundCorp/KeyCorp in 2016, but continued to make public appearances on behalf of the brand as recently as last June, when she visited the Franchise Times’ booth at the International Franchise Expo in New York.

Two items are noteworthy in the Chapter 11 bankruptcy filing last week by Mr. Gatti’s Pizza, Sovrano and Gigi’s Cupcakes: a $20.2 million term loan from Equity Bank to Mr. Gatti’s and Sovrano, its parent company, and a $9.2-million term loan from Equity Bank to Gigi’s Cupcakes. 

Both loans are dated June 28, 2018. A bit over six months later, on January 4, 2019, the debtors claimed “a liquidity crisis” in the bankruptcy filing and petitioned the court to use cash collateral of Equity Bank. The filings said the companies needed “immediate access to its cash to pay employees and to pay for ordinary operational expenses.” Principal and interest payments on the loans are in arrears, the documents said.

Jeffrey Cohen of Cohen Law, the attorney representing 18 Gigi’s Cupcakes franchisees in ongoing litigation, is working to find out where that loan money went. “The company never repaid a dime post-June 28, and as of the filing date, Friday, January 4, owed late charges, interest, couldn’t make its principal payment,” Cohen says, referring to Gigi’s Cupcakes and KeyCorp. “It’s a term loan, not a line of credit. What happened to the cash?” 

KeyCorp of Fort Worth, Texas, is the venture capital firm that bought Gigi’s in 2016 via an affiliate called FundCorp, whose principal is Jim Phillips. Sovrano, which bought Mr. Gatti’s in 2015, is also listed as an affiliate of FundCorp. (Neither KeyCorp nor FundCorp is listed as a debtor on the bankruptcy filing.) 

“I have a feeling, and I’ve brought it up, that the money went upstream to KeyCorp, who is the owner, and Jim Phillips, the major principal,” Cohen alleges. “This $30 million that went upstream—so they sucked the money out of the companies and they put them into bankruptcy." 

“That’s what I strongly suspect,” Cohen continues. “It doesn’t seem that Gigi’s is going to borrow $9 million in June and claim it’s insolvent six months later.”

Cohen represents 18 plaintiffs who own some 25 units of Gigi’s Cupcakes, which reached a high point of about 100 units at the time of the sale but is now down to about 70, Cohen said. “What I need to nail down is where the cash went?” he said, something that he believes will be easy to ascertain via bankruptcy court. “If indeed the money went upstream, then we would add those claims immediately” to his clients’allegations.

Michael McConnell of Kelly Hart & Hallman, the outside attorney for the debtors in the bankruptcy filing, referred a request for comment to Jack Strother, general counsel of Mr. Gatti’s Pizza and Gigi’s Cupcakes, who did not immediately respond.

Deborah Coldwell of Haynes & Boone, who represents the franchisor Gigi’s Cupcakes in the ongoing litigation, did not immediately respond to a request for comment. 

Documents say the Chapter 11 filing will “facilitate a quick turnaround and improvement in liquidity in order to create a fiscally stronger enterprise.” The debtors’ filings “are the result of a combination of factors stemming from the acquisition of the Gigi’s brand in 2016, leverage undertaken in connection with acquisition and growth of both brands, and operating losses at certain stores,” according to Dawn Ragan, chief restructuring officer.

“The companies and their advisers expect the Chapter 11 process will best facilitate the companies’ immediate liquidity needs and preserve the Mr. Gatti’s Pizza and Gigi’s Cupcakes brands, store, restaurant and franchise operations, and jobs for employees as well as allow for the sale of certain assets of the debtors,” the filing said.

 

 

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The latest news, opinions and commentary on what's happening in the franchise arena that could affect your business.

Tom KaiserTom Kaiser is senior editor of Franchise Times. He can be reached at 612.767.3209, or send story ideas to tkaiser@franchisetimes.com.
 
Beth EwenBeth Ewen is senior editor of Franchise Times. She can be reached at 612.767.3212, or send story ideas to bewen@franchisetimes.com.
 
Nicholas UptonNicholas Upton is restaurants editor at Franchise Times. He can be reached at 612.767.3226, or send story ideas to nupton@franchisetimes.com.
 
Laura MichaelsLaura Michaels is editor of Franchise Times. She can be reached at 612.767.3210, or send story ideas to lmichaels@franchisetimes.com.
 
Mary Jo LarsonMary Jo Larson is the publisher of Franchise Times Magazine and the Restaurant Finance Monitor.  You can find her on Twitter at
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