When the lawyer for Philadelphia celebrity chef Jose Garces revealed the maneuver, it left his embittered business partners angry and dumbfounded.
"This," said Jason Spiro, lawyer for Tom and Maria Spinner, "would rank as one of the most disgusting sham performances I've witnessed as a lawyer. It's about as low as you can get."
The dispute that so upset Spiro unfolded last month at Garces' company board meeting in the offices of a Center City law firm. Garces' lawyer had unveiled a proposal to get around the partners' vehement opposition to the chef's plan to declare bankruptcy and sell out to a Louisiana food chain — a plan that could cost his original partners millions.
In a boardroom gambit that Garces' side said was perfectly legal, the chef divided his ownership stake into three corporate pieces — and thus was able to outvote his two partners, 3-2, to approve filing for bankruptcy.
In a hearing Monday, a federal judge will begin determining the legality of Garces' move — and the future of the struggling restaurant empire created by the ambitious Philadelphia chef and entrepreneur.
Lawyers for Garces and his opponents have filed a blizzard of legal motions, including a transcript of that contentious April 26 vote at the law office. That transcript and other documents provide an unusually unvarnished look at the dispute between Garces and the investors who had bet on his culinary genius a dozen years before when the chef opened Amada, the Old City restaurant that secured his reputation.
Garces' bankruptcy plan would cost him control of his company but would free Garces of massive debts and release him from multimillion-dollar liens on his Center City home and Bucks County farm. But it also would leave those early partners — food purveyor Jim Sorkin and New Jersey insurance magnate Tom Spinner and his wife, Maria — out in the cold, cut off from future profits. In Sorkin's case, he would be stuck with a $3 million tab for goods his family firm trucked to Garces' restaurants.
Sorkin, now 47, and the Spinners, in their 60s, put up $100,000 each to open Amada, as did Garces, 45, who also personally signed for a $700,000 small-business loan.
Spinner and Sorkin also were financial angels for Tinto and Village Whiskey, two Garces restaurants near 20th and Sansom Streets that are said to remain highly profitable. Spinner was a natural to link up with Garces; he is the scion of a family that has been in the Philadelphia food trade for a century. The Spinners grew close with Garces after he mentored one of their sons as a chef.
Garces has started as many as 30 restaurants since opening Amada. But he quietly put his remaining 15 or so restaurants on the block last summer, climaxing a skid that began in 2014 with the closure of the high-end Revel casino in Atlantic City, where Garces had opened four restaurants. His fiscal woes deepened after he tried to recoup by opening a new Amada in New York City. Garces closed the restaurant this spring after losing hundreds of thousands of dollars.
As part of his bankruptcy plan, Garces has lined up a suitor for his enterprises, Ballard Brands, a firm near New Orleans that operates about 150 restaurants under a variety of names. One of its prized items is a pancake as big as a pizza — cuisine seemingly a bit downscale from the Garces approach.
On Friday, Garces disclosed new details about the Ballard offer. The firm has agreed to pay $2 million in cash to acquire Garces' restaurants; to cover an additional $2.8 million in prepaid gift cards and catering deposits; and to pay an additional $1.3 million in other bills, including money for employees given "retention" deals.
The trouble is, as Garces has also disclosed, his businesses owe about $7 million to M&T Bank, in Buffalo, and an additional $7 million to other creditors. The biggest of those by far is Sorkin's food-distribution business, owed $3.2 million.
Experts agree that under bankruptcy rules, the $2 million in cash would overwhelmingly go to the bank, a secured creditor. The unsecured creditors, notably Sorkin's business, would get little or nothing.
Judge Jerrold N. Poslusny Jr., sitting in federal bankruptcy court in Camden, has scheduled hearings on the case for Monday morning. He is expected to rule relatively quickly.
Should Garces prevail, his restaurant chain would be put up for auction in a sale in which, in effect, the Ballard Brand offer would become the floor for all bids. His lawyers say that the prospect of buying his operation has stirred considerable interest and that an auction could draw many bidders. They are pushing for an auction as early as June 14.
Garces' restaurants Amada, Village Whiskey, Tinto, Buena Onda, the Olde Bar, Volver and JG Domestic and the event/catering division are among those included in the filing, as are his management companies for several other restaurants. (Garces Trading Co. and the Distritos in University City and Moorestown were not included in filings.)
Sorkin and the Spinners contend that Amada, Village Whiskey, and Tinto may not be part of any bankruptcy proceeding. In a recent lawsuit against Garces filed in the Pennsylvania courts, they say that Garces improperly siphoned off money from those three places in a vain bid to bail out his other losing locations. Garces contends that the investors knew all along that the early restaurants were integrated into "a larger enterprise."
In the fight, the Garces camp says that the Skinners and Sorkin rejected a $1.5 million offer to settle the dispute. The investors say the proposal amounted to a problematic promise of future payments, not a cash offer.
The quarrel between the partners has grown heated. Lawyers for Garces' partners have freely expressed their outage, while Garces hired the crisis-public relations firm Ceisler Media and retained lawyer George Bochetto to safeguard his image.
In a filing last week, Sorkin's lawyer, William Harvey, complained bitterly about the board stratagem that Garces used to get into bankruptcy court. Harvey did not mince words. He called it "shocking, fraudulent, unethical, and absolutely unenforceable under Pennsylvania law."
Going into the April 26 meeting, it seemed that there was a 2-1 majority against filing for bankruptcy. Opposed were Sorkin and the Spinners, voting a single vote as Spinner Family Holdings.
But then Garces' lawyer, Warren J. Martin Jr., stunned the others with the news: On the very day of the meeting, Garces had transferred slivers of his holdings to two other businesses — GR300 LLC and Garces Catering 300 LLC — that he owned 100 percent. Thus, when the vote came, a proxy for Garces cast three votes on his behalf for a corporate bankruptcy. The measure had passed 3-2, Martin announced. (Garces himself did not attend the meeting.)
"That's hilarious," Harvey responded immediately. "That's not going to fly. In fact, that's fraud. That's actionable fraud."
In filings since, the investors say the move blatantly violated the operating agreements they and Garces signed years ago. They point to language that bans the addition of new owners or a bankruptcy filing without a majority approval.
At the meeting, Martin was imperturbable, pointing to language in the agreement that he said trumped the other restrictions and permitted the action, as long as Garces had transferred a part of his stake to himself, and not an outsider.
Garces' opponents were having none of it. "I don't agree at all," Harvey said. "In fact, what you're forcing us to do now is go to court."
The dispute will resume Monday at 10 a.m. in Courtroom 4C in federal bankruptcy court in Camden.