Investors file appeal to block Garces auction

The investors fighting chef Jose Garces' plan to auction off his restaurant business have filed an appeal in federal court to try to stop the sale and overturn a ruling Garces won last month in U.S. Bankruptcy Court.

Insurance magnate Tom Spinner, who says he lost $3.5 million backing Garces, brought the action late Thursday  in a bid to freeze the scheduled June 26 auction of Garces' Amada, Tinto, Village Whiskey, Olde Bar and Volver restaurants, among numerous Garces-related enterprises and restaurants also to be on the block.

A spokeswoman for Garces said the appeal was without merit. "We expect to prevail as we have previously," Kate Wilhelm said.

Spinner and another investor, Philadelphia food purveyor Jim Sorkin, have been fighting Garces' effort to seek bankruptcy protection for his businesses. As unsecured creditors, they stand to receive pennies on the dollar from the auction.

A Louisiana restaurant company, Ballard Brands, has provided a floor for any auction, bidding just $2 million in cash, money that would go primarily to M&T Bank of Buffalo, which has lent about $9 million to Garces' operation. Ballard also has agreed to cover about $4 million in costs, including redeeming gift cards.

Sorkin and Spinner first backed Garces a decade ago, helping to finance Amada in Old City and Tinto and Village Whiskey in Center City. Despite the fiscal crisis facing Garces' operation overall, Sorkin and Spinner maintain that those three restaurants are highly profitable. Last year, Spinner said in his filing Thursday, the three pulled in $10 million from customers —  $2.7 million of which was profit.

Garces said he filed for bankruptcy only after the investors rejected a generous settlement offer.  The chef said Spinner and Sorkin had invested in the operation as a whole, and have to accept losses along with gains. In the filing Thursday, Spinner called the idea of a interconnected network of restaurants "fictional" and an "imaginary enterprise." He said the Amada, Tinto and Village Whiskey restaurants should be pulled from the bankruptcy package.

Spinner is asking that a U.S. district  judge in Camden allow him to appeal the May 22 ruling by U.S. Bankruptcy Judge Jerrold N. Poslusny Jr. that gave Garces the green light to file for bankruptcy protection.

Poslusny ruled in a complex dispute about a heated board meeting in the spring at which Garces won approval to file for bankruptcy. The chef's lawyers surprised and angered the investors by announcing that Garces had sliced off part of his ownership stake and transferred it to other corporate bodies that he alone owned. Through this transfer, Garces was able to outvote the investors by 3-2.

While the board's vote may have produced a "a strange, perhaps apparently unfair result," Poslusny said, the underlying operating pacts for the restaurants gave Garces "an extremely large amount of control."  Poslusny deemed the tactic lawful.

As he had at the board meeting and before Poslusny, Spinner decried this in his filing Thursday. If upheld, he said, the ruling would permit one owner "to add an infinite number of voting members."

"Voting would be impossible," he wrote. "Gamesmanship and sham maneuvers would be the rule. Minority investors would lose all of their rights."

In an recent interview and in an affidavit attached to his Thursday filing, Spinner provided additional details about his relationship with Garces over the years.  Spinner said one of his three sons, a chef himself who was mentored by Garces, introduced him to Garces and urged Spinner to consider investing.

"I liked him," Spinner said of Garces during the interview at his New Jersey home. "I thought he was very humble. He was soft-spoken."

Spinner got eye-popping returns on his first investment — $400,000 in return for a $215,000 investment in Amada in Philadelphia, he said. But over time, Spinner said, his investment of  $5 million in seven Garces restaurants in Philadelphia, Atlantic City and New York netted him only about $1.5 million in return.

Garces has blamed his financial issues in large part on the failure of an Amada restaurant he opened in New York. After putting up an initial $750,000 for the Manhattan place, Spinner said he agreed to provide Garces with an additional $750,000.

He said he did so after Garces promised that payback of this second investment would be guaranteed by a $775,000 annual income paid to the chef by three management concerns. However, Spinner acknowledged that he wired the money without first obtaining a signed contract from Garces.  He said the contact was only sent to him months later — without Garces' signature.

Garces never did sign, leaving the investor with a feeling of "broken trust," Spinner said.

Asked about this, Wilhelm replied, "There was never a signed document."

"The investment in Amada NY did not work out for anyone — employees, vendors, Chef Garces or Mr. Spinner," she said in a statement. "Our focus is on the future, embarking on a new partnership that will bring financial stability,  and continuing to provide exceptional hospitality to our guests."