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Krispy Kreme Is Sued by Franchise Owners

The L.A.-based investors allege that the doughnut chain wants to force them into bankruptcy.

October 01, 2005|James F. Peltz | Times Staff Writer

The main owners of Krispy Kreme Doughnuts Inc.'s Southern California franchisee are suing the doughnut maker, alleging that Krispy Kreme is trying to bankrupt them so it can buy back their franchise rights "for cents on the dollar."

The suit was filed in Los Angeles Superior Court by Richard Reinis and Roger Glickman, the principals of privately held Great Circle Family Foods in Los Angeles. Reinis also is Great Circle's chief executive.

Krispy Kreme spokeswoman Laura Smith declined to comment because the Winston-Salem, N.C.-based company -- known for its "original glazed" doughnuts -- had not yet reviewed the complaint. The suit was filed Thursday and seeks unspecified damages.

The executives alleged that Krispy Kreme overcharged for equipment and supplies, misappropriated franchisee funds, improperly changed Great Circle's payment terms and fraudulently induced the executives to personally guarantee Great Circle payments that Krispy Kreme is now demanding.

Krispy Kreme contends that the plaintiffs owe the doughnut maker about $9 million, the suit states.

The executives are demanding an accounting of the situation, but in the meantime Krispy Kreme is trying "to force Great Circle into bankruptcy" and, if so, "Krispy Kreme will be able to purchase the franchise rights for cents on the dollar," the suit alleged.

Also named as defendants are Scott Livengood, Krispy Kreme's former chief executive, and John Tate, its former chief operating officer. Livengood could not be reached for comment, and Tate did not return a call seeking comment.

Great Circle is Krispy Kreme's largest franchisee, operating 30 locations in Southern California and selling doughnuts to grocery chains and other wholesale accounts.

It employs nearly 1,000 people and had $64 million in sales last year.

The lawsuit is the latest chapter in the stunning decline of Krispy Kreme and many of its franchisees, who were riding high a few years ago when Krispy Kreme's surging sales, stock price and expansion plans made the company a Wall Street darling.

But Krispy Kreme's performance began crumbling a year ago, and Livengood was ousted in January.

In August, a sweeping investigation by a special board committee found that Krispy Kreme had used improper accounting to generate much of its double-digit gains.

Krispy Kreme's stock, which peaked at nearly $50 a share in mid-2003, closed Friday at $6.26 a share, unchanged for the day.

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