Krispy Kreme Doughnuts Inc. (Winston-Salem, N.C.), struggling to avoid a bankruptcy filing, has lost a court battle in Illinois over franchisee rights that could cost it a lot of money.
The court, responding to a suit filed by the financially troubled franchise holder for the Chicago and St. Louis areas, has ordered Krispy Kreme to keep shipping doughnut mix and other ingredients even if the franchise holder, Sweet Traditions, cannot pay for the shipments. Sweet Traditions complained that it was in distress as a result of mismanagement at the parent company, including the charging of excessive fees to franchisees. It said that it had reached an agreement with its banks to pay only interest on its loans, deferring principal repayments, but could not comply with that agreement if it continued to pay the parent company.
Sweet Traditions said that it had asked Krispy Kreme on July 19 to allow it to discontinue payments for royalties, public relations and advertising, but that the parent refused.
In granting a temporary restraining order, the state judge said Krispy Kreme’s “severe mismanagement” was a cause of the franchise holder’s problems.
In May, a similar action filed by Lone Star Doughnuts, a Houston franchise holder, led to a court ruling that shipments would have to continue pending mediation of the complaints that it had been overcharged. Lone Star claimed that Krispy Kreme said in May that shipments would be cut off, a warning that came a day after its executives criticized Krispy Kreme officers during a meeting with representatives of Krispy Kreme’s board. The board was examining activities that have led to investigations by the Securities and Exchange Commission and Justice Department.