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Stormy Days for Tully’s Coffee

(The Herald Business Journal)

Los Angeles attorney Michael Avenatti has been busy on the global stage these days, battling President Donald Trump in court and through the media over sexual-affair allegations leveled against the president by Avenatti’s client, porn star Stormy Daniels.

Meanwhile, Avenatti has another, Seattle-centric, legal battle brewing. Tully’s Coffee, the local coffee chain founded a quarter-century ago with the intention of becoming the next Starbucks – and which lead investor Avenatti and investment group Global Baristas LLC bought out of bankruptcy in 2013 for $9.15 million – appears to have been given its last rites.

The struggling chain, which Avenatti once hoped to expand to more than 200 outlets, is down to about a dozen stores in and around Seattle, all of them now “temporarily” closed, the company said last week. Word is Tully’s could return under another name and with fewer stores following what the company calls an “exciting rebranding plan,” which could take months.

The name change would be part of a legal settlement over Tully’s alleged breach of contract with Vermont single-serve coffee pod giant Keurig Green Mountain, which owns the Tully’s trademark and has licensed it to the brick-and-mortar franchises.

Keurig is suing to terminate the use agreement and seeking $500,000 in unpaid fees. According to interviews and federal court filings, if victorious, Keurig expects to end up controlling the Tully’s brand and logo again and could start its own chain under that name or sell/lease it to another entity.

Keurig says the contractual breaches include Tully’s use of unapproved trademarks and failure to make two $250,000 annual royalty payments. Their licensing agreement ended by default in December when Tully’s didn’t respond to Keurig’s demands, the latter says in court papers. That was to be followed by a three-month “wind-down” period for Tully’s to drop the name – a period that ended March 31, which seems to match up with Tully’s sudden shutdown.

In the latest court action March 28, a New York federal judge gave both sides until April 20 to file arguments over counter claims made by Tully’s.

The chain always seemed to have trouble making a profit, yet had been popular with Seattleites and other customers who insisted its coffee didn’t have that legendary “burnt taste” of Starbucks (which started with one store at Pike Place Market in 1971). In its early phase, from 1992 to 2012, the chain had turned a profit in just two years – both times by selling off parts of the chain.

Founder Tom “Tully” O’Keefe, who retired in 2010, had watched his empire of four dozen stores throughout the West begin to fade away in the decade leading up to the 2007 stock-market crash, which aborted the chain’s plan to launch an initial public offering.

After Avenatti and his fellow investors rescued Tully’s from bankruptcy, the slide resumed. Last fall, Tully’s was forced by rental disputes to suddenly close 12 stores it operated at Boeing facilities. Other closures followed as locations’ unlawful detainer claims (due to unpaid monthly lease fees) began to stack up.

That wasn’t the plan, of course. Avenatti was optimistic in outlining an ambitious turnaround plan after he and investors sized up Tully’s Chapter 11 reorganization filing in 2013. He envisioned a remodeling of all 48 company stores (another 50-some locations were franchises) and expanding to 225 locations. He said he’d make a personal $10 million investment in the chain’s operations.

Actor Patrick Dempsey brought some flair to Tully’s image after joining the investor group that forked over $9.15 million five years ago. But within a few months, Dempsey was gone. He sued Avenatti for allegedly failing to fully finance the chain as promised. Dempsey also admitted he hadn’t invested any money in Tully’s, just face time to promote the business.

Not long after Dempsey left, stores began to disappear, too.

As of last Monday, the company website gave no hint of which stores are closed – or for that matter whether any of them are closed (the online map shows 15 are open). There’s also a notice on the site that “We’re hiring!” Some employees learned about the closures in recent weeks by showing up for work and finding their stores dark. Now phone calls go unanswered, message boxes are full, and the company is not responding to calls or emails.

Corporate spokeswoman Suzy Quinn had earlier announced that the latest closures were the result of the coffee chain running out of coffee – a headline that must have provoked worldwide double takes. Later, Quinn blamed rebranding for the closures, claiming all Tully products had to be sold off to make way for the new brand. (Which seems like a difficult proposition with closed stores.)

Quinn also emailed The Seattle Times claiming that Avenatti now “serves as the General Counsel for the company. He divested his interest in Tully’s nearly a year ago.” But the Secretary of State’s corporate filings still list Avenatti as chief honcho, and more than a few employees says he is indeed still in charge.

“Avenatti personally handles all payments to vendors, landlords, etc.,” one recently told the Times in an email. Because payment hadn’t been made to the coffee-roasting company Tully’s uses, he added, “the stores are running out of supplies, namely beans. Several stores, including mine, have closed as a result.”

If Avenatti is still owner or at least involved in Tully’s day-to-day operations, he’s got a full dance card these days. He’s counsel for Daniels, the 39-year-old adult-film actress. She claims to have been paid $130,000 by Donald Trump’s attorney in 2016 to keep quiet about an alleged and brief affair with Trump a decade before his election. Trump’s lawyers, in turn, say she owes him $20 million for not keeping quiet about the affair he says he didn’t have.

Though he’s Tully’s counsel, Avenatti has publicly been focused on proving Trump a liar, and has not responded to the latest coffee lawsuits. One suit, filed March 9, is like most of the 30 other legal actions lodged in just over two years against Global Baristas.

Almost all the claims filed in U.S. and King County courts involve unpaid rent, fees, or state taxes (estimated at $5 million, which Tully’s denies).

© Copyright (c) 2018 Sound Publishing Inc., The Herald Business Journal. All rights reserved.

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