Unpaid taxes, abruptly closed locations, and employee rebellions: Inside the 6-year-downfall of Michael Avenatti’s coffee chain

Atilgan Ozdil/Anadolu Agency/Getty Images

Michael Avenatti — together with the actor Patrick Dempsey, who left the partnership soon after — acquired Seattle-based coffee chain Tully’s for $9 million in 2013.
Over the next six years, Tully’s parent company Global Baristas faced dozens of lawsuits over unpaid rent and taxes.
On Monday, federal prosecutors revealed that Avenatti was facing federal charges of bank fraud and wire fraud connected to his business dealings — including Tully’s.
Avenatti said in October that he sold the coffee company for "nearly $28 million a long time ago"; federal prosecutors said in their complaint on Monday that this statement appears to be false.
"Myself and God knows how many other people have been waiting for this day for a long time," former Tully’s manager Robert Sifuentez told Business Insider.

Michael Avenatti’s 2013 purchase of a struggling coffee chain is coming back to haunt the celebrity attorney.

On Monday, federal prosecutors announced that Avenatti was facing charges of bank fraud and wire fraud. According to the criminal complaint, Avenatti is being accused of providing false information to get a loan from a Mississippi bank, and of defrauding a legal client out of a portion of a $1.6 million settlement.

According to the filing, these schemes were interconnected with Avenatti’s business dealings, including his attempts to keep Tully’s, a coffee chain based in Seattle, Washington, afloat.

Avenatti purchased Tully’s out of bankruptcy in 2013, in partnership with actor Patrick Dempsey. In March 2018, as Avenatti’s star was rising as Stormy Daniels’ lawyer, the chain abruptly closed all remaining locations; in late October, a Chapter 7 involuntary bankruptcy petition was filed against parent company Global Baristas.

"Myself and God knows how many other people have been waiting for this day for a long time," former Tully’s manager Robert Sifuentez told Business Insider on Monday evening.

Here’s how Avenatti went from Tully’s savior to having the federal government link him to the coffee chain’s downfall.

Tully’s search for a savior

REUTERS/Stephane Mahe

Tully’s was founded by Tom O’Keefe in Washington in 1992. The chain grew quickly — including through a 2006 franchisee deal in Japan — and attempted to brand itself as an independent, scrappy rival to Starbucks. But while Starbucks thrived, Tully’s struggled to become profitable.

In 2012 Tully’s filed for Chapter 11 bankruptcy with more than $3 million in debt.

The chain never managed to truly compete with Starbucks, another Seattle-based chain whose thousands of locations dwarfed the 131 Tully’s operated globally at the time. Keurig’s parent company, which was then called Green Mountain Coffee Roasters, had purchased the chain’s wholesale business for $40 million in 2009. The purchase turned Green Mountain into Tully’s supplier, and the chain struggled to find the necessary money to pay for its coffee.

Then Dempsey swooped in, in an apparent effort to valiantly save the Seattle coffee chain — the perfect role for an actor best known for his part as Derek "McDreamy" Shepherd in the Seattle-based "Grey’s Anatomy." In January 2013, Dempsey served as the public face of Global Baristas LLC when the company beat out Starbucks and five other bidders with a $9.15 million offer to buy Tully’s more than 40 locations in Washington state.

"We met the green monster, looked her in the eye, and … SHE BLINKED! We got it! Thank you Seattle!" Dempsey tweeted, a reference to rival Starbucks.

Yet while the media focused on Dempsey, "McDreamy" was working with Avenatti — who had allegedly promised to fund the entire project, according to a complaint filed by Dempsey against Avenatti in August 2013.

‘McDreamy’ deal gone sour

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By the time he entered the coffee business, Avenatti had already worked on several high-profile cases, including a $10 million defamation case involving Paris Hilton and an $80.5 million class-action lawsuit against the Jewish cemetery Eden Memorial Park.

At the same time, Avenatti was also racing as a professional driver. It was likely on the racetrack that his path first crossed with Dempsey, a fellow race-car driver.

It didn’t take long for Avenatti and Dempsey’s business partnership to fall apart. The Tully’s deal closed in late June 2013; by August, Dempsey was suing Avenatti.

Avenatti was originally the sole owner and manager of Global Baristas before Dempsey joined as a partner, according to Dempsey’s complaint. Dempsey said in the complaint that Avenatti had promised to provide all funding for the deal.

According to Dempsey, Avenatti didn’t actually have the funds to buy Tully’s. In the suit, Dempsey claims his business adviser found out through an internet search that Avenatti had borrowed $2 million with an "exorbitant" interest rate of 15% to fund the deal, sparking Dempsey’s decision to sue his way out of the partnership.

"Avenatti concealed the Loan and the Security Agreement from Dempsey," the complaint says.

It continues: "He provided no advance notice that he was going to cause Global Baristas to borrow two million dollars, pay an exorbitant interest rate, and secure repayment in borrowed funds by pledging all or substantially all of the company’s assets and future income."

The case was settled out of court, with Dempsey dissolving his relationship with Avenatti and cutting ties with Tully’s. In a statement, Dempsey wished "the Company and Michael all the best," saying he was "happy to have been a part of the effort that brought awareness to Tully’s brand."

Employees claim Avenatti went from savior to accomplice in killing the chain

Ted Warren/AP

Avenatti apparently had big plans for Tully’s, with the company’s representative Suzy Quinn telling Bloomberg in 2013 that the brand had planned to open more than 25 stores in the US and 200 in China.

However, according to six former workers who spoke with Business Insider in 2018, it soon became clear that Tully’s was dealing with significant financial struggles. These ex-employees shared different stories from their individual coffee shops of experiences including the chain having trouble making payments — some to suppliers, some to landlords, and even some to employees.

"Corporate always postured that we were in good financial straits, but the feeling with myself and other managers was that we had been struggling for years," a manager who worked at the chain for three years said. "All of the locations I worked at were in disrepair, with inadequate maintenance on equipment, furniture, counters, signage, etc. I don’t think we ever purchased new equipment, just recycled old units."

One former employee — who held various roles at Tully’s over her three-and-a-half years at the chain — started working for the company soon after Avenatti acquired the chain.

"It was really exciting," she said. "And then we started to realize that nothing was happening."

According to the employee, workers would wait weeks for items to be repaired, and she would typically have to fix things herself. Once, she said, a neglected shop in Mercer Island, Washington, was forced to shut down after its drive-thru roof collapsed when the corporate office failed to find the money to fix a leak.

The same employee said workers were forced to wait to get Avenatti’s explicit approval to drop off the check for the week’s supply of coffee beans from Dillanos Coffee Roasters every single Friday. The worker, who had firsthand knowledge of the situation, said Avenatti would often wait until the last minute to give his okay because otherwise, the check might bounce. Avenatti denied the claim when asked for comment by Business Insider in June.

Three different employees told Business Insider that, at times, managers or the corporate home office would ask them to wait until a certain time of day to attempt to cash paychecks.

The federal criminal complaint against Avenatti, which was filed in February but unsealed on Monday, highlighted similar concerns, with employees telling a federal agent that payroll time was stressful because "cash was always tight."

According to one former employee identified by the initials "B.H." who was featured in the complaint: "Avenatti did not reinvest into the company and the stores were failing. B.H. said that there was a ‘steady bleeding’ of [Global Baristas] and Avenatti placed ‘band aids’ on it."

Legal problems

AP Photo/Jeff Chiu

As Tully’s struggled, Global Baristas allegedly failed to pay taxes, landlords, and rent. According to the recently unsealed complaint, a Tully’s employee reached out to an IRS investigator with information about the company in September 2017.

Global Baristas failed to pay $4,998,198 in federal taxes in 2017, according to a tax lien filed by the IRS. That is in addition to thousands of dollars in state taxes the company failed to pay over the years, according to more than 20 state tax liens filed in California and Washington.

The recently unsealed complaint states that Avenatti attempted to prevent the government from collecting payroll taxes from Global Baristas by "lying to an IRS Revenue Officer, changing contracts, merchant accounts, and bank account information to avoid liens and levies imposed by the IRS, and instructing employees to deposit over $800,000 in cash from Tully’s stores … into a bank account associated with a separate entity."

According to employees, the company also frequently failed to pay vendors. A former female barista who worked at the chain for roughly six months in 2017 said that suppliers quit delivering products twice to her store, citing a lack of payment.

"The first time it occurred it was handled really quickly," the ex-worker said. "The second time we were concerned about running out of coffee, and the stores ran out of espresso yet continued serving espresso-based drinks … The upper-level management came by and suggested how to blend the coffee we had to fake espresso."

Global Baristas was also hit by lawsuits over rents from landlords, with at least 14 unlawful detainer cases filed since 2017. And, in January 2018, Keurig Dr. Pepper — which owns Tully’s brand — demanded that Global Baristas stop using the brand, alleging that the company failed to pay $500,000 in licensing fees for 2016 and 2017.

Tully’s demise

In March 2018, Tully’s abruptly shut down all remaining locations.

"Dozens of people showed up for work on that March morning to find they were without a job," an employee who worked at Tully’s for eight years told Business Insider in June.

"Many are college students that needed to work to help lighten the financial burden on their parents, to reduce as much as possible any future student loans, and to cover their day-to-day cash needs," he continued. "Many are single moms that seriously depended on their income to support their families."

Less than a week after the stores shut down, Suzy Quinn — Tully’s head of communications, who transitioned to work as Stormy Daniels’ head of media relations in 2018 — told the Associated Press that the company was "rebranding," an effort that could take months.

In late September, Global Baristas agreed to never operate a coffee chain, or any other food or beverage business, under the Tully’s name again, as part of a permanent injunction with Keurig Dr. Pepper. Keurig Dr. Pepper, which owns the Tully’s brand and wholesale business, will continue to sell Tully’s branded coffee.

In late October, a Chapter 7 involuntary bankruptcy petition was filed against Global Baristas.

Avenatti’s role

Reed Saxon/AP

Since stores closed in March 2018, Avenatti has publicly maintained that he sold his stake in the company and serves only as an outside attorney. Avenatti did not respond to Business Insider’s requests for comment on Monday and Tuesday.

However, employees who spoke with Business Insider and federal agents said that Avenatti both owned the company and had the final say on financial decisions.

"He was barking orders via phone calls and emails right up until he ghosted everyone last year," Sifuentez said on Monday. "And as I’ve said before, every single paycheck I ever got from 2013 to the end in March 2018 had his signature on it."

Employees who spoke with federal agents shared similar experiences — and skepticism of Avenatti’s statements otherwise.

"On March 8, 2018, M.G. [a Tully’s employee] sent Avenatti a text message confronting him" over Avenatti’s statements that he was not Global Baristas’ owner, the complaint reads. "M.G. asked Avenatti if he was not the owner of Global Baristas, then who should she go to for Global Baristas business decisions. Avenatti responded everything still went through him."

According to an employee who handled the company’s accounting transactions until September 2018 and was cited in the federal complaint, Avenatti earned $250,000 a year as the CEO and chairman.

In a number of interviews with Business Insider throughout 2018, Avenatti said that he was no longer the owner or CEO of Global Baristas. Most recently, in October, he said he "sold the company for nearly $28 million a long time ago."

"To date, the government has been unable to locate any information confirming that Avenatti has sold Global Baristas LLC or Global Baristas US," states the recently unsealed complaint. "To the contrary, based on the information available to the government, it appears these statements are false."

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Source: Business Insider – ktaylor@businessinsider.com (Kate Taylor)