Country Style franchisee challenges creditors' meeting

A franchisee for the Country Style Food Services Inc. doughnut shop chain wants to disallow a recent creditors' meeting, claiming that the chain did not disclose pertinent information and the monitor, Deloitte & Touche Inc., was in conflict of interest. The franchisee, Taragon Financial Inc., is also asking the Ontario Superior Court for permission to commence an action against Country Style executives, claiming they were in breach of trust.

The Globe and Mail
March 4, 2002

Country Style franchisee challenges creditors' meeting
Oliver Bertin

CountryStyleClosedStore1.jpg

A franchisee for the Country Style Food Services Inc. doughnut shop chain wants to disallow a recent creditors' meeting, claiming that the chain did not disclose pertinent information and the monitor, Deloitte & Touche Inc., was in conflict of interest.

The franchisee, Taragon Financial Inc., is also asking the Ontario Superior Court for permission to commence an action against Country Style executives, claiming they were in breach of trust.

The allegations, which have not been proved in court, are contained in a notice of motion filed with the court on Feb. 20.

Country Style, based in Richmond Hill, Ont., filed for bankruptcy protection under the Companies' Creditors Arrangement Act on Dec. 13. A creditors' meeting was held on Feb. 18, at which time the company won approval for a restructuring from 93 per cent of the creditors.

Country Style plans to pay creditors 14 cents on every dollar they are owed. Deloitte said in a statement that it was not appropriate to comment while the matter was before the court.

Pat Gibbons, president of Country Style, said in a statement that he "disagrees with Taragon … as to whether or not it has a trust claim, as opposed to an unsecured claim, and whether or not there was a breach of trust."

Taragon said in the court documents that it was Country Style's licensee in Cuba. Taragon said it paid Country Style $85,000 (U.S.) to be held in trust. But when the deal fell through, Country Style returned $21,250.

"Only after the CCAA did Taragon learn that its development money was not put in a segregated trust," Taragon said in the court document.

Taragon also alleged that Country Style has not disclosed its full financial assets. Country Style is "now apparently profitable," Taragon claimed in the document. "The applicants have net cash flow of $1.2-million [Canadian], a full $1-million more than projected… . In other words, the applicants are even more profitable than the $1.2-million suggests."

Taragon said Country Style executives are paying themselves hefty bonuses, despite the CCAA action.

In the court documents, Taragon also asked for a new monitor. It claimed that Deloitte is in conflict of interest because it acted as auditor for Country Style, as consultant to Country Style in the CCAA action, and then as monitor.

"There is reason to believe that the plan, of which Deloittes was principal architect, unreasonably favours the interests of the sole secured creditor Bank of Nova Scotia and the interests and objectives of the DIP lender," Taragon claimed.

Furthermore, Taragon claimed "there is evidence of a breach of trust occurring during Deloitte's watch," referring to the alleged misuse of franchisee funds that it said should have been held in trust.

"Deloitte failed to take any steps to preserve those … payments as trust monies," Taragon claimed.

Taragon lawyer Arnold Schwisberg said he hopes to present his case to the court, also on March 7.

Meanwhile, Mr. Schwisberg and lawyers for Cassels Brock & Blackwell LLP have urged creditors to seek a 60-day delay in proceedings to allow time to obtain more information.


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