Franchisee sentenced amid Dunkin' lawsuit barrage

Nation's Restaurant News, April 28, 2003 by Richard Martin

BOSTON -- As Dunkin' Donuts Inc. wages a cleanup campaign of court battles against scores of franchisees, a five-store operator who pleaded guilty to tax evasion was sentenced April 15 to eight months' confinement and two years' probation in connection with a kickback scheme involving other Dunkin' shopkeepers.

Tiberio "Barry" Furtado of Reading Mass., owner of Dunkin' Donuts shops in Saugus and Revere, Mass., was ordered to serve the first four months of his sentence in "community confinement" and the next four months in home detention with electronic monitoring, the U.S. Attorney's office here said.

A U.S. District Court judge also levied a $2,000 fine against Furtado, who diverted more than $284,000 in falsely invoiced supplier "rebates" to his personal use without reporting them as income, prosecutors said. The scheme was conducted from 1994 to 1997 with West Lynn Creamery, Assistant U.S. Attorney Diane Freniere asserted during an earlier plea hearing in the Furtado case. The defendant entered his guilty plea last September.

West Lynn Creamery pleaded guilty to its part in tax-evasion schemes with franchisees last year and was ordered to pay a $7.2 million fine.

Dunkin' Donuts franchisor Allied Domecq Quick Service Restaurants of Randolph, Mass., "cooperated fully with the investigation" of Furtado by Internal Revenue Service special agents, according to Samantha Martin, spokeswoman for the U.S. Attorney's office. Martin declined to comment further on the brand owner's role in the prosecution and said she had no knowledge of any further IRS levies that might be pending against Furtado over the diverted funds.

In January four-unit Dunkin' Donuts franchisee Dinart Serpa was sentenced in federal court in Boston to four months in prison on a tax fraud conviction involving more than $288,000 in kick-backs from West Lynn Creamery. In addition to Furtado and Serpa, five other Boston-area franchisees were hit with similar federal tax charges last May.

Stephen Horn, general counsel for the Allied Domecq restaurant division, could not be reached immediately for comment on its cooperative role in the Furtado case or on an extraordinary wave of at least 350 lawsuits initiated by the company against its franchisees since January 2000.

By comparison, McDonald's Corp. reportedly had sued only about a dozen of its franchisees over the same period.

Dunkin' Donuts' litigation binge coincides with its efforts to bolster its system at a time when such rivals as Krispy Kreme Doughnuts and Starbucks are gobbling up snack-and-coffee market share. Dunkin' Donuts' legal initiatives to weed out subpar operators also can be seen as a precursor to the chain's newly disclosed plan to roll out espresso beverages to its 3,000 locations, entailing the training of some 90,000 workers.

Acknowledging that Dunkin' Donuts is regarded as especially active in pressing lawsuits against franchisees, Allied Domecq restaurants' communications director, Cindy Gordon, explained, "We have very high standards." However, as the chain enforces its franchise contracts and operating standards, "slowly that number [of lawsuits] is coming down," she added.

But one of those cases could be stalled for a year or more over an unusual tax evasion allegation made by the company itself that raised thorny legal issues.

That unorthodox strategy evolved from a case it filed against a Pittsburgh operator, according to Miami attorney Robert Zarco, a prominent defender of franchisees in contract disputes with their chains. He said Dunkin' Donuts' complaint against franchisee Chris Romanias, for alleged underpayment of royalties, spelled trouble for the franchisor when the case was thrown out of federal court in Pittsburgh last year. The judge ruled that the company's sales-accounting methods could not substantiate its charges, Zarco said.

Allegedly alarmed by their Pittsburgh setback, the same team of lawyers for Dunkin' Donuts, who simultaneously were pursuing a Florida franchisee in a similar civil action that depended on the company's accounting, converted their strategy in that action to one that Zarco argued was improper.

Instead of trying to document the Florida operator's alleged underreporting of sales, the franchisor's lawyers offered evidence that a principal of the four-unit franchisee, known as Jeslisa Inc. and Philomar, had improperly used franchise funds to pay for various personal expenses, including child support. According to Zarco, Dunkin' Donuts argued that. those illicit expenses had illegally lowered the principal's 'taxable income and constituted tax evasion, which it said violated a franchise contract provision requiring that the operator maintain, lawful relations with all government agencies -- implicitly including the IRS.

The federal court in Miami found the evidence persuasive and ruled that Dunkin' Donuts' tax-based civil complaint could proceed against the franchisee, Zarco said. However, Zarco obtained a court ruling in February that suspended the case indefinitely pending a further legal decision on whether a corporate plaintiff can invoke charges of tax evasion against a civil defendant or whether such charges can be brought only by government authorities.