Franchisees say they got burned twice

…some unscrupulous franchisors spend more time selling the franchises than supporting them. When a franchisee goes bust, the franchisor simply resells the location to another hapless investor, he said. Industry Canada reports that it paid out $13.6 million under its small business loan program to banks that lost money on bad franchisee loans, Stewart noted.

The Toronto Star
April 18, 2005

Franchisees say they got burned twice
After businesses went under, they turned to a consultant. He took payment but cases languished and he has disappeared.
Dana Flavelle

Sixty-six year old Mary Filyo will be in court today, along with a handful of other failed Second Cup Ltd. franchisees, trying to keep her lawsuit against the coffee chain on track after a franchise consultant allegedly bungled their case.

The retired Brantford teacher is among half a dozen former Second Cup franchisees that hired franchise consultant Lawrence Eftoda to help them sue the company two years ago. And, at first, he appeared to be the answer to their problems.

Through a lawyer, hired on their behalf by Eftoda, the franchisees launched a lawsuit against Second Cup on Jan. 25, 2003, claiming they'd lost $16 million investing in coffee shops that failed.

Now, more than two years later, their case is on the verge of collapse. Second Cup, which has filed a statement of defense and is also counter-suing Eftoda, declined to comment on the case. But court filings show the company has moved to have the case dismissed because of undue delays.

Meanwhile, Eftoda seems to have disappeared, leaving a trail of angry clients in his wake, many of them from franchises unrelated to Second Cup.

One of them, Song's International Holding Inc., last month won a court judgement against Eftoda for $16,050 after suing him for breach of contract. Song's had invested in a Coffee Time Donuts Inc. franchise that failed.

Two others have filed complaints with the Ontario ministry of consumer and business services against Eftoda and his business, Franchise Review Services Corp., for failure to deliver the services for which he was paid.

"It's like a second slap in the face," said Audrey Castillo, who with her husband Arturo turned to Eftoda for help after losing $150,000 on a Chez Cora franchise in Mississauga.

But two years after the Castillos paid Eftoda $2,500 to investigate their case, he still hadn't launched a lawsuit on their behalf. A year ago, he stopped returning their phone calls and e-mails, she said.
Eftoda could not be reached for comment.

A former landlord said Eftoda abandoned his last-known business address about six months ago, packing up without warning one weekend and leaving no forwarding address. At least half a dozen people have come through his office looking for Eftoda, all telling a similar tale of woe, the landlord, Javier Sanchez, said in a telephone interview.

A sister in Florida said Eftoda is still living in Toronto. But he has no listed phone number and a woman who answered his brother's phone in Oakville said she didn't know where Eftoda could be reached.

Business failures aren't unusual and franchises are no exception, the Canadian Franchise Association said. Among industry insiders, it's generally believed that 80 per cent of all franchisees succeed while the other 20 per cent founder, association president Richard Cunningham said.

Among the banks that lend franchisees money, Cunningham said, it's widely believed franchisees enjoy a higher success rate than independent business operators. However, no hard data exists to support either claim.

The difference with franchises is often the victims feel the franchisor is to blame. Too many investors mistakenly believe that a large, well-known company is immune to failure, said Ben Hanuka, a lawyer who specializes in franchise law. They don't do their homework before making the purchase, he said.

But franchisee advocate Les Stewart said some unscrupulous franchisors spend more time selling the franchises than supporting them. When a franchisee goes bust, the franchisor simply resells the location to another hapless investor, he said.

Industry Canada reports that it paid out $13.6 million under its small business loan program to banks that lost money on bad franchisee loans, Stewart noted.

"I'd never recommend a franchise to anyone," said Filyo. "You think it's a foolproof set up with a well-known company that can't lose. A lot of people lose."

Yet pursuing far larger and better-financed rivals through the courts is a daunting prospect for small investors who have already lost their life's savings, they said.

That's where Eftoda came in. "Lawrence was out to help people like me," Filyo said.

"Is Your Franchise Failing? Recover your financial losses! Tired of being intimidated??? Escape is a phone call away!!!" Eftoda's classified ads screamed at prospective clients.

In person, Eftoda seemed knowledgeable about the franchise industry and the law and he appeared to offer a relatively cost-effective alternative to hiring a lawyer directly, former clients said. For a relatively modest initial fee, he would review their case and assess their chances of succeeding in court, they said.

If they chose to proceed, he would require additional funds, but the bulk of the payment would come from a 25 per cent share of the final settlement if the claim were successful.

Dozens of failed franchisees responded to Eftoda's appeal. Publicity about his success in launching a lawsuit against Second Cup helped drive more clients his way.

But, unbeknownst to his later clients, such as the Castillos, the Second Cup case was already in trouble. On Oct. 4, 2004, the franchisees' lawyer, Robert MacFarlane, asked to be removed from the case on the grounds that Eftoda's "obstructionist and interfering behaviour" prevented him from properly representing his clients, according to court documents.

The court agreed and also ordered Eftoda to end his involvement in the case.

Filyo and the others were forced to then hire their own lawyers directly to pursue their claims. Filyo opted to continue even though it meant dipping further into her retirement savings, she said.

But several other former Second Cup franchisees, including Ludwig Edinger, dropped out. Edinger, who said he lost his Second Cup franchise in Mississauga's Square One mall after 17 years, had already paid Eftoda $10,000 to join the lawsuit. At this point, he said, he just wants to get on with his life.

Meanwhile, other failed franchisees, like the Castillos, were turning to Eftoda for help.

The Castillos had invested in a Chez Cora franchise. The popular Quebec-based breakfast restaurant chain had just expanded into Ontario.

The Castillos, who were originally from Montreal, believed they had the necessary expertise and knowledge to run the business. Arturo had spent many years in the restaurant industry working his way up from dishwasher to manager. Audrey has a background in marketing and communications.

But the restaurant cost more to build and opened months later than expected, they said. Sales were lower than anticipated. Less than a year into the business, the Castillos were deeply in debt and asked to be allowed out of the franchise agreement, they said.

Chez Cora agreed, they said, but the experience still left them angry and $150,000 in debt to various family members. Eftoda seemed to be the answer to their troubles, the said.

Over the course of several meetings, Eftoda told them the same story he had told others. That he'd been a franchise broker in the U.S. for many years, that he'd become disillusioned with the industry, that he'd moved to Canada with his wife and opened a consulting service in hopes of helping other franchisees, the Castillos and others said.

He seemed knowledgeable about franchise operations and legal procedures and, at one point, had several lawyers on retainer, the Castillos said. "He seemed very optimistic. We were very depressed."

"He thought we could get $1.2 million," Arturo Castillo said. The Castillos jumped in with both feet. But months of meetings and phone calls later, Eftoda had yet to file a claim. Now, the Castillos can no longer reach him.

"The last time we had contact with him was last May. I was getting very frustrated (with the lack of progress). He had changed his email and his phone number twice because he said he was getting nasty phone calls from franchisors. Then, in January, I sent him an email and it just bounced back," Audrey said.

"It's not so much the money we lost with Larry as it was the hope that we'd get some form of retribution from Chez Cora because we felt we were wronged," she added.

The franchisees interviewed for this story tell a cautionary tale that's all too familiar to franchise law expert Hanuka.

Too many prospective franchisees jump in too quickly without doing enough research, while too many franchisors promise more than they can deliver, he said in an interview. Investors should read the franchise agreement carefully.

Under current legislation, franchisors are required to disclose any lawsuits launched against them and the number of franchisees that have failed, among other things.

Investors should also speak to current and former franchisees and hire a lawyer, accountant and consultant with franchise expertise, he said, because suing after the fact is just too expensive for most people, Hanuka said.

"Most actions commenced by franchisees die within six months to a year because there's no money left and they've moved on with their lives," Hanuka said.

"You have to really investigate things before you get involved," Audrey Castillo agreed.

In the meantime, Filyo's Second Cup case continues to grind its way through the courts.

Today her lawyer, Andy Chan, of Rueter, Scargall and Bennett LLP, will be back in court arguing against Second Cup's motion to dismiss the case. In a separate action Second Cup is suing Eftoda for $1.5 million for defamation for statements he made in a book he's writing about the franchise industry.

Some of Eftoda's clients said they believe he genuinely intended to help.

"He may have been well-meaning and just got in over his head," said Audrey Castillo. "We just don't know."


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