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Racketeering Expert Goes After Coffee Beanery

Successful racketeering charges put people behind bars
Successful racketeering charges land people in jail

BALTIMORE – Rick Welshans and partner Deborah Williams filed their second amended complaint last month against Coffee Beanery alleging racketeering claims, those normally associated with organized crime.  But this time the allegations are asserted by a racketeering specialist, one who has a proven record of protecting clients from business fraud and conspiracy.

The former franchisees retained RICO (Racketeer Influenced and Corrupt Organizations) expert Jeffrey E. Grell of Grell & Feist in Minneapolis. Looking back at their long six-year legal dispute, Williams and Welshans made this statement: "The biggest lesson we have learned throughout this journey is that we should have retained a franchise attorney as opposed to a contract attorney to perform our due diligence prior to buying a franchise. So, when we realized that RICO was a strong factor in our case, we looked to an attorney that specialized in RICO law.”

In the complaint, Grell highlights RICO requirements. “Since 1999 . . . JoAnne Shaw, Julius Shaw, Kevin Shaw, Kurt Shaw and Owen Stern . . . conducted, participated in, engaged in, and operated and managed the affairs of CBL [Coffee Beanery) through a pattern of racketeering activity . . . Under RICO, those persons constitute an ‘enterprise’ and their activity consists of acts of mail, wire and bank fraud.”

He emphasizes that the Shaw family and other company perpetrators engaged in the fraudulent scheme over a substantial period of time, against a number of franchisees including Welshans and Williams. And they continue their acts of racketeering as a regular way of doing business, threatening to continue it indefinitely. 

Franchisor’s continuing scheme to defraud buyers

The basis of Williams and Welshans legal dispute centered around Coffee Beanery presenting them with a franchise disclosure document that was different than the one registered with the Maryland Attorney General’s Office. And while they were purchasing a “cafe” model franchise, their disclosure document, then known as the Uniform Franchise Offering Circular (UFOC), was designed for Coffee Beanery’s “traditional coffee shop” model, two entirely different concepts.

After they opened their cafe in 2003, they began realizing the franchisor made numerous other misrepresentations and omissions regarding the marketing fund, gift card program, kickbacks from PepisCo and other vendors, and the mandatory purchase of DMX Music. And, they failed to disclose that its vice president Kevin Shaw had a felony conviction of grand larceny.

After operating their business for four years, both working at it full time, they incurred operating losses of $324,063. Welshans personally loaned their business $870,000 to open and operate their cafe. They had also received an SBA loan. Realizing they would never be successful, they closed their doors on November 17, 2007. 

Coffee Beanery’s scheme goes beyond Williams and Welshans, showing a pattern of racketeering activity to defraud a large group of owners and prospects. Since 2002, one of the franchisor’s alleged goal has been to fraudulently induce people to invest in its cafe model, an unproven concept.

The second amended complaint documents the franchisor’s pattern of activity. It states that Coffee Beanery is able to accomplish that by giving bogus estimates of the initial investments presented to prospective buyers, which exclude marketing and royalty fees. In this latest amended complaint, the amounts are documented from 2004 to 2011 showing a pattern of deception.

The fraudulent FDDs and UFOCs also show discrepancies in dates as to when Coffee Beanery was incorporated and when it began offering its cafe concept.  Some of the documents falsely state that the franchisor has negotiated purchase arrangements with suppliers to give franchise owners better prices, while others state the opposite: “We have not negotiated any contracts with suppliers which gives us a better price . . .”

Another problem, the franchisor tells some prospects in its disclosure that certain supplier pay Coffee Beanery rebates or incentives for purchases made by franchisees, while others are told, “No portion of these rebates are retained by us.”

The amended complaint shows how Coffee Beanery alters its disclosure about its marketing fund, sometimes stating contributions are kept separate, while others state those funds “must be used exclusively to meet all costs of maintaining, administering . . . and any other activities which we believe will benefit the System.”

And yet another example of falsifying UFOCs and FDDs is in listing franchise owners who have left the system. Depending on the documents, many telephone numbers and addresses are incorrect or not listed, making it difficult for prospects to contact the former franchisees. In order to find out what their experience with Coffee Beanery had been, they must spend needless time investigating.

This latest petition also gives the testimonies of other failed franchise owners of Coffee Beanery’s cafe model.

One interesting note, while the franchise disclosure documents, over a span of a decade, were compiled and completed by Pear, Sperling, Eggan & Daniels, PC, Williams and Welshans do not allege at this time that the law firm had knowledge of the falsity of Coffee Beanery’s UFOCs and FDDs, the complaint states.

Now, in addition to the allegations for violations of Maryland’s franchise act, detrimental reliance, and intentional and negligent misrepresentation, Coffee Beanery is facing four criminal violations of the RICO Act. The complaint, filed in Maryland federal court, shines a brighter light on the claims of fraud and conspiracy against the franchisor, its officers and employees.

Racketeering activity defined

The second amended complaint shows that the Shaw family and other employees constitute the Coffee Beanery Enterprise under RICO. All share the common purpose of misleading prospect and defrauding franchisees of their money or property. Richard Welshans and Deborah Williams, owners and operators of a Coffee Beanery franchise, are considered to be the “Welshans/Williams Enterprise,” victims of the franchisor’s acts of racketeering. 

The RICO attorney claims that the officers of Coffee Beanery and other co-conspirators carried out their scheme by means of false or fraudulent pretenses, representations, or promises to franchise owners. He asserts that the executives and other employees used the U.S. Postal Service and interstate wires (Internet, telephones, television, radio) to defraud franchisees.

They also knew that the postal service and interstate wires would be used to receive and deliver disclosure documents and other materials. And they would use telephone calls to discuss and negotiate the terms of Coffee Beanery’s sales, funds for payment of franchise fees, and loan documents to and from financial institutions that financed the franchisees’ build-out and operational costs.

Regarding financial institution fraud, Coffee Beanery, its officers and employees allegedly executed their scheme to obtain moneys, funds, credits, assets or other property from franchise owners. In presenting false financial information, projections and estimates to prospects, they knew that those financial institutions, including the U.S. Small Business Administration, would rely on such false financial information when approving or guaranteeing loans and other obligations to franchisees.

Even at that, Grell states that the franchisees could not have known all instances of mail and wire fraud that advanced the franchisor’s scheme. The company executives had exclusive control over information regarding when the fraudulent disclosure documents were transmitted to government regulators, and to prospective franchisees, and complaints filed by owners after discovering the cafe’ could not profitable. 

Attorneys respond

Attorney Harry M. Rifkin, who continues as counsel to the franchisees, expressed his confidence in their latest filing on RICO: “We can document every single one of the allegations. We expect to prevail on these claims.” After six years of litigation, Rifkin said Coffee Beanery and its company officers seem to be unrepentant. 

Chicago attorney Carmen Caruso said franchise attorneys often consider how a couple of powerful federal laws—RICO and antitrust—might apply to cases that they litigate against franchisors. He reminds that with RICO, the plaintiff attorney has to show evidence that the principals committed indictable federal crimes.

Caruso also stresses that racketeering requirements say that the franchisor defendant has to commit to two or more acts of mail or wire fraud, or other predicate acts over a period within ten years. Then, the attorney must show it amounts to a pattern of racketeering activity, meaning it was continuous, and the acts were related in a scheme usually directed to defrauding a group of victims, such as multiple franchisees.

The Chicago attorney said the same pattern of racketeering activity creates the potential for both civil and criminal liability. “You are now calling the franchisor a criminal, saying whatever they did here they should be in jail,” declares Caruso.

William “Bill” Killion of Faegre Baker Daniels, LLP, now representing Coffee Beanery, the Shaw family officers and other employees, did not return our telephone calls requesting comments. Killion, who has specialized in franchise law for years, also counsels and litigates on all areas of product distribution, antitrust, deceptive trade practices and other issues. Coffee Beanery now has until the end of the month to file its answer to the complaint.

Grell’s only statement at this time is, “I am willing to stand on the complaint and see how the case progresses from here.”

Because Welshans and Williams have been injured by the franchisor’s illicit acts, they demand judgment against Coffee Beanery, its officers and employees in the amount of $2 million in compensatory damages. Under RICO, that amount would be raised threefold to $6 million, plus attorney fees, interest, costs and other reasonable relief.

Welshans and Williams are confident going forward with their racketeering claims. “Working with Jeff Grell has been different,” said Williams. “Unlike a franchise attorney who only focuses on what is and is not required to be disclosed, Jeff focused on the pattern of behavior by Coffee Beanery, and what they knew about the concept they were selling. He taught us that what's not disclosed is just as important as what is disclosed.”


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