The early investors in Jose Garces’ first three restaurants — Amada, Village Whiskey, and Tinto — on Monday filed suit in Philadelphia Common Pleas Court, seeking to remove the chef from his managerial control of those restaurants and to appoint a temporary receiver to operate them.
Lawyers for Spinner Family Holdings and food distributor James Sorkin accuse Garces and his representatives of misappropriating millions of dollars of cash and assets.
They also fired back at him for dismissing their criticisms in an interview with the Inquirer last week, during which Garces acknowledged financial problems and suggested that a bankruptcy filing was one option that was being explored.
A representative of Garces on Monday labeled the claims as “false and erroneous.”
Garces last week said his enterprise was beset with problems that started with the 2014 shutdown of Revel Casino in Atlantic City — idling four profitable restaurants — and suffered a large loss from the failure of an Amada restaurant in New York City.
In the suit filed Monday, Tom and Maria Spinner and Sorkin claim that Garces agreed to run Amada, Village Whiskey, and Tinto as “profitable, standalone Garces restaurants, whose net profits would be distributed to investors without regard to Garces’ other interests and whose assets would be insulated from Garces’ personal, corporate, and other restaurant debts.”
In last week’s interview, Garces said: “Without a doubt in my mind, they were very aware that this company was operated as an enterprise. There were multiple projects that everyone was involved in and at no point was this operated as entity by entity.” Garces called it “illogical” for his investors to think they should get money from the restaurants “that do well, but not have to suffer any downside from the places that have failed.”
Since opening Amada in 2005, Garces has gone on to open 30 restaurants. He now controls 13 restaurants, plus a catering division, including Buena Onda, Volver, two Distrito restaurants, and the Olde Bar.
In the new suit, Sorkin and the Spinners assert that Garces borrowed more than $9 million from M&T Bank to pay off old debts and to garner $4.5 million for new endeavors. Of that $4.5 million, they say Garces withdrew all but $150,000 within nine months. They also say he maxed out a $500,000 credit card from the bank.
They also say Garces sought to justify cutting off money payments to them by saying he was holding on to cash as a form of “intra-company loans.” They say these loans had no known interest rate and that Garces had made no payments on them.
The investors also said they voted in January to remove Garces as leader of the three restaurants, saying they had to take action once they realized his “mismanagement was ongoing and would not stop.” Garces ignored the vote, the suit alleges.
Garces initially followed the operating agreements and paid distributions to Spinner and Sorkin, the suit says. But after Garces gained celebrity status, the suit alleges, Garces “deliberately and systematically breached the operating agreements and his fiduciary duties for his own benefit. Beginning at least by 2011, Garces began to conduct routine, unauthorized cash sweeps.” In effect, the suit accuses Garces of building an empire off the initial three restaurants and managing the restaurants for his own benefit and not the benefit of his investors.
The suit also says Garces arranged $9 million in credit with M&T Bank by pledging the assets of the three restaurants, without calling for a member vote. The suit says Garces “paid off restaurant debts, spent millions to open new restaurants, and maxed out the $500,000 credit line on his M&T corporate credit card” and used cash from the three restaurants to pay interest on the M&T loans as well as management fees. Also named in the suit is John Fioretti, whom M&T Bank and Garces Group appointed chief executive officer when M&T grew skittish over the company’s finances last year.
In last week’s interview, he wished to emphasize that his employees were performing “the best that they can. And we notice no customer drop-off, no poor ratings in service, no food-quality issues.”
“These investors continue to make false and erroneous claims that not only tarnish Jose’s brand, but the company and the employees who have committed to what we do,” a Garces representative said. “They will clearly stop at nothing to impede our future because of their greed and desire to undermine any new partnerships. The bottom line is we are not going to continue to litigate this in the press day after day and know the truth will prevail, as will our business.”