BALTIMORE – Essential Pizza filed an emergency motion yesterday asking the court to unfreeze its bank accounts after filing for Chapter 11 reorganization. Because of the freeze, the Papa John’s franchisee is unable to meet its payroll for 1200 employees.

After GE Capital sued the owner for breach of a promissory note, the franchise owner filed for bankruptcy protection on Tuesday in Baltimore, where the company is based. The emergency motion (pdf) is the latest development on franchisee Essential Pizza suing Papa John’s for allegedly hiding important information in PJCOMN Acquisition Corporation’s original purchase of 84 Colorado and Minnesota stores.

Regarding GE Capital freezing the funds, attorney Robert Zarco of Zarco Einhorn Salkowski & Brito explained, “That was done without any hearing, after claiming they wanted to protect the assets of the business.” He said in their view, there was no evidence of waste, mismanagement or any other inappropriate disposition or dissipation of assets outside the ordinary course of business operations.

In its lawsuit against the franchisor, Essential Pizza alleges they were uninformed of all liabilities when purchasing the underperforming restaurants. As a result, the price for the business was inflated. That put their franchise in the position of having a higher debt service because it had to take out a larger loan than it should have, Zarco explained. The company then found other financial obligations to the tune of $1.2 million, and another for $700,000, which they started to pay down. Of the $1.2 million they paid $200,000, and of the $700,000 they paid $500,000. “After Essential paid down a total of $700,000, you can imagine what kind of financial strain that put on the business,” Zarco stated.

As a result, Essential fell behind on their payment to GE Capital Corp., on a loan of approximately $8 million. That is when GE Capital filed its lawsuit against Essential Pizza/PJCOMN. When the court issued its order to the receiver, Zarco said he unilaterally froze all of the bank accounts, including the payroll account. “PJCOMN has approximately 1800 employees, with approximately 1000 in Colorado, so we immediately requested that GE Capital order the receiver to unfreeze the accounts,” he explained. “But the receiver unfroze only the payroll account, without unfreezing the bank account that funds their payroll. Of course, many checks issued started bouncing. That has created a major public relations nightmare because employees who rely on their paychecks don’t have money to pay their livelihood,” Zarco declared.

In order to get rid of the receiver and let someone else take over the proper administration of the financing of the stores, Essential has filed for bankruptcy in the US District Court of Maryland. Zarco insists that the bankruptcy reorganization does not depend on the outcome of the Papa John’s lawsuit, as they utilize the avenues of the bankruptcy court in order to reorganize and do what they have to do.

In closing Zarco declared, “This whole debacle started by what we believe is the wrongful conduct that we have alleged against Papa John’s in our lawsuit.”

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Related Article:

• Papa John's Sued for Hiding Liability | BlueMauMau
• The Denver Business Journal reports