What was the nature of the 'material inaccuracies' that Mr. Dollinger and other defendants believed existed in the Complaint related to Cinnaholic's affiliate, The S&Q Shack, LLC?
Cinnaholic Franchise · 2025 FDDAnswer from 2025 FDD Document
- Filed August 24, 2012.*
In 2012, the United States Bankruptcy Trustee sued certain of our affiliates, officers, and directors as well as other defendants. The lawsuit claims there were fraudulent transfers, constructively fraudulent transfers, and wrongful distributions made in connection with the sale of one of our affiliates, The S&Q Shack, LLC ("S&Q"), to Edmonds Capital Fund I, LLC. The lawsuit further alleged that S&Q forgave the debts some of our "affiliates" may have owed S&Q. Specifically, the Complaint alleged our officer, Daryl Dollinger and the other defendants caused or benefitted from the distribution of the entire proceeds from the sale of the S&Q assets, thereby leaving no assets available to pay S&Q's creditors nor receivables that could be collected to pay S&Q's creditors. The lawsuit further claimed Martin Sprock authorized Daryl Dollinger to make wrongful distributions of the proceeds from the S&Q sale to RBI, Mr. Sprock, and other defendants. The lawsuit sought to recover the transfers made to ten defendants, on the grounds that the defendants did not take such amounts for value or in good faith. The lawsuit also sought to make Mr. Sprock personally liable for the amount of any "excess" in the distribution made to him. The Complaint further demanded that property be turned over to the bankruptcy estate by companies with which Mr. Dollinger was formerly affiliated and the other defendants.
Mr. Dollinger and the other defendants investigated the allegations, and believed there are material inaccuracies in the Complaint and that substantial defenses existed. This adversary proceeding was stayed pending completion of litigation in the underlying bankruptcy cases of RBI and S&Q over the allowed amount of the claim of BV Retail, the sole remaining creditor in those cases. After the amount of the claim was adjudicated by the bankruptcy court, the Bankrupt Estate, the trustee, BV Retail and all of the defendants (except for Brand and Hollingsworth) successfully mediated the claims to a global resolution in November 2016. The parties subsequently executed a settlement agreement and an order approving settlement and dismissing this proceeding followed in 2017. This case and the one described below were settled jointly upon payment to debtor (through the Trustee) of the sums of $310,000 paid by Mr. Sprock and $90,000 paid by Mr. Seydel. This settlement was approved by the Bankruptcy Court and mutual general releases were enter
Source: Item 3 — LITIGATION (FDD pages 9–11)
What This Means (2025 FDD)
According to Cinnaholic's 2025 Franchise Disclosure Document, in 2012, the United States Bankruptcy Trustee initiated a lawsuit against certain affiliates, officers, and directors of Cinnaholic, including Daryl Dollinger, regarding the sale of The S&Q Shack, LLC. The lawsuit alleged fraudulent and constructively fraudulent transfers, as well as wrongful distributions related to the sale of S&Q to Edmonds Capital Fund I, LLC. The complaint specifically claimed that Dollinger and other defendants facilitated or benefited from the distribution of proceeds from the sale of S&Q assets, leaving insufficient assets to pay S&Q's creditors. The suit also targeted Martin Sprock for allegedly authorizing Dollinger to make wrongful distributions to RBI, Sprock, and other defendants. The lawsuit sought to recover transfers from ten defendants, alleging they did not provide value or act in good faith, and aimed to make Sprock personally liable for any excess distribution he received. Additionally, the complaint demanded the turnover of property to the bankruptcy estate by companies affiliated with Dollinger and other defendants.
Mr. Dollinger and the other defendants believed that the Complaint contained 'material inaccuracies' and that they had substantial defenses against the allegations. The adversary proceeding was temporarily suspended while litigation in the underlying bankruptcy cases of RBI and S&Q determined the allowed amount of the claim of BV Retail, the sole remaining creditor. Eventually, in November 2016, the Bankrupt Estate, the trustee, BV Retail, and all defendants except Brand and Hollingsworth reached a global resolution through mediation. A settlement agreement was executed, and in 2017, an order approving the settlement and dismissing the proceeding was issued. The cases were settled jointly with payments of $310,000 by Mr. Sprock and $90,000 by Mr. Seydel, which were approved by the Bankruptcy Court, and mutual general releases were entered into among all parties.
For a prospective Cinnaholic franchisee, this litigation history indicates the importance of understanding the financial dealings and potential liabilities associated with affiliated entities. While the matter was settled, it highlights the risks involved in business transactions and the potential for legal challenges related to financial management and asset distribution. It is important to note that the FDD does not specify the exact nature of the 'material inaccuracies' that Mr. Dollinger and the other defendants believed existed in the Complaint. A prospective franchisee should seek clarification from Cinnaholic regarding the specifics of these inaccuracies and the defenses that were considered substantial.