Buyers of 13 Mr. Gatti’s Stores Claim They Were Misled
The chief restructuring officer for Mr. Gatti’s, which is in Chapter 11 bankruptcy court, calls the claims “without any merit whatsoever.”
Two men who bought 13 corporate stores from Mr. Gatti’s Pizza last September for $4 million have filed a complaint against the franchisor, claiming executives did not disclose financial problems at the firm that led to a Chapter 11 bankruptcy filing in January.
In Three Dough Boys v. Gatti’s Great Pizza Inc., plaintiffs are Jeff Tisdel and Kenny Starks, who left positions at Papa John’s to buy the restaurants. R.J. Phillips Jr. and Kyle Mann of Great Pizza Inc. are the defendants.
“In financially distressed times, men can make legally desperate decisions. Defendants misrepresented the financial performance of 13 restaurants and misrepresented Gatti’s insolvency to induce plaintiffs to pay them several million dollars so that defendants could continue to pay off their creditors,” the complaint intones. They are now “paying royalties to the same defendants who swindled them.”
Dawn Ragan, chief restructuring officer for Mr. Gatti’s, dismissed the lawsuit as a nuisance. “I would advise you that the company denies the claims made in the referenced litigation and considers them wholly without any merit whatsoever. They constitute nuisance claims that we will deal with in the bankruptcy court process,” she said via email.
“This litigation is not expected to impact the procedures and timing in place to move forward with our restructuring plan, and should not hold up the company’s exit from Chapter 11, which is expected to occur in approximately 60 days.”
Jeffrey Cohen of Cohen LLC in Denver, attorney for the plaintiffs, said the stores owned by Tisdel and Starks are performing “surely not as good as they should. Three or four of them are not making money at all. A third of them need to be closed, of the 13 we’re talking about. The other eight or nine, let’s put it this way, it’s not a stellar investment.”
Cohen is continuing to press a related case on behalf of several franchisees claiming fraud against the franchisor of Gigi’s Cupcakes, which shares ownership with Mr. Gatti’s. The assets of Gigi’s debtors in April were sold “free and clear of all liens, claims, encumbrances and other interests,” according to an order from U.S. Bankruptcy Court for the Northern District of Texas.
The buyer was initially to be MTY Franchising, but MTY declined to proceed as purchaser following the court’s initial approval of the sale. Debtors contacted other interested parties to seek an alternative buyer, agreeing to sell Gigi’s assets to Elite Restaurant Group, subject to a “reduced purchase price of $1.2 million.”
At least 10 franchisee groups, clients of Cohen’s, had filed an omnibus objection to the Gigi’s sale. The court found that objecting franchisees “failed to satisfy their burden of proof” with respect to three claims. And, the franchisees’“demand for repayment of all royalties paid is not credible and in bad faith,”the court said. A settlement of $140,000 was paid to the objecting franchisees, the filing said.
Cohen said that settlement and court rulings apply only to the sale of Gigi’s, and the larger lawsuit against Gigi’s owners continues. “You can’t conflate this $140,000 that we got out as a result of the sale with the lawsuit we have pending. The $140,000 is a meager amount. The major lawsuit pending against these people is really the key."