Sonny's tangled in legal web

Nation's Restaurant News, August 27, 1990 by Jack Hayes

Sonny's tangled in legal web

Battle rages between owner, licensees, founder

GAINESVILLE, Fla. -- Franchisees and current and former owners of 80-unit Sonny's Real Pit Bar-B-Q are pinned in a three-sided legal crossfire that is threatening the future of the nation's largest barbecue chain.

The escalating dispute -- which is being fought in state and federal courts here and in Tallahassee, Fla. -- is centered around a tangle of allegations and counter claims going back to December 1988, when Floyd "Sonny" Tillman sold the 22-year-old chain to Robert B. Malkani and his company, M Group International, for more than $5 million.

A franchisee group is suing M Group, charging that the chain's new owner has mishandled advertising fees and has cut back field support services such as training. The franchisees are seeking more than $7 million in damages.

M Group is suing Tillman, claiming that at the time of the sale the chain's former owner did not disclose several handshake agreements he had made granting certain franchisees exclusive territories and area expansion rights.

The company wants the court to rescind the sale plus award a $1 million damage penalty, claiming it can't operate profitably while honoring the "side" agreements that it says franchisees are demanding be kept.

M Group is also countersuing franchisees, charging breech of contract.

Tillman, meanwhile, is countersuing M Group. He is also alleging that Malkani has stopped making payments according to certain terms of the sale agreement.

With all three sides involved as plaintiffs and defendants in the various suits and countersuits, not only is franchisee morale and business suffering, but volume is reportedly down sharply at Sonny's five company-owned stores--four of which operate in this market.

And Sonny Tillman -- who was looking ahead to retirement when he sold his chain 18 months ago -- is now facing the prospect of returning to work.

"I'm not anxious to go back and pilot Sonny's, but Malkani owes me a lot of money and that might be the only way I'll be able to get it," Tillman said.

Unless a settlement is reached beforehand, the dispute between Tillman and Malkani will not be settled until next spring, when they are scheduled to meet in court.

"The side agreements were not discovered until six months after the purchase," said Beth Hardy, a spokeswoman for Malkani and M Group. "It was May or June [1989] when franchisees started mentioning deals, and that's when the fallout began. But efforts to have Sonny Tillman settle the agreements weren't fruitful."

Despite the fact that M Group's suit seeks to have the sale agreement voided, Hardy insisted the company remains committed to Sonny's.

"The rescission clause is more a legal leverage point," she said. "The ultimate goal is to continue to operate the chain."

In countersuing, Tillman --who remained a paid consultant to Sonny's for several months -- denies that such side agreements existed. He alleges that Malkani grossly mismanaged the Sonny's operation, and claims the reason for franchisee disgruntlement was M Group's attempt to raise royalties and advertising fees.

"He needed a scapegoat because business was falling apart," Tillman asserted.

Meanwhile, the Franchisee Cooperative Association, a group that said it represents all of Sonny's 39 franchisees, has withdrawn a motion to have advertising fees and royalties held in court escrow while it pursues an audit of M Group's accounting on past franchisee payments.

M Group claims it offered to cooperate with the franchisee audit request, now in the form of a letter written on August 14 by the FCA.

The FCA was formed last October, reportedly to address concerns over the chain's new ownership. The association is chaired by Ted Hires, a longtime Jacksonville, Fla. franchisee who operates three Sonny's units and one of seven plaintiffs named in the franchisee suit against M Group.

"He [Malkani] leads you to believe the seven of us are alone, but all 39 Sonny's franchisees belong to the association," said Hires.

Furthermore, Hires claims that of 34 franchisees attending a May meeting of the FCA, all had voted to sue Sonny's new owners for mishandling advertising funds, and failing to provide services in return for royalties.

M Group meanwhile has countersued, alleging franchisees withheld portions of royalties and violated other obligations. Malkani has attempted to "standardize" the system's menus, signage, and uniforms, according to spokeswoman Hardy.

In fact, M Group admits that its efforts to implement financial operating goals had partly stirred the franchisee grievances.

"Some of the franchisees got disillusioned by Mr. Malkani's new operating style," said Hardy. "He was someone coming from a corporate structure and they were used to doing things their way, often not thinking beyond their own stores. It was like a family business, not structured the way a corporation has to be in order to survive."

To the franchisees, Malkani, who was president of two telecommunications companies before venturing into the restaurant business, presented a contrast to Tillman, a folksy entrepreneur that built his barbecue chain from the ground up. And franchisees are quick to point out his lack of experience.