Franchisee Awaits Jury Trial after Four-Year Battle with Dunkin' Donuts

PROVIDENCE, R.I. (Blue MauMau) - When Irwin Barkan began his business relationship with Dunkin' Donuts and Baskin-Robbins in 2001, he had no idea he would be dumped into a quagmire of litigation costing him millions. But not only has it been a costly proposition, it has also caused him to lose six stores, his store development agreements (SDAs)—contracts allowing him to open new shops—and forced him into bankruptcy, through what he says was Dunkin's intentional effort to eliminate him from the system while restructuring his debt in developing new shops.

Now, seven years later, Barkan and his attorneys, Gelb & Gelb, are awaiting a court decision on Dunkin's motion for summary judgment, hoping it will be favorable in allowing their case to go forward with a jury trial. In opposition, Dunkin’ anticipates the court will grant its motion and quickly dismiss the case.

The Crux of the Lawsuit

Inside of one of the shops. Photo/Barkan

According to the first amended complaint filed in Rhode Island federal court in 2006, Barkan and his company, D&D Barkan LLC, entered into franchise agreements with Dunkin' in early 2002 for five shops— four underperforming stores and one to be developed. He also acquired the rights to develop other shops in Rhode Island pursuant to the SDAs he entered into with Dunkin' in 2002 and 2003. The purchase price was financed through a loan provided by CIT, a lender associated with Dunkin'. Not only did Dunkin' help arrange for his loan, but also guaranteed it. 

Following the development requirements of his SDAs, Barkan identified three new sitesfor additional donut shops, with the thought that the economies of scale from the additional stores would increase profits.

In September 2003, he presented his plan to Dunkin’ to restructure debt for developing his stores in order to bring them to a positive cash flow. When he presented four others during the next six months, Dunkin' rejected all refinancing proposals, citing disputes with Barkan, including the amount owed to CIT under the loans guaranteed by Dunkin'. The company also threatened to terminate his franchise and SDA agreements.

Barkan in front of his Burrillville, R.I. shop. Photo/Barkan

On June 15, 2004, Barkan entered into a settlement agreement with Dunkin' to resolve their disputes. Prior to completing the transaction, CIT informed him of several requirements: that he would have to pay $11,562 for one of the existing loans and a fee of $7000 to CIT for rewriting the debt; that Dunkin' needed to sign recourse letters; and that CIT needed to amend the debt agreements. But after the agreement was signed and he paid the appropriate monies, Dunkin’ did not sign the recourse letters and as a result, CIT refused to issue the documents amending the debt agreements.

Barkan claims that Dunkin' induced him into the settlement agreement by promising to assist him in refinancing his existing debt and to work with CIT on the loans, when Dunkin’ had no intention of exercising reasonable efforts to satisfy their obligations. If he had known that prior to the time the settlement agreement was executed, Barkan said he would not have signed it.

At the end of July 2004, Dunkin’ notified Barkan that CIT was not refinancing the debt. He subsequently learned from CIT that it did not refinance the loans because despite the settlement agreement, Dunkin' had not requested financing from CIT and had not furnished CIT with the necessary paperwork in a timely fashion. According to the lawsuit, as a result the loan was removed from CIT books.

Barkan Seeks Potential Buyers

Photo/Irwin Barkan

As Barkan came to grips with his dire financial situation, he began seeking potential buyers for his stores and agreements. First, he was approached by a Dunkin' franchisee, Guido Petrosinelli. Dunkin' was provided a copy of the initial letter of intent. At its request, Dunkin' was then provided a copy of the draft purchase and sale agreement. As the discussions went on, the potential purchaser kept Dunkin' informed on the proposed business terms, according to the amended complaint.

On January 13, 2005, both the potential purchaser and Dunkin’ attended a meeting at the Dunkin’ Donuts Center in Providence.  Barkan did not attend, as he was not invited. Immediately after the meeting, Petrosinelli, the potential purchaser, demanded a $50,000 price reduction from Barkan with respect to the proposed sale. Barkan rejected his demands. 

A second proposal then came from another potential buyer, who was an "A" rated Dunkin' franchisee with 150 stores. The Cafua Group proposal, among other things, provided for payment of all amounts owed by Barkan to Dunkin’ at the time of sale, which would not have occurred under the first proposal. It also provided for the payment of all of the outstanding CIT debt (which had been purchased by Dunkin’ from CIT). The complaint states that it was a significant improvement over the proposal from the first prospect, Petrosinelli, which had a lower price, did not allow for payment of the entire CIT balance, and required rent concessions from Dunkin’ Donuts Realty, Inc.

As with the first potential purchaser, Dunkin’ acted unreasonably and in bad faith to derail the possible sale so that it could acquire the Barkan plaintiffs’ store assets for next to nothing and resell them at a large profit. For example, the Dunkin’ defendants allegedly first told this prospect that if it purchased the Barkan Plaintiffs’ six shops, the prospect’s entire 150 store network would be re-rated to “B.” As a result, this would prevent it from future expansion until the rating was changed back to “A.” Then Dunkin' told Barkan and the other four plaintiffs that this buyer would not be approved for the purchase because it lacked adequate capability to supply baked goods to their shops. Both issues were resolvable, but according to the complaint Dunkin' "chilled the prospect’s interest and slowed negotiations."

Dunkin' then issued a notice of default/notice to cure under the settlement agreement, giving Barkan seven days to pay $1,874,122 or suffer termination.

Barkan Seeks Protection against Economic Ruin

In order to protect himself from the actions of Dunkin’ and to avoid complete economic ruin, Barkan filed for bankruptcy protection for his franchises. His existing six stores were sold at auction for $4,025,000. The debtors, as a condition of the sale of the stores, executed releases in favor of Dunkin’. Barkan’s claims against Dunkin’ in this case were dismissed. 

Barkan and his company D&D Barkan, which were not Chapter 11 debtors, did not file bankruptcy. They retained ownership interest in the SDAs, which were not assets of the bankrupt estate. Because of Dunkin’s wrongful actions, resulting in the improper termination of the SDAs, Barkan alleges that they lost the value of the SDAs which were in an amount of at least $3,000,000.

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In his amended complaint, Barkan alleges fraud, breach of the terms of the settlement agreement, breach of the covenant of good faith and fair dealing, violation of Massachusetts law and tortious interference. Because of Dunkin's alleged unlawful conduct explained in the complaint, Barkan is seeking damages to exceed $3 million, interest and reasonable attorney fees.

Dunkin' Moves for Summary Judgment

On September 29, Dunkin' filed its motion for summary judgment through its attorneys at law firm Nixon Peabody. They strongly state that Barkan's claim against Dunkin' and Baskin-Robbins is a contrived attempt to blame Dunkin' for his own poor business performance and credit unworthiness. " . . . Barkan builds a Trojan horse from an implausible series of speculations bereft of substantive evidentiary support."

Nixon Peabody denies Barkan’s allegations and alleges that any damages sought from the bankruptcy have already been dismissed from the case. They argue that following the bankruptcy, Barkan retained ownership interest in the SDAs and sued Dunkin' for the "lost . . . value of the SDAs.”   "Barkan's final supposition . . . is that Barkan suffered ‘lost profits’ exceeding $18 million that it would have earned, albeit ‘not in the real world,’ from the additional Dunkin' Donuts shops where were and remain unbuilt, and in three instances, not even associated with an identifiable piece of real estate."  

Dunkin's motion further states that the most implausible portion of Barkan's damages hypothesis is its contention that he would have turned a profit. It declares, "Barkan ran every Dunkin' location that it owned into the ground, and ultimately lost all of its active stores in bankruptcy." It concludes that Barkan is a failed Dunkin' franchisee who cannot demonstrate a past history of successful operation and who, as a franchisee, would only generate profits if its sales were greater than its overhead.  " . . . Barkan plaintiff has no clue as to what its overhead would have been for its prospective stores. Barkan's damages are consequently based upon sheer speculation, and fail as a matter of law."

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"Barkan's damages are certainly not speculative,” according to Barkan’s motion. In fact, the very reason he was awarded SDAs and was developing stores is that Dunkin' vetted his business along with those of other franchisees and concluded that he would succeed. Now that it is in defensive posture, Dunkin's position is that Barkan could not have succeeded. However, the [Settlement] Agreement contemplated a long relationship between Dunkin’ and Barkan which Dunkin’ sabotaged. Dunkin’s attempt to avoid the jury’s scrutiny of its actions through a motion for summary judgment based on disputed material facts is meritless."