Giordano’s Trustee Accuses Franchise Owners of Conspiracy

The bankruptcy trustee in charge of troubled Chicago pizza chain Giordano’s is suing most of the restaurant’s franchise owners, accusing them of conspiring to block the company’s sale to outside buyers.

Nearly all of the company’s 35 franchise owners have pooled together money to put in a $30 million bid for the restaurant chain’s assets—a price that falls below other informal offers that Chapter 11 trustee Philip V. Martino has come across while gauging buyer interest in the company.

Many franchise owners have stopped making royalty payments and have even started cooking with rogue ingredients that don’t conform to the pizza chain’s standards, jeopardizing its reputation and hindering the broader efforts to successfully reorganize the company, according to the lawsuit that Martino filed Wednesday with the U.S. Bankruptcy Court in Chicago.

“The Giordano’s franchise system is a valuable asset that cannot be sold for full value while the franchisee dispute is still pending,” according to the lawsuit, which asks a bankruptcy judge to force the group’s cooperation.

The lawsuit demands that franchise owners start making royalty payments again, which funnel about $2 million annually toward the company, formally Giordano’s Enterprises Inc. It also requests that franchisees cook with the proper ingredients they agreed to use in their franchise agreements, which enable them to use secret Giordano’s recipes and trademarks.

“That is extremely serious in the franchising world,” Martino said in an interview Thursday. “When you go to Giordano’s, you have an expectation that you’re going to get a Giordano’s pizza.”

Chicago attorney Chester Foster Jr., who represents about 30 of the dissenting franchise owners, wouldn’t respond to specific accusations but said he hopes to “ work through the bankruptcy process to try to achieve the best possible results for Giordano’s and for all of the individual franchise owners.”

Martino began looking for buyers shortly after taking over the case as trustee in early May, a move that came at the request of a federal watchdog that pointed out that the chain’s owners had failed to file key financial documents on time and had fired their attorneys. He expects the company, which is known for selling “Chicago’s World Famous Stuffed Pizza,” to be sold by the end of the year.

Martino’s appointment removed the chain’s control from longtime owners John and Eva Apostolou, who purchased control of Giordano’s in 1988. Under the Apostolous’ ownership, the company began to expand outside Illinois for the first time in 2005, opening six restaurants in Florida.

The company said it owed at least $45.7 million, mostly to lender Fifth Third Bank, when it filed for bankruptcy protection on Feb. 16, according to court documents. But Martino said the company operates profitably, earning at least $1.2 million in operating profits during the first four months of its restructuring.

As of the filing date, Giordano’s operated six company-owned stores, four joint-venture stores, and 35 franchise locations. The company employed about 330 workers.