Cuppy's Coffee: In-House Attorney Attempts To Set Record Straight

In an effort to put to rest the never-ending blog mayhem related to Cuppy’s Coffee, Smoothies and More and its purchase of assets of Java Jo’z Coffee and More, Lou Manganiello, Cuppy's in-house attorney, answered questions for Blue MauMau in an interview this week. The firestorm of criticism in the blogosphere has been triggered by allegations that the newly formed coffee franchise emerged out of the ashes of an existing licensing company, Java Jo’z, and that in reality the two are virtually the same. As a result of the sale, many feel Java Jo’z had abandoned many of its licensees, leaving them with little hope of getting back their $30,000 refundable deposits.

But Cuppy’s Coffee is offering its assistance in the matter, even though it has no legal liability to do so. According to a letter to licensees from Beggs & Lane, Pensacola, Fla., Robert Morgan, owner and manager of Medina Enterprises, Inc., doing business as Cuppy’s Coffee (pdf), has pressured the Snowdens, Java Jo’z owners, into settling with the disenchanted licensees, in an effort to do the right thing and to keep the problems of Java Jo’z from bleeding over to Cuppy’s. But this new endeavor won’t be easy, especially since the Internal Revenue Service has issued a Notice of Levy against the previous owners, and Roy Snowden is awaiting sentencing on charges of evasion of payment of income taxes and conspiracy to defraud the IRS.

To begin with, Manganiello explained the difference in the two coffee concepts, saying that in a license arrangement such as Java Jo’z it simply states, ‘Here’s the concept. You can use my name, but basically you are on your own. There is no monitoring, no controls from the licensors. Compliance issues are not involved.’ He said the licensees paid a nominal fee upfront of approximately $495 under the Java Jo’z contract, and another fee of approximately $30,000 to Emerald Coast Manufacturing, Inc., under a separate contract as a down payment for the buildings. According to Manganiello, “The Emerald Coast issue sort of gets buried because no one knows Emerald Coast, but everybody knows Java Jo’z.”

When Medina Enterprises, Inc., a Nevada based corporation, purchased the assets of Java Jo’z Coffee & More for $3 million in May 2006, Medina's owner Morgan (pdf), formed a coffee franchise under the name of Cuppy’s Coffee, as a Texas corporation, which was headquartered in Fort Walton Beach, Florida. Under their contract, Medina paid $250,000 upfront, leaving approximately $50,000 in monthly payments for a period of about four-and-a-half years. Manganiello said that was the money being paid back to Java Jo’z founders Roy and Kim Snowden for their interests, which included Java Jo’z, Emerald Coast, Snowden Holdings and other entities that owned assets.

Snowden still owns and controls the stock in all of those original companies. Snowden Holdings, according to Manganiello, was an entity that only held automobile titles, while the licensing was under Java Jo’z Coffee and the building producer was under Emerald Coast Manufacturing. He also said that Cuppy’s is no longer working with Emerald Coast, because it went by the wayside.

But on October 4, the entire transaction hit a snag when the Internal Revenue Service issued a subpoena to Robert Morgan, under Medina Enterprises, d/b/a Cuppy’s Coffee (pdf), to appear in U.S. District Court in Pensacola, Florida. It advised him that in anticipation of a trial date, jury selection would take place in November in the criminal case against Roy and Kimberly Snowden. Morgan was ordered to bring any and all records and documentation of payments with him related to all Snowden companies.

On November 13, Snowden pled guilty in federal court to five counts of Evasion of Payment of Income Taxes and one count to Defraud the IRS. And, the IRS issued a Notice of Levy on December 19, to all outstanding contractual obligations owed, in the amount of $1,176,884.10, to Roy P. Snowden and all his entities and. Kimberly M. Snowden, as alter egos. But Manganiello said that it was just a “technical” conviction, which was a result of a situation that happened back to 1992, when Snowden was in the magazine business.

Manganiello said that Medina Enterprises and manager/owner Robert Morgan were able to negotiate with the IRS through attorney David McGee, Beggs & Lane, which resulted in allowing them to put $15,000 of the $50,000 monthly payments to the Snowdens into a refund pool, leaving the IRS with $35,000 per month toward reducing the Snowden debt. The proposal for the pool was designed to provide a fair refund to all legitimate claims made against the previous owners.

Manganiello said, “It is money that normally the Snowdens would be paid under the Promissory Note for the asset purchase agreement, if people did not request money (refunds) and if the IRS was not there. In the asset purchase agreement, his clients have the right to offset for any claims left from the previous seller. He said, “If Snowden was able to reduce his IRS debt, and the IRS gets off the program, then more of that money could go toward the refunds.”

Resolving Past Issues

In resolving issues with licensees who paid money to Java Jo’z under contracts, McGee sent out two letters in an effort to resolve issues regarding refunds. Manganiello said there are two groups of people, those who now want money back (pdf) because they say they cannot find a location or get financing, and those who were able to arrive at a settlement agreement (pdf) with the Snowden interests. In the latter, Manganiello said the payments had already gone out to some people when the IRS levy hit. He said ultimately that was the difference between licensees. Otherwise, everyone would end up in the same spot. “Some go into the pool asking for $30,000 back, and some go into it saying they are owed $5,000.” The payments made out of the pool funds will be in different amounts and McGee’s firm will handle and mange it.

According to Manganiello, there were no timelines on settlements because they had no idea how many people may want to go into the refund pool. He said, “If people want their money quicker, they need to come into the pool quicker. If they drag their feet, they may be further out.” He also emphasized that Cuppy’s was volunteering to pay this money out from the amount they were obligated to pay the Snowdens. So when all that money is paid back, then conceivably they are going to be out of that program.

UFOC Issues?

Manganiello said the Nixon Peabody law firm was responsible for the Uniform Franchise Offering Circular for Cuppy’s Coffee (pdf). In reviewing it, it clearly states that the franchise has no predecessors, that they only have affiliates. Java Jo’z is not listed as either. Although the principal officers, directors and executives are required to be named as working in the franchise in Item 2 under Business Experience, the only people listed are Doug Hibbing as President and Rachel Clark as Vice President of Marketing. Hibbing’s past experience shows that he was the Chief Financial Officer of Snowden Holdings from December 2002 to May 2006, and Clark served as Director of Marketing of Java Jo’z in October 2005. Morgan, owner and manager, is not listed. According to the counsel for the Communications division of the California Department of Corporations, anyone not involved in the management of the franchise, does not have to be listed, even if they are the owner.

So, why were other executives of Cuppy’s Coffee not listed in the UFOC? Manganiello responded, “That’s like saying, how long is a piece of string? Where would we stop?” He said the regulators were concerned only with the principal people who would interface with franchisees, and that Morgan, the owner of Cuppy’s parent company, was the key person in the building portion of Elite Manufacturing. He also said the company does not have a development person at this time, at least not by that name. He explained, “We do have a sales manager.”

Manganiello verified that Hibbing was the Chief Financial Officer of Snowden Holdings, that he was basically the accountant for Snowden. Morgan, Cuppy’s owner, also worked for Snowden as Director of Operations. They were only involved in Java Jo’z to the extent that Mr. Snowden allowed them to be involved.

He continued saying that no one was really privy to the books and the records. Snowden at that time had an accountant that was located in Kansas, and the daily and weekly books were shipped there, and everything was merged at that level. He said, “Hibbing was out of the loop as far as putting the different numbers and figures and concepts together. No one did that except Snowden. So, no one really knew where the company was financially.”

Manganiello said that Hibbing and Morgan always felt that if the company was running in a different direction, they could make a good business out of it. That is why Morgan decided to buy the assets and why he bought out the leases, vehicles and computer and telephone systems. And, that’s why they also have some of the same employees. When they hear people say that Cuppy’s must be the same company, that all it did was change its name, they tell them if that was true the IRS would not have let them alone.

But in retrospect, he said it might have been better to make a clean break from Java Jo’z, but then they would have had to get new deposits, new locations, and move the entire computer systems.

Manganiello explained, “You have to understand that neither Morgan nor Hibbing knew the extent of the problems that Snowden had. If they did they wouldn’t have done that. It didn’t surface until they took control and saw what was hidden beneath all the books and numbers.”

Janet Sparks is a contributing reporter for Blue MauMau